OFFICE USE ONLY

Monash University
Semester One Examination 2009
Faculty of Business and Economics
Department of Accounting and Finance

EXAM CODES: AFW2020

TITLE OF PAPER: COST INFORMATION FOR DECISION MAKING
EXAM DURATION: 3 hours
READING TIME: 10 minutes

THIS PAPER IS FOR STUDENTS STUDYING AT: (office use only - tick where applicable)

 Berwick  Clayton  Peninsula  Distance Education  Open Learning

 Caulfield  Gippsland  Sunway  Hong Kong  Other (South Africa)

During an exam, you must not have in your possession, a book, notes, paper, calculator, pencil case, mobile
phone or any other material/item which has not been authorised for the exam or specifically permitted as noted
below. Any material or item on your desk, chair or person will be deemed to be in your possession. You are
reminded that possession of unauthorised materials in an exam is a disciplinable offence under Monash Statute
4.1.

AUTHORISED MATERIALS

CALCULATORS  YES  NO
(Only calculators with an ‘approved for use’ Faculty label can be used)

OPEN BOOK  YES  NO

SPECIFICALLY PERMITTED ITEMS  YES  NO

if yes, items permitted are:

This paper consists of six (6) questions printed on a total of six (6) pages. Students must attempt to answer
ALL questions.

PLEASE CHECK THE PAPER BEFORE COMMENCING. THIS IS A FINAL PAPER.

STUDENT ID: …………………….......................……...DESK NUMBER: …………....………….

THIS EXAMINATION PAPER MUST BE INSERTED INTO THE ANSWER BOOK AT THE
COMPLETION OF THE PAPER. NO EXAMINATION PAPERS SHOULD BE REMOVED FROM
THE EXAMINATION ROOM
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AFW2020 COST INFORMATION FOR DECISION MAKING

Question 1

(a) Explain the similarities and differences between institutional theory and contingency theory
as applied to management accounting research.
(b) What is an engineering approach to cost estimation? In which kinds of organisations do you
see its relevance? Explain.
(c) What are the key distinguishing features of service organisations?
(d) Explain the problems that can arise in product costing systems that use only volume-based
cost drivers?
(5 + 5 + 5 + 5 = 20 marks)

Question 2

Duperchip manufactures Superchip for mobile phones. Direct materials are added at the
beginning of the production process and conversion costs are incurred evenly during the process.
Some Superchips are spoiled during the production process and these defective units are detected
during inspection of the finished units at the end of the process. The spoiled units are disposed of
at zero net realisable value. Duperchip uses FIFO costing method. The table below summarises
details on physical units, costs and stages of completion for the month of March 2008.

Physical units Direct materials Conversion cost

Work in process 1 March 400 $64,000 $10,200
Degree of completion 100% 30%
Started during March 1,700
Completed during March 1,400
Work in process 31 March 300
Degree of completion 100% 40%
Total costs added in March $382,500 $171,000
Normal spoilage as a
percentage of good units 15%
Degree of completion
of all spoilage 100% 100%

Required:
(a) For each category of cost calculate equivalent units.
(b)For each category of cost calculate cost per equivalent unit.
(c) Calculate the cost of units started and completed during March.
(d) Compute the cost of work in process at 31 March.
(e) Compute the additional cost to complete 1 March inventory.
(f) Provide the journal entry to record the cost of abnormal spoilage.
(6 + 2 + 2 + 2 + 2 + 2 = 16 marks)

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Question 3

Mandy Moore is the new manager of Isla Consultant, a small company that provides consultancy
courses. The company offers two basic consultancy packages - two-day short courses and five-
day courses. Currently, Moore is reviewing the company’s total costs with the intention to set
new pricing for the coming year. Over the past 12 months, the company ran 30 two-day courses,
with an average of 50 participants, and 10 five-day courses, with an average of 30 participants.
Total costs amounted to $957,200. After several discussions with her assistant, Moore decided to
base prices for the coming year on the cost per day for last year plus a 20 percent profit margin.

The following activities and costs are available for last year:
Quantity of
Activity Costs Activity Driver Activity Driver
Advertising $40,000 Number of courses 40
Enrol participants $16,200 Number of participants 1,800
Hire presenters $550,000 Number of days 110
Hire premises $30,800 Number of days 110
Hire audiovisual equipment $88,000 Number of days 110
Produce handouts $25,200 Number of participants 1,800
Lunches $207,000 Number of person-days 4,500
Total Costs $957,200

Required:

(a) Estimate the costs of a two-day course and a five-day course, using the average cost per
day approach (round to the nearest dollar).
(b) Estimate the cost of a two-day and a five-day course, using activity-based costing.
(c) Which cost in requirements (a) and (b) do you think would provide a more reliable basis
for cost-plus pricing? Why?

(6 + 9.5 + 2.5 = 18 marks)

Question 4

Babel Ltd manufactures and distributes language learning software. Although most of the
company’s operations have focused on writing the software, there is a small ‘Finishing’
department that burns the software to DVDs and builds in anti-piracy controls on each DVD.
Babel Ltd has recently been approached by Dolittle Pty Ltd, which has offered to provide the
DVD-burning and anti-piracy processing at a cost of $1.60 per DVD.

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Question 4 (cont’d)

If Babel Ltd accepts the offer from Dolittle Pty Ltd, the Finishing department will be closed.

The management accountant has obtained the following historical information regarding the
Finishing department for the year ended April 2009:

Number of DVDs 300,000

Salaries $455,000
Warehouse rental $42,000
Depreciation on machinery $87,500
Book value of machinery $385,000
Insurance $22,100
Allocated IT support costs $18,400
Allocated HR costs $15,700
Repairs and maintenance on machinery $7,250
Cost of blank DVDs $75,000

Salaries are for the five employees in the Finishing department. These salaries are fixed in their
employment contracts, together with a required increase of 3% per annum from May each year. If
the department closes, the manager (with a salary of $105,000) would be retrained and
transferred to another department within Babel Ltd. The other employees would be retrenched
and paid out a retrenchment package equal to their annual salary for the year ended April 2009.

The Finishing department occupies 80m2 of the warehouse. Half of this would be taken over by
the Accounting department if the Finishing department were to close. The other half would be
unused. Rent is payable on the warehouse as a whole.

The machinery used in the Finishing department cannot be used elsewhere in the business.
However, it is estimated that it could be sold for $420,000.

The insurance policy relates exclusively to the Finishing department and can be cancelled
without penalty.

The IT and HR costs reflect the cost of support departments that have been allocated to the
Finishing department based on the number of employees in the department. However, the
Finishing department has made little actual use of IT and HR services and it is estimated that
closing the Finishing department would only save 20% of the allocated costs.

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Question 4 (cont’d)

It is anticipated that the number of DVDs processed will increase to 320,000 for the next year.
Costs other than the cost of DVDs can be considered fixed in relation to production and, except
as noted above, are estimated to be the same for the next year.

Required:

(a) Present an analysis of relevant costs to determine whether or not Babel Ltd should accept the
offer from Dolittle Pty Ltd for the year ended April 2010.
(b)Briefly discuss the factors that Babel Ltd might take into account if it considers using Dolittle
Pty Ltd beyond 2010.
(c) Explain what is meant by the terms ‘Sunk cost’ and ‘Opportunity cost’. Give one example of
each of these.
(13 + 3 + 4 = 20 marks)

Question 5

Touch Wood Furniture Company produces wooden chairs. The company has just prepared its
budget for the forthcoming financial year:

Sales 1, 681,200
Less: Variable Costs 773,352
Contribution Margin 907,848
Less: Fixed Costs 450,000
Net Profit 457,848

Required:

(a) Calculate the contribution margin ratio.

(b) How much revenue must the company earn to break even?
(c) What is the amount of sales revenue that Touch Wood Furniture Company must earn in order
for it to make a profit equal to 9% of sales?
(d) If Touchwood Furniture Company decides to increase its unit selling price by 10%, what
effect would this have on the contribution margin ratio, assuming that the unit variable cost
also increased by 10%? Support your answer with appropriate calculations.
(e) Suppose that management has decided to give a 3% commission on all sales. The budgeted
income statement given above does not reflect this commission. Calculate the contribution
margin ratio, assuming that the commission will be paid. What effect does this have on the
breakeven point?
(1 + 1 + 3 + 3 + 4 = 12 marks)

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Question 6

Santana (Pty) Ltd is a company manufacturing soccer balls for the 2010 soccer world cup. The
cost of manufacturing 100,000 soccer balls is as follows:

$
Variable cost per soccer ball
Direct material 60.00
Direct labour 18.00
Manufacturing overhead 9.00
Selling and administrative cost 9.00
96.00

Fixed costs
Manufacturing overhead 240,000
Selling and administrative costs 160,000

Santana (Pty) Ltd invested $5,000,000 in this project and the desired rate of return is 20%. The
company is using cost-plus pricing based on absorption cost.

Required:

(a) Calculate the cost price per unit.

(b)Calculate the mark-up percentage.
(c) Calculate the selling price per unit.
(d)Verify your calculations to (b) and (c) by preparing an income statement.
(e) Explain three disadvantages that can result when cost-plus prices are based on
absorption costs.
(2 + 4 + 2 + 3 + 3 = 14 marks)

END OF PAPER

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