PM-G11-SEPTEMBER 2023-TEST 4

The following scenario relates to questions 1 – 5.

A furniture company manufactures high quality dining room furniture that is sold to major retail stores.
Extracts from the budget for last year are given below:
Tables Chairs Sideboards
Sales volume (units) 8,000 26,000 6,000
Average selling price $ 2,200 $ 320 $ 2,800
Direct material cost per unit $ 1,000 $ 160 $ 1,200
Direct labour cost per unit $ 400 $ 60 $ 600
Variable overhead cost per unit $ 40 $ 6 $ 60

The budgeted direct labour cost per hour was $20.

Actual results for last year were as follows:

Tables Chairs Sideboards
Sales volume (units) 7,200 31,000 7,800
Average selling price $ 2,400 $ 310 $ 2,500
Direct material cost per unit $ 1,100 $ 150 $ 1,300
Direct labour cost per unit $ 450 $ 60 $ 600
Variable overhead cost per unit $ 60 $ 8 $ 80

The actual direct labour cost per hour was $25.

Actual variable overhead cost per direct labour hour was $2.50.
The company operates a just-in-time system for purchasing and production and does not hold any
inventory.

Question 1
Based on the above information calculate the adverse total sales mix contribution variance?
$____________________

Question 2
Based on the above information calculate the favourable total sales quantity contribution variance?
$____________________

Question 3
Based on the above information calculate the direct labour rate operational variance, if the
production manager failed to adjust for 10% increment given to all production staff?

A. $6,000,117 adverse
B. $6,117,000 adverse
C. $1,173,611 favourable
D. $1,173,600 adverse

Question 4
State whether the following statement are true or false about production staff efficiency?
Statement True False
A) Efficiency was better than expected. Ο Ο
 B) Efficiency deteriorated during the period. Ο Ο
C) Efficiency was as per expected. Ο Ο
D) The increment in wage rate did not motivate them to improve efficiency. Ο Ο

Question 5
Which of the following statements about planning variance is/are true?

(I) Planning variance is the difference between actual and revised standard.
(II) Planning variance is the difference between original standard and revised standard.
(III) Adverse planning variances are caused by internal inefficiency.
(IV) Managers should be held responsible for all variances, including the planning variances.
(V) Cost centre managers would welcome adverse planning cost variances.

The following scenario relates to questions 6 – 10.

Darask Co
Darask Co is a global consumer electronics manufacturer. It sells its own brand of smartphones,
computers and personal entertainment devices. It uses target costing.

D-Paad - Feasibility study results

The board of Darask Co has conducted a feasibility study in order to decide whether or not to launch
a new device, the D-Paad, in 20X9. The D-Paad will have a threeyear life cycle, over which a total of 80
million units will be sold.

The variable manufacturing and selling cost of the D-Paad is currently estimated at $123 per unit. The
total fixed product cost, including investment and overheads, is budgeted to be $3,360m over the
whole life cycle.

The initial estimate of the selling price included in the feasibility study for the D-Paad was calculated
to ensure a profit mark-up of 60%.

D-Paad - Market research analysis

The board decided to commission some market research to determine the price customers would be
willing to pay for the D-Paad. Sales volumes and sales prices were estimated for the various stages of
the D-Paad’s product life cycle as follows:

Sales volume (millions) Sales price ($/unit)

Introduction 8 425
Growth 14 300
Maturity 56 220
Decline 2 120

Based on the market analysis, the board has approved the development of the DPaad as long as the
total product cost, including manufacturing, investment and overheads, does not exceed $13,000m.

Retail outlets
The board of Darask Co is also considering the opening of some retail outlets which will be located in
major cities around the world. The outlets, as well as selling Darask Co's products, will also hold free-
of-charge surgeries where the product users can seek help on how to use their devices and have their
devices repaired.

The board has been discussing whether it is possible to use target costing in relation to the retail
outlets. The following statements have been made:
Director X Target costing cannot be used because it is difficult to estimate
target selling prices for services.
Director Y Target costing is most useful when what is being developed has a
high degree of variability such as developing new services.
Director Z Target costing when developing new services is difficult because
services are intangible and measuring a unit of service is not
always possible.

Question 6
State whether the following statements about the use of target costing at Darask Co are true or
false?
Statement True False
(1) It relies on just-in-time processes in order to work Ο Ο
(2) It can be used alongside life cycle costing and planning Options Ο Ο

Question 7

What was the initial selling price of the D-Paad from the feasibility study results (to the nearest
whole $)?

A. $264
B. $246
C. $274
D. $346

Question 8

Based on the market research analysis, what is the total cost gap of the DPaad, if Darask Co wants to
achieve a target profit margin of 45%?

A. $3,928m
B. $1,912m
C. $9,072m
D. $11,088m

Question 9

The following proposals have been made in order to close the cost gap of the DPaad. Which of these
proposals is/are likely to reduce the cost gap?
 (1) Introduce 24-hour working in the factories where the D-Paad is made in order to increase
production and build inventory
(2) Incorporate quality assurance inspections into the manufacturing processes to reduce faulty
units
(3) Increase the sales and marketing spend in order to boost the sales volumes of the DPaad

Question 10

In relation to the use of target costing for the retail outlets, state whether of the directors'
statements are true or false?

Statement by: True False

Director X Ο Ο
Director Y Ο Ο
Director Z Ο Ο

The following scenario relates to questions 11 to 15.

CDF has been asked to provide a quotation for a contract for a new customer and is aware that this
could lead to further orders. As a consequence, CDF will produce the quotation by using relevant
costing instead of its usual method of full cost-plus pricing.

The following information has been obtained in relation to the contract:

Components

4,000 components would be required. These could be bought externally for $15 each or alternatively
they could be supplied by RDF, another company within the DF manufacturing group. The variable
cost of the component if it were manufactured by RDF would be $8 per unit, and RDF adds 30% to its
variable cost to contribute to its fixed costs plus a further 20% to this total cost in order to set its
internal transfer price. RDF has sufficient capacity to produce 2,500 components without affecting
its ability to satisfy its own external customers. However, in order to make the extra 1,500
components required by CDF, RDF would have to forgo other external sales of $50,000 which have a
contribution to sales ratio of 40%.

Labour hours

850 direct labour hours would be required. All direct labour within CDF is paid on an hourly basis
with no guaranteed wage agreement. The grade of labour required is currently paid $10 per hour,
but department W is already working at 100% capacity. Possible ways of overcoming this problem
are:

• Use workers in department Z because it has sufficient spare capacity. These workers are paid
$15 per hour.

• Arrange for sub-contract workers to undertake some of the other work that is performed in
department W. The sub-contract workers would cost $13 per hour.

Specialist machine
The contract would require a specialist machine. The machine could be hired for $15,000 or it could
be bought for $50,000. At the end of the contract if the machine were bought, it could be sold for
$30,000. Alternatively, it could be modified at a cost of $5,000 and then used on other contracts
instead of buying another essential machine that would cost $45,000.

The operating costs of the machine are payable by CDF whether it hires or buys the machine. These
costs would total $12,000 in respect of the new contract.

Question 11

What is the relevant component cost for the contract?

A. $49,920
B. $41,600
C. $60,000
D. $51,200

Question 12

What would be the relevant cost for the labour?

A. $12,750
B. $11,050
C. Nil
D. $8,500

Question 13

State whether the following statements are true or false in relation to relevant cost of specialist
machine?

Statement True False

I) The machine operating cost of $12,000 is not relevant Ο Ο
II) The relevant cost for the machine is $35,000, which is the difference
Ο Ο
between hire and purchase cost.
III) Both, the modification cost of $5,000 and purchase cost of another
Ο Ο
new machine of $45,000 are relevant.
IV) The relevant cost is $10,000. Ο Ο

Question 14
What should be the total relevant cost for contract?
$__________________________.

Question 15
Which of the following statement regarding relevant cost is true?

I) Decision should be based on cash flow rather than accounting profit.

II) The cash flow must arise as a direct consequence of the decision.
III) The concept of opportunity costing is important within the area of relevant costing because
operating capacity of a business is limited.
IV) Since relevant costing involves comparing relevant costs of alternative courses of action it is
logical to regard those common costs to be relevant.
V) The decision-making process will be influenced by quantitative and qualitative factors.