Question-1) Marks 20
Anwar Ltd produces a moulded plastic casing, LX201, for desktop computers. Summary data
from its 2014 income statement are as follows:
Revenues $5 000 000
Variable costs 3 000 000
Fixed costs 2 160 000
Operating profit $(160 000)
Jane Woodall, Anwar’s CEO, is very concerned about the company’s poor profitability. She
asks Max Wilson, production manager, and Lyle Hayes, management accountant, to see if
there are ways to reduce costs.
After two weeks, Max returns with a proposal to reduce variable costs to 52% of revenues by
reducing the costs Anwar Ltd currently incurs for safe disposal of wasted plastic. Lyle is
concerned that this would expose the company to potential environmental liabilities. He tells
Max: ‘We would need to estimate some of these potential environmental costs and include
them in our analysis’. ‘You can’t do that’, Max replies. ‘We are not violating any laws. There
is some possibility that we may have to incur environmental costs in the future, but if we
bring it up now, this proposal will not go through because our senior management always
assumes these costs to be larger than they turn out to be. The market is very tough, and we
are in danger of shutting down the company. We don’t want all our colleagues to lose their
jobs. The only reason our competitors are making money is because they are doing exactly
what I am proposing.’
a) Calculate Anwar Ltd’s break-even revenues for 2014.
b) Calculate Anwar Ltd’s break-even revenues if variable costs are 52% of revenues.
c) Calculate Anwar Ltd’s profit for 2014 if variable costs had been 52% of revenues.
d) Given Max Wilson’s comments, what should Lyle Hayes do?
Question 2: Marks 20
Kim Daley is examining customer service costs in the southern region of Capital Products.
Capital Products has more than 200 separate electrical products that are sold with a six-month
guarantee of full repair or replacement with a new product. When a product is returned by a
customer, a service report is prepared. This service report includes details of the problem and
the time and cost of resolving the problem. Weekly data for the most recent 8-week period
Week Customer Service Department costs Number of service reports
1 $13 700 190
2 20 900 275
3 13 000 115
4 18 800 395
5 14 000 265
6 21 500 455
7 16 900 340
8 21 000 305
a) Plot the relationship between customer service costs and number of service reports. Is the
relationship economically plausible?
b) Use the high–low method to calculate the cost function, relating customer service costs to
the number of service reports.
c) What variables, in addition to number of service reports, might be cost drivers of weekly
customer service costs of Capital Products?
Question-3) Marks 20
Pet Products Company uses an automated process to manufacture its pet replica products. For
June, the company had the following activities:
Beginning work-in-process inventory 4500 items, 1/4 complete
Units placed in production 15 000 units
Units completed 17 500 units
Ending work-in-process inventory 2000 items, 3/4 complete
Cost of beginning work in process $5250
Direct material costs, current $16 500
Conversion costs, current $23 945
Direct materials are placed into production at the beginning of the process and conversion
costs are incurred evenly throughout the process.
a) Prepare a production cost worksheet using the FIFO method.
b) What is the difference between a weighted-average method of process costing and a firstin,
first-out method of process costing?
Question-4) Marks 10
Universal Industries operates a division in Zimbabwe, a country with very high inflation
rates. Traditionally, the company has used the same costing techniques in all countries to
facilitate reporting to corporate headquarters. However, the financial accounting reports from
Zimbabwe never seem to match the actual unit results of the division. Management has
studied the problem and it appears that beginning inventories may be the cause of the
unmatched information. The reason for this is that the inventories have a different financial
base because of the severe inflation.
Question 5) Marks 20
Brilliant Accents Company manufactures and sells three styles of kitchen taps: brass, chrome,
and white. Production takes 25, 25, and 10 machine hours to manufacture 1000-unit batches
of brass, chrome and white taps, respectively. The following additional data apply:
BRASS CHROME WHITE
Projected sales in units 30 000 50 000 40 000
PER UNIT data:
Selling price $40 $20 $30
Direct materials $8 $4 $8
Direct labour $15 $3 $9
Overhead cost based on direct labour hours
(traditional system) $12 $3 $9
Hours per 1000-unit batch:
Direct labour hours 40 10 30
Machine hours 25 25 10
Setup hours 1.0 0.5 1.0
Inspection hours 30 20 20
Total overhead costs and activity levels for the year are estimated as follows:
Activity Overhead costs Activity levels
Direct labour hours 2900 hours
Machine hours 2400 hours
Setups $465 500 95 setup hours
Inspections $405 000 2700 inspection hours
a. Using the traditional system, determine the operating profit per unit for each style of tap.
b. Determine the activity-cost-driver rate for setup costs and inspection costs.
c. Using the ABC system, for each style of tap
1. compute the estimated overhead costs per unit.
2. compute the estimated operating profit per unit.
d. Explain the differences between the profits obtained from the traditional system and the
ABC system. Which system provides a better estimate of profitability? Why?
Question 6) Marks 10
Jack Halpern is the owner and CEO of Aerospace Comfort, a firm specialising in the
manufacture of seats for aeroplanes. He has just received a copy of a letter written to the
general audit section of the RAAF. He believes it is from an ex-employee of Aerospace
Aerospace Comfort manufactured 100 X7 seats for the RAAF in 2014. The following may be
1- Direct materials costs billed for the 100 X7 seats were $25000.
2- Direct manufacturing labour costs billed for 100 X7 seats were $6000. These costs include
16 hours of set-up labour at $25 per hour, an amount included in the manufacturing overhead
cost pool as well. The $6000 also includes 12 hours of design time at $50 an hour. Design
time was explicitly identified as a cost the RAAF would not reimburse.
3- Manufacturing overhead costs billed for 100 X7 seats were $9000 (150% of direct
manufacturing labour costs). This amount includes the 16 hours of set-up labour at $25 per
hour that is incorrectly included as part of direct manufacturing labour costs.
You may also want to know that over 40% of the direct materials is purchased from Frontier
Technology, a company that is 51% owned by Jack Halpern’s brother. For obvious reasons,
this letter will not be signed.
cc: The Australian, Jack Halpern, CEO of Aerospace Comfort
Aerospace Comfort’s contract states that the RAAF reimburses Aerospace Comfort at 130%
of total manufacturing costs. Assume that the facts in the letter are correct as you answer the
a- What is the cost amount per X7 seat that Aerospace Comfort billed the RAAF? Assume
that the actual direct materials costs were $25 000.
b- What is the amount per X7 seat that Aerospace Comfort should have billed the RAAF?
Assume that the actual direct materials costs were $25000.
c- What should the RAAF do to tighten its procurement procedures to reduce the likelihood
of such situations recurring in the future?