GREAT ZIMBABWE UNIVERSITY

FACULTY OF COMMERCE

DEPARTMENT OF ACCOUNTING AND INFORMATION SYSTEMS

EXAMINATION
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BACHELOR OF COMMERCE DEGREE PART 4 SEMESTER 1

STRATEIC MANAGEMENT ACCOUNTING AC411

DATE JUNE 2015

DURATION 3 HOURS

MAIN EXAMINATION

INSTRUCTIONS TO CANDIDATES

1. ANSWER ALL QUESTIONS

2. START EACH ANSWER ON A FRESH PAGE

3. SHOW ALL WORKINGS, WHERE APPLICABLE

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QUESTION 1

Edward Co assembles and sells many types of radio. It is considering extending its
product range to include digital radios. These radios produce a better sound quality than
traditional radios and have a large number of potential additional features not possible
with the previous technologies (station scanning, more choice, one touch tuning, station
identification text and song identification text etc). A radio is produced by assembly
workers assembling a variety of components. Production overheads are currently
absorbed into product costs on an assembly labour hour basis. Edward Co is
considering a target costing approach for its new digital radio product.

Required:
(a) Briefly describe the target costing process that Edward Co should
undertake. (3 marks)
(b) Explain the benefits to Edward Co of adopting a target costing approach at
such an early stage in the product development process. (4 marks)
(c) Assuming a cost gap was identified in the process, outline possible steps
Edward Co could take to reduce this gap. (5 marks)

A selling price of $44 has been set in order to compete with a similar radio on the
market that has comparable features to Edward Co’s intended product. The board has
agreed that the acceptable margin (after allowing for all production costs) should be
20%.

Cost information for the new radio is as follows:

Component 1 (Circuit board) – these are bought in and cost $4·10 each. They are
bought in batches of 4,000 and additional delivery costs are $2,400 per batch.

Component 2 (Wiring) – in an ideal situation 25 cm of wiring is needed for each

completed radio. However, there is some waste involved in the process as wire is
occasionally cut to the wrong length or is damaged in the assembly process. Edward Co
estimates that 2% of the purchased wire is lost in the assembly process. Wire costs
$0·50 per metre to buy.

Other material – other materials cost $8·10 per radio.

Assembly labour – these are skilled people who are difficult to recruit and retain.
Edward Co has more staff of this type than needed but is prepared to carry this extra
cost in return for the security it gives the business. It takes 30 minutes to assemble a
radio and the assembly workers are paid $12·60 per hour. It is estimated that 10% of
hours paid to the assembly workers is for idle time.

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Production Overheads – recent historic cost analysis has revealed the following
production overhead data:

Total production overhead Total assembly labour hours

$
Month 1 620,000 19,000
Month 2 700,000 23,000
Fixed production overheads are absorbed on an assembly hour basis based on normal
annual activity levels. In a typical year 240,000 assembly hours will be worked by
Edward Co.

Required:

(d) Calculate the expected cost per unit for the radio and identify any cost gap
that might exist. (13 marks)
(TOTAL MARKS: 25)

QUESTION 2

MUSHAMBANZOU Ltd produces three products using three different machines.

The following information is available for a product for a period:

Product X Y Z
($) ($) ($)
Selling price per unit 20 15 10
Direct materials 8 5 4
Direct labour 5 3 2
Overheads 2 1 1

Estimated sale demand (unit) 310 280 250

Machine hours required per unit:

Machine 1 4 2 1
Machine 2 4 3 2
Machine 3 3 1 3

Machine capacity is limited to 2,000 hours for each machine.

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Required:
(a) Calculate throughput accounting ratio and rank the products. (18 marks)
(b) Calculate the revised production schedule and the maximum profit that the
company is likely to get given that there is a bottleneck. ( 7 marks)
(TOTAL MARKS: 25)

QUESTION 3

Mahobo Co manufactures three products, X, Y and Z. Demand for products X and Y is

relatively elastic whilst demand for product Z is relatively inelastic. Each product uses
the same materials and the same type of direct labour but in different quantities. For
many years, the company has been using full absorption costing and absorbing
overheads on the basis of direct labour hours. Selling prices are then determined using
cost plus pricing. This is common within this industry, with most competitors applying a
standard mark-up.

Budgeted production and sales volumes for X, Y and Z for the next year are 20,000
units, 16,000 units and 22,000 units respectively.

The budgeted direct costs of the three products are shown below:

Product X Y Z
$ Per unit $ per unit $ per unit
Direct materials 25 28 22
Direct labour ($12 per hour) 30 36 24

In the next year, Mahobo Co also expects to incur indirect production costs of
$1,377,400, which are analysed as follows:

Cost pools $ Cost drivers

Machine set up costs 280,000 Number of batches
Material ordering costs 316,000 Number of purchase orders
Machine running costs 420,000 Number of machine hours
General facility costs 361,400 Number of machine hours
––––––––––
1,377,400
––––––––––

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The following additional data relate to each product:

Product X Y Z
Batch size (units) 500 800 400
No of purchase orders per batch 4 5 4
Machine hours per unit 1·5 1·25 1·4

Duff Co wants to boost sales revenue in order to increase profits but its capacity to do
this is limited because of its use of cost plus pricing and the application of the standard
mark-up. The finance director has suggested using activity based costing (ABC) instead
of full absorption costing, since this will alter the cost of the products and may therefore
enable a different price to be charged.

Required:

(a) Calculate the budgeted full production cost per unit of each product using
Duff Co’s current method of absorption costing. All workings should be to two
decimal places.
(3 marks)
(b) Calculate the budgeted full production cost per unit of each product using
activity based costing. All workings should be to two decimal places.
(11 marks)
(c) Discuss the impact on the selling prices and the sales volumes OF EACH
PRODUCT which a change to activity based costing would be expected to
bring about. (6 marks)
(TOTAL MARKS: 20)

QUESTION 4

A company is seeking to establish whether there is a linear relationship between the

level of advertising expenditure and the subsequent sales revenue generated. Figures
for the last 10 months are as follows:

Month Advertising Expenditure Sales Revenue

$ 000 $ 000
1 4 45
2 3 38
3 2 35
4 5 47
5 6 58
6 8 65
7 3 43
8 4 48
9 5 60
10 1 30

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REQUIRED:
(a) Draw a scatter diagram for this data and comment on any relationship
observed? (4 marks)
(b) Using the scatter diagram drawn above for the period 2003-2014 estimate a
regression equation or model for this data. (4 marks)
(c) Estimate the regression model or equation mathematical using the least-
squares method. (5marks)
(d) Evaluate the regression equation in terms of its likely reliability for
forecasting by calculating:
i. The Coefficient of Determination, (9 marks)
ii. The Standard Error of the Estimate, and (4 marks)
iii. The Standard Error of the Coefficient. (4 marks)
(TOTAL MARKS: 30)

END OF EXAM

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