QUESTION ONEThe following information relates to the only product manufactured and sold by Wood Ltd.
K per unit
Selling process 180
Direct material cost 55
Direct labour cost 45
Variable production overhead 10
Variable sales & marketing overhead 8
The following levels of activity took place over the first three months of the product's life:
Sales Units Production Units
January 5,800 7,000
February 6,500 8,000
March 7,800 8,500
Additional information is as follows:
1. Budgeted fixed production overhead was K500,000 per annum
2. Actual fixed production overhead for the period was K45,000 per month.
3. Sales and marketing overhead of K35,000 per month and administration overhead of k20,150 per month were in line with the budget for that period.
4. All fixed overhead costs are budgeted on the basis of a projected volume of 80,000 units per year and all costs are expected to be incurred at a constant rate throughout the year.
5. The business does not expect to have any inventory at 1 January.
(a) On the assumption that Wood Ltd. Operates an absorption system, calculate the (under)/over absorbed fixed production overhead for each month. (3 marks)
(b) show a profit statement for each month using each of the following bases:
(i) Absorption costing
(ii) Marginal costing (14 marks)
(c) Reconcile the difference in the reported profit under the two (2) bases for each month. (3 marks)
[Total: 20 marks]
Luangwa electronics manufactures two remote controllers. The basic controller sells for K50, has a direct material cost of K12.5 and requires 2.5 hours of labour time to produce. The other type, the wireless controller, sells for K75, has a direct material cost of K16.3 and takes 3.75 hours to produce. Labour, which is paid at the rate of K6 per hour, is currently very scarce, while demand for the company's controllers is heavy. The company is currently producing 8,000 of the basic controller and 4,000 of the wireless controller per month, while fixed costs are K240,000 per month.
An overseas customer has offered the company a contract, worth K350,000, for a number of controllers made to its requirements. The estimating department has ascertained the following facts in respect of the work:
1. The labour time for the contract would be 12,000 hours.
2. The material cost would be K90,000 plus the cost of particular component not normally used in the company's controllers.
3. These components could be purchased from a supplier for K25,000 or alternatively, they could be made internally for a material cost of K10,000 and an additional labour time of 1,500 hours.
Luangwa Electronics uses one Accountant - the Financial Accountant to perform both roles of cost analysis and financial accounting and reporting. Luangwa Electronics is considering splitting the role of cost analysis to be performed by a Management Accountant.
(a) Calculate the contribution per hour for each controller (4 marks)
(b) Determine whether to make or buy the component (5 marks)
(c) Advice whether the contract with the overseas customer should be accepted
(d) Compare and contrast management accounting to financial accounting. (6 marks)
[Total: 20 marks]
(a) Luapula Ltd is deciding whether or not to proceed with a special order contract. This order contract will require the following;
(i) Materials P and Q will be used for the contract. A total of 100 tonnes of material P will be needed and sufficient material is in inventory because the material is in common use in the company. The original cost of the material in inventory is K10 per tonne but it would cost K12 per tone to replace if it is used for this contract. The material Q required in inventory as a result of previous over purchasing. This material originally cost K5,000 but it has no other use. The material is toxic and if it is not used on this contract, then Luapula Ltd must pay K2,800 to have it disposed of.
(ii) The contract requires 200 hours of labour at K50 per hour. Employees possessing the necessary skills are currently employed by the company but they are idle at present due to a lull in the company's normal business.
(iii) Overhead will be absorbed by the contract at a rate of K100 per labour hour, which consists of K70 for fixed overhead and K30 for variable.
(iv) The contract will require the use of a storage unit for three months. Luapula Ltd is committed to rent the unit for one year at a rental of K500 per month. The unit is not in use at present. A neighbouring business has recently approached Luapula Ltd offering to rent the unit from them for K700 per month.
(v) Total fixed overheads are not expected to increase as a result of the contract.
Use the details above to determine the relevant cost of the order contract, including an explanation of the reason for including or excluding a cost in the relevant cost schedule.
(b) Minimum pricing based on relevant costing is normally seen as a 'tool' used by private businesses to increase their market share and enhance profits. Nowadays, we are seeing public sector organisations employing cost effective techniques and optimizing their resources.
Explain and compare the public sector objective of 'value for money' and the private sector objective of 'maximization of shareholder wealth'. (9 marks)
[Total: 20 marks