Question 1
DN.plc experiences difficulty in its budgeting process because it finds it necessary to
quantify the learning effect as new products are introduced. Substantial product
changes occur and result in the need
...
Question 1
DN.plc experiences difficulty in its budgeting process because it finds it necessary to
quantify the learning effect as new products are introduced. Substantial product
changes occur and result in the need for retraining.
An order for 40 units of a new product has been received by DN.plc. So far, 15
have been completed; the first unit required 50 direct labour hours and a total of 565
direct labour hours has been recorded for the 15 units.
The production manager expects a 93% learning effect for this type of work.
The company uses standard absorption costing. The direct costs attributed to the
centre in which the unit is manufactured and its direct costs are as follows:
There are 30 direct employees working a five-day week, eight hours per day, in the
centre in which the unit is manufactured. No other product is made in this centre.
Personal and other downtime account for 20% of the total available time. Fixed
overhead costs are recovered on the basis of labour hours worked.
The company has an advertised policy that orders, once accepted by the company,
will always be delivered within one week.
You are required to:
A) determine whether the assumption of a 93% learning effect is a reasonable
one in this case, by using the standard formula y = axb (4 per cent)
B) calculate the number of direct labour hours likely to be required for the
outstanding 25 units of the order. (4 per cent)
C) use the cost data given above to produce an estimated product cost for the
40 units on order, mentioning briefly the problems which may be created for
budgeting by the presence of the learning effect. (8 per cent)
D) discuss whether the order for 40 units should have been accepted by DN.plc
for £45,000 and the implications of accepting this order.
Trainers Ltd is a provider of language tuition for students who are preparing for their
language examinations. For many years it has provided Tuition courses, during
which students are taught the syllabus using workbooks written by Trainers Ltd, and
also Exam preparation courses. The Tuition courses introduce the material to the
students and provide some practice tests. The Exam courses consist of revision
sessions and two mock examinations, which are written by Trainers Ltd.
Last year Trainers Ltd decided to diversify into providing bespoke training courses
for individual students. Because the bespoke courses are developed specifically for
each student, Trainers Ltd have decided to charge £150 per student, instead of
£100, which is the charge per student on the normal language courses. Trainers Ltd
has a policy of charging the same per student whether they are taking a Tuition
course or an Examination course.
Trainers Ltd have always dealt with overheads for their products by using the Direct
Labour Hours that are incurred for each type of course. The managing director is
unsure which courses are profitable, and has asked you to look at the courses sold
using activity based costing, a method that he has heard about, but has never used
before.
You have found that the overhead costs were determined by cost drivers as follows:
You are to write a memo to the managing director, which is to cover:
A) an explanation and calculation of the overhead costs per course using:
1) direct labour hours as an allocation method
2) an activity based costing approach
You are to advise the managing director on the implications of these findings for the
marketing of the courses currently sold.
(20 per cent)
B) your advice regarding whether a marginal costing approach or an activity based
costing approach would result in better decisions being made by Trainers Ltd
when approached by individual students asking Trainers Ltd to provide courses
specifically for them. Explain clearly the terms used
Mowers Ltd, a manufacturer of lawn mowers, is unsure of whether to purchase an
automated metal cutting machine to speed up its building of the bodywork for its
lawn mowers. The machine would cost £300,000, which would have to be borrowed
at an overdraft rate of 8% per annum, but would reduce variable costs from the
current level of £39.00 per lawn mower to £35.50 per lawn mower. At present
Mowers Ltd has fixed costs of £600,000 per annum.
A consultant has been commissioned by Mowers Ltd to help establish its demand
function, and it has been found that demand increases at a constant rate of 1,660
lawn mowers for every £1 decrease in price and that there will be no sales at a price
of £76.00.
Mowers Ltd seeks to maximise profits. Ignore taxation. If purchased, the metal
cutting machine would be acquired on the first day of Mowers’ accounting year.
Since the machine will last for many years its depreciation should be ignored.
Requirement:
A) If the company does not purchase the metal cutting machine calculate the selling
price required to maximise profit, the quantity sold, and the corresponding total
revenue and profit at that selling price, using differential calculus techniques.
Bogus 999 calls were made by Surrey Police to itself to boost its speed of response
figures, it was claimed (and reported in The Times on 1st July 2005). When targets
were missed one night, an operator for the force was told to improve response rates
by making emergency calls on his mobile. These would be answered quickly by the
response team, thereby improving the speed of response figures so that the target
would be met.
Discuss the above allegation with reference to your studies of the behavioural
aspects of management accounting.
(25 per cent
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