Cost and Management Accounting 2nd edition
Solutions (Additional questions)
CHAPTER 4
SOLUTIONS (ADDITIONAL QUESTIONS)
4.1
A
4.2
D
4.3
B
4.4
A
4.5
C
4.6
D
4.7
D
4.8
D
4.9
B
4.10
C
4.11
A
4.12
D
4.13
A
Adult clothing
Contribution – Direct fixed costs – Total allocated common costs
R409 500 – 189 000 – 165 375 = R 55 125
4.14
B
Incremental revenue
Incremental costs
Net incremental income
100kg x (R25 – R 5)
R2 000
R1 500
R500
The incremental revenue exceeds the incremental cost by R500, therefore the product
should be further processed.
4.15
D
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
4.16
(a)
Sales
120 000
Less: Cost of sales
36 000
Gross profit
84 000
Less: operating expenses
57 000
Wages and salaries
25 500
Rental including down payment
26 000
Water and electricity
3 000
General expenses
2 500
Net profit
27 000
According to the estimates provided, the restaurant would generate a profit of
R27 000, which equates to R2 250 per month.
She should open up the restaurant since it would generate a net profit of
R27 000.
(b)
The sunk cost would be the down payment of R 2000 for the lease. Whether
she opens the restaurant or not the R 2000 has already been paid and cannot
be recovered.
The opportunity cost would be the R1 000 rental from her friend that she
would forego if she opens up the restaurant.
(c)
Notional costs/speculative costs such as notional rent and notional interest are
irrelevant costs. The main purpose of these costs is to make internal decision
making more accurate, since it allows mangers to benchmark competitors’
product costs. For example, if an organisation purchased their premises
instead of renting them, then each responsibility centre is charged rent based
on market value notional rent. This helps managers make the optimum use of
the space. If there is surplus space available, it can be sold or rented out.
Notional rent only becomes relevant if the organisation had the option to rent
out their premises. The lost rental is considered an opportunity cost of
choosing to use the premises for manufacturing purposes.
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
4.17
(a)
Current profit:
Sales (R225 x 15 000)
3 375 000
Less: Variable costs (120 x 15 000)
1 800 000
Contribution
1 575 000
Less: Fixed costs
375 000
Net profit
1 200 000
Available production capacity:
15 000 = 75%
15 000 x100 / 75
100% = 20 000
Calculation of potential sales:
12 000 x 20%
= 2 400
16 500 x 5%
=
21 000 x 25%
= 5 250
25 500 x 40%
= 10 200
30 000 x 10%
= 3 000
Total number of units
825
21 675
Calculation of available capacity if expansion takes place:
Available production
20 000
Expansion 45%
9 000
29 000
Estimated net profit:
Next year
Year 2
Year 1
Sales (R225 x 21 675)
4 876 875
4 876 875
Less: Variable costs (120 x 21 675)
2 601 000
2 601 000
Contribution
2 275 875
2 275 875
495 000
495 000
1 230 000
-
550 875
1 780 875
Less: Fixed costs (375 000 + 120 000)
Fixed cost (purchase price)
Net profit
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
(b)
Internal financing:
Does the company have sufficient cash to purchase the machine?
External financing:
If the company does not have sufficient cash, can funds be obtained from
external sources?
Competitors:
If expansion is not carried out, will competitors take over a bigger share of the
market?
(c)
Increased market share
4.18
SC1
SC2
(22 500 machine hours available)
Units manufactured
(4 000 x 4.5 = 18 000 hours leaving only 4 500 hours
4000
(1 500 x 3 = 4 500 hours)
1 500
Units purchased
2 500
4 000
4 000
Rs
Rs
Variable manufacturing costs
24
7.5
Purchase price
30
9
6
1.5
4.5
3
Savings
Machine hours
Savings per machine hour
(6 / 4.5)
R 1.33
(1.5 / 3)
R 0.5
Total savings 4 000 x 1.33 =
R 3 000
If manufactured 1 500 x 0.50 =
R
750
R 6 070
The subcomponents should be manufactured in-house, since the company would save
R6 070 and also have better control over the quality of the products.
However, there are only 22 500 machine hours available so 2 500 units of SC2 would
also have to be bought in.
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
4.19
Part A
(a)
Product
Sales value of
Joint cost
production
allocation
Cost per litre
Value of
closing stock
W
1 575 000 (21 000 x 75)
630 000*
**30
***90 000
X
2 700 000 (30 000 x 90)
1 080 000
36
162 000
Y
2 250 000 (37 500 x 60)
900 000
24
144 000
Z
225 000 (1 500 x 150)
90 000
60
90 000
6 750 000
2700 000
486 000
*Joint cost allocation
(R1 575 000 / R6 750 000) x R2 700 000
**Cost per unit
(R630 000 / 21 000 litres)
***Value of closing stock
[R30 per litre x 3 000 (21 000 – 18 000)]
(b)
Sales
W (18 000 x75)
1 350 000
X (25 500 x 90)
2 295 000
Y (31 500 x 60)
1 890 000
Less Joint costs
2 700 000
Closing stock
Net profit
486 000
5 535 000
3 186 000
2 349 000
Part B
The decision to further process or not, should not be based on the joint cost
allocations.
One would have to compare the additional relevant revenue with the additional
relevant costs of further processing.
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
A
Additional revenue
B
C
15 (90 – 75)
15(105 – 90)
15(75 – 60)
10.50
12
13.50
4.50
3
1.50
36 000
38 800
21 600
(2 160 000 / 60)
(2 328 000 / 60)
(1 296 000 / 60)
8 000
12 933
14 400
Additional variable cost
Contribution to fixed costs
Additional fixed costs per month
(depreciation)
(Machine cost / 60 months)
Number of units sold to justify
further processing
(Fixed costs / Unit contribution)
As long as the average monthly sales exceed the above output level, further
processing is justified.
Alternative:
A
B
C
Total
Additional sales revenue per month
270 000
382 500
472 500
1 125 000
Less: Additional variable costs per month
189 000
306 000
425 250
920 250
Less: Additional depreciation per month
36 000
38 800
21 600
96 400
Average monthly profit
45 000
37 700
25 650
108 350
The above calculations are based on the sales volumes given in part a
4.20
Differential cost statement:
Current
Special order
Difference
position
Sales
4 000 000
5 275 000
1 275 000
Less: Variable costs
1 597 500
2 194 875
597 375
Direct materials
675 000
*923 062.50
248 062.50
Direct labour
810 000
**1 159 312.50
349 312.50
Variable manufacturing overheads
112 500
112 500
-
2 402 500
3 080 125
677 625
500 000
587 500
87 500
1 902 500
2 492 625
590 125
Contribution
Less: Fixed costs
Net profit
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
The order should be accepted since it generates an extra R 656 500 net profit.
Workings:
*Direct materials
R675 000 + [675 000 x (15 000 / 40 000) x 0.98]
**Direct labour
R810 000 + [810 000 x (15 000 / 40 000) x 1.15]
4.21
(a)
R Note
Food and drink at meeting
Material Z
Construction workers
Engineers
Specialist machine
Windows
Other materials
Fixed overhead
Profit margin
78 000
4 485
15 250
1 500
6 000
-
Total relevant cost
105 235
1
2
3
4
5
6
7
8
9
Notes:
1. The food and drink costs are sunk. The meeting with the client has already occurred
and therefore the costs not relevant.
2. Material Z is regularly used by DLW. The 550kg currently in inventory will need to
be replaced and therefore should be valued at replacement cost:
R65 x 550kg = R35 750
The remaining 650kg required for the contract is not owned by DLW and therefore
will need to be purchased at the replacement cost:
R65 x 650 = R42 250
Total relevant cost = R78 000
3. The construction workers have spare capacity to complete the work and are employed
under a guaranteed wage agreement. Construction workers will be paid whether or
not they work on the contract, therefore the cost is not relevant.
4. Engineers are salaried and this is not an incremental cost. However, they are currently
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
at full capacity and do not have time within their normal hours to complete the 90
hours’ work required. The engineers’ additional time should be valued at opportunity
cost.
If overtime is paid, the cost would be 90 hours x R52 = R4 680.
Alternatively, switching engineers from their existing job:
90 hours / 30 hours to produce a unit = 3 units valued at contribution per unit R1 495
= R4,485.
The lower cost of the two options is R4 485 and this is the relevant cost.
5. The first rental period is part way through and the payment of R15 000 has already
been made. Therefore, this is a sunk cost and not relevant. In order to obtain the
machine for the required seven-week period, another 15-week standard rental
agreement would have to be entered into, therefore the relevant cost is R15 250.
If the machine were to be purchased, the relevant cost would be R20 000 (Sales price
– Resale value). The lower relevant cost of the two options is to rent the machine for
another rental period, R15 250.
6. The cost to produce the windows has already been incurred and is therefore sunk and
not relevant.
If DLW use the windows for the build and miss, the conference the sales will not be
lost. The chief executive will visit the clients at a later date to secure the sales,
therefore, there is no incremental loss in contribution. The chief executive’s time is
not relevant as he is paid an annual salary and would receive this irrespective of the
visit to the clients.
However, should the windows be used for the build, DLW would not be able to
attend the conference and be liable to pay the non-attendance fee of R1 500.
Total relevant cost = R1 500
7. 400kg of other materials are required for the house build. The incremental cost is R6
000.
8. Fixed costs are not relevant as they will be incurred irrespective of whether the
contract is taken or not.
9. Profit mark-up is not relevant as DLW is producing a minimum price quotation to
exactly cover the relevant cost.
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
(b)
When quoting a minimum price for the contract, relevant costing principles are being used.
Only relevant costs, i.e. those that change as a direct result of the contract decision, are
included in the quoted cost.
The minimum price will result in DLW making neither a profit nor a loss. This is not a
sustainable pricing policy in the long term as it does not include a contribution to the fixed
costs of the organisation.
Relevant costing does not include a profit margin. This is not suitable for DLW in the long
term as the company is planning to expand into different countries and investors will also
require a return on their investment.
(c)
Market skimming would be a suitable pricing strategy to launch the houses in the new
country. Market skimming charges a high price for the product initially where the product is
unique and there are significant barriers to entry for competitors. The price is reduced as
new competitors enter the market with a similar product. The strategy aims to maximise the
profit from the product.
The high quality materials and unique energy saving technology used in the houses should
command high prices from customers keen to have a house with this technology. The house
that consumers are willing to pay a high price for, together with the barrier to competitors of
the new energy saving technology, make DLW’s product suited to the market skimming
pricing strategy. This market skimming approach will allow DLW to recover the research
and development costs incurred to develop the energy saving technology.
4.22
(a)
X
Labour hours per unit
Machine hours per unit
Production and sales (units)
Labour hours needed for budget
Machine hours needed for budget
Y
0.5
Z
1.5
Total
Available
1.5
1
2
0.75
10 000
6 000
10 000
5 000
9 000
15 000
29 000
12 500
10 000
12 000
7 500
29 500
30 000
From the above table it can be seen that labour hours are the limiting factor.
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
Selling price (R per unit)
X
Y
Z
24
41
42
8
14
Variable cost (R per unit)
8
Contribution per unit (R)
16
33
28
Labour hours per unit
0.5
1.5
1.5
32.00
22.00
18.67
1st
2nd
3rd
Y
Total
Contribution per labour hour (R)
Rank
X
Output (units)
10 000
R
R
R
240 000
205 000
445 000
Variable costs
80 000
40 000
120 000
Contribution
160 000
165 000
325 000
Revenue
(b)
5 000
Fixed costs
402 000
Loss
(77 000)
The shadow price of labour is R22 per hour for the next 1 500 hours (up to a total of
14 000 hours) and then R18.67 per hour for the subsequent 15 000 hours (up to a
total of 29 000 hours). After that the shadow price will be zero because of the lack
of demand.
(c)(i) It is necessary to compare the marginal contribution earned from each batch and
recognise the labour hours used.
Product X
Sales
Price
Contr. per
unit
Total
contr.
(R)
(R)
(R)
Marginal Marginal
contribution contr./lhr
(R)
Hours
Cumulative
used Rank
hours
(R)
2 000
28
20
40 000
40 000
40
1000
1
1 000
4 000
27
19
76 000
36 000
36
1000
2
2 000
6 000
26
18
108 000
32 000
32
1000
4
6 000
8 000
25
17
136 000
28 000
28
1000
5
7 000
10 000
24
16
160 000
24 000
24
1000
7
11 000
12 000
23
15
180 000
20 000
20
1000
8
12 000
13 000
22
14
182 000
2 000
4
500
9
12 500
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
Product Z
Sales
Contr.
Total
Marginal
Marginal
Price
per unit
contr.
(R)
(R)
(R)
(R)
(R)
Hours
contribution contr./lhr
used
Cumulative
Rank
hours
2 000
66
52
104 000
104 000
34.67
3000
3
5 000
4 000
60
46
184 000
80 000
26.67
3000
6
10 000
6 000
54
40
240 000
56 000
18.67
8 000
48
34
272 000
32 000
10.67
10 000
42
28
280 000
8 000
2.67
12 000
36
22
264 000
-16 000
-5.33
The revised optimum production plan is 13 000 X and 4 000 Z.
(ii)
The total contribution from the revised plan is:
(13 000 x R14) + (4,000 x R46) = R366 000
4.23 (a)
Buying in the component:
D
E
F
Total
Contribution per unit
54
72
35
Skilled labour hours per unit
1
1.5
0.5
Contribution per skilled labour hour
54
48
70
Rank
Output (units)
Contribution R
2nd
3rd
1st
2 400
1 000
3 000
129 600 72 000 105 000
306 600
Making the component:
Contribution per unit
Skilled labour hours per unit
Contribution per skilled labour hour
Rank
D
54
1
54
1st
E
72
1.5
48
3rd
F
78
1.5
52
2nd
Total
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
Output (units)
Contribution R
2 400
129 600
0
2 000
0 156 000 285 600
In Month 1, the optimum production plan is to buy in the component and make 2 400,
1 000 and 3 000 units of D, E and F respectively. This will earn a profit of R156 600.
4.24
(a)
Figure 1:
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
Workings:
W1
(4 000 + 2 600 – 300) / 900 = R7
W2
(2 100 + 3 300) / 300 = R18
W3
(1 400 + 2 400) / 200 = R19
W4
(2 800 + 1 500 + 1 155 + 1 350 + 1 520) / 555 = R15
(b)
Product
XXX
(c)
Output
(tonnes)
555
Total cost
Cost per tonne
R
R
8325
15
Y
225
4050
18
Z
120
2280
19
An alternative treatment is to credit the income directly to the profit and loss account
rather than crediting the proceeds to the process from which the by-product was
derived.
4.25
(a)
Figure 2 below shows a flowchart for an input of 100 litres of raw material A and 100
litres of raw material B. The variable cost for an input of 100 litres of raw materials for
each product is as follows:
R
R
Fertilizer
P
Fertilizer
Q
*25.71
*25.71
Raw materials:
100 litres of A at R25 per 100 litres
25.00
100 litres of B at R12 per 100 litres
12.00
37.00
Mixing:
200 litres at R3.75 per 100 litre
Residue x (10 litres at R 0.03)
7.50
(0.30)
7.20
Distilling:
190 litres at R5 per 100 litre
By-product Y (57 litres x R0.04)
Total joint costs
9.50
(2.28)
7.22
51.42
Raw material C (114 litres at R20 per 100
litres)
Raw material D (57 litres per 100 litres)
22.80
31.35
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
Blending:
P (171 litres at R7 per 100 litres)
11.97
Q (114 litres at R7 per 100 litres)
7.98
Cans:
P (57 cans at R0.32 per can)
18.24
Q (19 cans at R0.50 per can )
9.50
Labels:
P (57 cans at R3.33 per 1 000 cans)
0.19
Variable cost from 100 litres input of
each raw material
78.91
Figure 2:
74.54
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
Output is restricted to 570 000 litres of Q. An input of 100 litres of raw materials A
and B yield an output of 114 litres of Q. Therefore, an input of 500 000 litres [570 000
/ (114 / 110)] of each raw material will yield an output of 570 000 litres of Q. An input
to the joint process of 500 000 litres of each raw material will yield an output of
855 000 litres (171 x 5 000) of P. The total manufacturing cost based on an input of
500 000 litres of each raw material is shown below:
Fertilizer P
Fertilizer Q
R
R
Total variable cost:
5 000 x R78.91
394 550
5 000 x R 74.54
372 700
Mixing and distilling fixed costs
13 000 a
13 000 1
Blending fixed costs
19 950 b
13 300 2
i)Total manufacturing cost
427 500
399 000
Notes:
1
Joint costs are apportioned to the main products on the basis of the output from
each process. The mixing and distilling processes yield identical output for
each product. Therefore 50% of the costs are apportioned to each product.
2
(b)
Apportioned on the basis of an output of 171 litres of P and 114 litres of Q.
Manufacturing cost per litre:
Fertilizer P = R 0.50 (R 427 500 / 855 000 litres)
Fertilizer Q = R 0.70 (R 399 000/ 570 000 litres)
(c)
List price per litre:
Costs and profits as a percentage of list price are:
Percentage
List price
100
Net selling price
75
Profit (20% – 75%)
15
Total cost (75% – 15%)
60
Selling and distribution (13.33% x 75%)
10
Manufacturing cost (60% – 10%)
50
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
List price per litre is therefore, twice the manufacturing cost per litre
P = R1.00
Q = R1.40
(d)
Profit for the year:
P = R128 250 (15% of R1) x 855 000 litres
Q = R119 700 (15% x R1.40) x 570 000 litres