Contents

TRIPLE Limited........................................................................................................................ 2
A-ABC/ALLGRO/FERTIBEST/TRIALN09...................................................................................... 4
A/EMA/Processco d13.............................................................................................................. 5
B-CVP/Hair/D12....................................................................................................................... 6
B-PRICING/SEEWRAP/SILREP/TRIALN09................................................................................... 8
B- DM ROBBER make or Buy/J12........................................................................................... 10
BCC-BUDGET LCURVE............................................................................................................ 11
Truffle D12............................................................................................................................. 13
D-STD-PO/REBYC/TRIALN09................................................................................................... 14
E-PM/LORA/TRIAL N09.......................................................................................................... 16
HSC/PAFd13.......................................................................................................................... 18

TRIPLE Limited
(a) Traditional cost per unit
D

Lab($6/hour)

Mat.

20

12

25

Direct costs

23

21

31

42

28

84

65

49

115

Production
overhead

(28/machine hour)

(b) ABC cost per unit

Examiners note: Each step required has been given its own sub-heading to make the
procedure clear. The basic principle is to find an overhead cost per unit of activity for each
element of overhead cost. In some cases it might then be possible to find an overhead cost
per unit directly; here it is probably easier to split overheads between each product type first
and then find a cost per unit as shown.
(i) Total overheads
These were given at $654,500
(ii) Total machine hours (needed as the driver for machining overhead)
Product
Hours/unit Production units
Total hours
D
1 1,
750 2
1,125
C
1
1,250 2
1,250
P
3
7,000
21,000
Total machine hours
23,375
(iii) Analysis of total overheads and cost per unit of activity
Type of
overhead

Driver

Total
overhead

Level
ofdriver
activity

Cost per
driver

Set ups
Machining
Materials
handling
Inspection

No of setups
Machine hours
Materials movement

35
20
15

229,075
130,900
98,175

670
23,375
120

341.90
5.60
818.13

No of Inspections

30
100

196,350
654,500

1,000

196.35

(iv) Total overheads by product and per unit

D
C
P
Overhead
Set-ups
75 25,643
115 39,319
480
Machining
1,125
6,300
1,250
7,000 21,000
Material
12
9,817
21 17,181
87
Handling
2

164,113
117,600
71,177

670
23,375
120

229,075
130,900
98,175

Inspection
Total ohd
Cost
UNITS
Costs per
unit

150

29,453
71,213

180

750
$94.95

35,343
98,843

670

1250
$79.07

131,554
484,444

1,000

196,350
654,500

7000
$69.21

(v) Cost per unit

Direct costs (from (a))

Overheads (from (iv))

23.00
21.00 31.00
94.95 79.07 69.21
117.95
100.07
100.21

(c) Comment
The overhead costs per unit are summarised below together with volume of production.
Product
D
C
P
Volume
750 1,250 7,000
Conventional overheads $42 $28
$84
ABC overheads
$95 $79
$69
OR

65

49

117 100

115

100

1. INITIALLY UNDER traditional costing/absorption costing the high volume pdt, P has highest
overhead per unit compared to D and C.
2. UNDER Activity Based Costing the overhead cost of D and C has risen whilst that of P has
fallen.
This is in line with the comments of many who feel that ABC provides a fairer unit cost better
reflecting the effort required to make different products.
This is illustrated here with product P which may take longer to make than D or C, but once
production has started the process is simple to administer. This may be due to having much
longer production lines.
Under abc we use cost driver like mat. movement, setup, inspection
Products D and C are relatively minor volume products but still require a fair amount of
administrative time by the production department; i.e. they are complex to produce`.

To show how complex and full of hassle D and C it is explained by the following table of
`activities per 1,000 units produced`. (CAN ALSO DO per 1,000 per 100 or tens)
D
C
P
Units
750
1250
7000
Setups for total units (all)
75
115
480
Materials handling (mvment)
12
21
87
Inspection
150
180
670
SETUP PER UNIT
75/750=0.1
115/1250=0.092
480/7000=0.06
SETUP PER 1000
100
92
60
MAT HANDLG PER UNIT
12/750=0.016
21/1250=0.0168
87/7000=0.0124
MAT HANDLG PER 1000
16
16.8
12.4
3

INSPECTION PER UNIT

INSPECTION PER 1000

150/750=0.2
200

180/1250=0.144
144

670/7000=0.0957
95.7

Note: Not possible to COMPARE WITHOUT the calculation above.AS the cost driver overl P is
highest but need to examine per unit or 100 to correctly claim D and C is consuming more
activity.CAN EVERYONE SEE WHAT I MEAN?
The table above highlights the problem.
Product P has fewer set-ups, material movements and inspections per 1,000 units than or C
As a consequence product Ps overhead cost per unit for these three elements has fallen
The machining overhead cost per unit for P is still two or three times greater than for
products D or C, but because this
overhead only accounts for 20% of the total overhead this has a small effect on total cost.
The overall result is Ps fall in production overhead cost per unit and the rise in those figures
for D and C
(d) Pricing and Profitability
Switching to ABC can, as in this case, substantially change the costs per unit calculations.
Consequently if an organisations selling prices are determined by a version of cost-plus
pricing then the selling prices would alter.
In this case the selling price of D and C would rise significantly, and the selling price of P
would fall. This, at first glance may be appealing however:
Will the markets for D and C accept a price rise? There could be competition to consider. Will
customers be willing to pay more for a product simply because Triple Ltd has changed its cost
allocation methods?
Product P is a high volume product. Reducing its selling price will have a dramatic effect on
revenue and contribution.
Whether such a reduction would be compensated for by increased volumes.
Alternatively, one could take the view that prices are determined by the market and therefore
if Triple Ltd switches to ABC, it is not the price that would change but the profit or margin per
unit that would change.
Perhaps better to just maintain the price and just enjoy the higher margin.
This can change attitudes within the business. Previously high margin products (under a
traditional overhead absorption system) would be shown as less profitable. Salesmen
(possibly profit motivated) can begin to push the sales of different products seeking higher
personal rewards. (Assuming commission based on profits per unit sold)
It must always be remembered that if overheads are essentially fixed then they should be
ignored in business decision making.
Switching to ABC can change reported profits per unit but it is contribution per unit that is
perhaps more important.

A-ABC/ALLGRO/FERTIBEST/TRIALN09
1 a) (i)
Budgeted selling and distribution costs
OH absorption rate = ------------------------------------------------Budgeted total list price of fertilizers
$ 880,000
= ------------- = 0.16
$5,500,000

Charge for selling and distribution OH

4

Order A
Order B

$1,200,000 x 0.16 = $ 192,000

$900,000 x 0.16 = $144,000

(ii)
Cost pools
Invoice
processing

Cost
($)
280,0
00

Cost driver
No. of invoice

Packing
costs

120,0
00

Size of
package:
large
small

Delivery
costs

180,0
00

Delivery
journeys
Delivery
distance
No. of orders

300,0
00

25%x280,00
0 = 70,000
75%x280,00
0 = 210,000

cost

no.

of 1
8.75
- invoice 2
lines
15.00
Packaging cost
Small
27.00
Delivery costs - journey
40/12
- 3.33
distance
8
3.20
Other OH costs
1
37.50

28,000

x
x

7.50 per invoice line

OH cost for Order B

8.75 1
8.75
7.5 8
60.00
package Large
36.00
40/6
6.67
0.40 40
16.00
37.50 1
37.50
94.7

8.75 per invoice

36 per large
package

27 per small
package
1,000
40 per delivery
journey
350,000 0.40 per del. distance

8,000
37.50 per order

140,000

Cost driver rates

8,000

40,000

OH cost for Order A

Invoice
invoice

(4 x = 2m)

No. of cost
driver

Invoice line

Other OH

x
x

8.75
7.5
package

x
x

0.40
37.50
1

64.92
(22 x =
11m)

A/EMA/Processco d13
DESCRIBE TWO TECHNIQUES in the CONTEXT of EMA.
Input/outflow analysis
This technique records material inflows and balances this with outflows on the basis that what
comes in, must go out. So, if 100 kg of materials have been bought and only 80 kg of
5

materials have been produced, for example, then the 20 kg difference must be accounted for
in some way. It may be, for example, that 10% of it has been sold as scrap and 10% of it is
waste. By accounting for outputs in this way, both in terms of physical quantities and, at the
end of the process, in monetary terms too, businesses are forced to focus on environmental
costs.
Flow cost accounting
This technique uses not only material flows but also the organisational structure. It makes
material flows transparent by looking at the physical quantities involved, their costs and their
value. It divides the material flows into three categories: material, system and delivery, and
disposal. The values and costs of each of these three flows are then calculated.
The aim of flow cost accounting is to reduce the quantity of materials which, as well as having
a positive effect on the environment, should have a positive effect on a businesss total costs
in the long run.
Activity-based costing
ABC allocates internal costs to cost centres and cost drivers on the basis of the activities
which give rise to the costs. In an environmental accounting context, it distinguishes between
environment-related costs, which can be attributed to joint cost centres, and environmentdriven costs, which tend to be hidden in general overheads.
Life cycle costing
Within the context of environmental accounting, life cycle costing is a technique which
requires the full environmental consequences, and therefore costs, arising from production of
a product to be taken account of across its whole life cycle, from cradle to grave. Note: Only
two techniques were required.

B-CVP/Hair/D12

(a) Weighted average contribution to sales ratio (WA C/S ratio) = total contribution/total sales
revenue
Per unit:
Selling price
Material 1
Material 2
Skilled labour
Unskilled labour
Contribution

C
$

S
$
110

(12)
(8)

D
$
160

(28)
(22)
(16)

(14)

(34)
(20)

60

120
(16)
(26)
(22)
(28)

56

28

Sales units
20,000
22,000
26,000
Total sales revenue
$2,200,000 $3,520,000 $3,120,000
Total contribution $1,200,000 $1,232,000
$728,000
WA C/S ratio = ($1,200,000 + $1,232,000 + $728,000)
($2,200,000 + $3,520,000 + $3,120,000) = $3,160,000/$8,840,000 = 3575%
(b) Break-even sales revenue = fixed costs C/S ratio
= $640,000/3575% = $1,790,20970
6

(c)
Per unit:
Contribution
Selling price
C/S ratio
Ranking
Product

C
$
60
110
055
1
Revenue
$

Sell0
Sell C
Sell C,S
Sell c,s&D

S
$

0
2,200,000
3,520,000
3,120,000

D
$
56
160

035
2
Cumulative
Revenue
$
0
2,200,000
5,720,000
8,840,000

28
120
023
3

Contribution
$
0
1,200,000
1,232,000
728,000

Cumulative
Profit
$
(640,000)
560,000
1,792,000
2,520,000

(d) From the chart above it can be seen that, if the products are sold in order of the highest
ranking first, break even will take place at a point just under $1,200,000 of sales revenue.
BEP = Fixed costs Product Cs C/S ratio
= $640,000 055 = $1,163,636
This is substantially earlier than the BEP if the products are all sold in a constant mix, which is
$1,790,209, as calculated in (b) above.
This is because the more profitable product, C, contributes more per unit to fixed costs when
being sold on its own, than when a mix of products C, S and D are sold.
The weighted average C/S ratio of all 3 products is only 3575%, compared to Cs C/S ratio of
55%. Obviously, then, break even will occur earlier if C is sold in priority.
In reality, the mix of sales will vary throughout the year and Hair Co can neither assume that
the products are sold in a constant mix, nor that the most profitable can be sold first.

B-PRICING/SEEWRAP/SILREP/TRIALN09
8

a) The managing director has adopted a full cost plus pricing strategy, which means that a
profit margin of 50% is added to the budgeted full cost of the product.
Disadvantages of this pricing strategy
o Its focus is internal internal costs and internal targets. It therefore takes no account of the
market conditions faced by Brite Division, which is why the divisions selling price bears
little resemblance to those of competitors. By adopting a fixed mark-up, it does not allow
the company to react to competitors pricing decisions.

o Absorption bases used when calculating the full cost are decided arbitrarily. Depending on
the absorption basis used in the calculation of total cost, the strategy can produce different
selling prices.

Advantages of this pricing strategy

o It is quick, cheap and relatively easy to apply. Pricing can
junior
management

o It ensures that all costs are covered and that the company
figures
used
in
the
pricing
calculation

o The costs of collecting market information on demand and

therefore be delegated to more

if
necessary.
makes a profit, provided budget
are
reaonably
accurate.
competitor activity are avoided.

(5 x 1 = 5 m; max 4 m)
b) Market penetration pricing
Market penetration pricing is a policy of low prices when a product is first launched in order to
achieve high sales volumes and hence gain a significant market share. If Brite Division had
adopted this strategy it might have discouraged competitors from entering the market.
(2 m)
Marketing skimming
This pricing strategy involves charging high prices when a product is first launched and
spending heavily on advertising and promotion to obtain sales so as to exploit any price
insentivity in the market. Such an approach would have been particularly suitable for Brite
Divisions circumstances: demand for the software would have been relatively inelastic,
customers being prepared to pay high prices for the software given its novelty appeal. As the
product moves into later stages of its life cycle, prices can be reduced on order to remain
competetive.
(2 m)
c) When demand is linear the equation for the demand curve is:
P = a bQ
$5
P = $800 - ----- Q
500
P = 800 - 0.01Q
(2 m)

d) (i)
Marginal cost per unit calculation
Machine Machine
Group 1
Group 8

Machine
Group 26
9

Assembl
y

Total

Materials
Labour
Variable
overheads
Setting-up costs

$
39.00
3.00
0.90

$
25.50
2.40
1.10

$
1.40
1.20

$
4.50
1.80
0.50

$
69.00
8.60
3.70

0.10
43.00

0.06
29.06

0.04
2.64

___
6.80

0.20
81.50

The lowest selling price per batch is therefore $81.50 x 200 = $16,300.

However, to sell at such a price would mean that the component would make no contribution
to fixed costs and such costs much be covered if the company is to make a profit.

Other factors to be considered

o It is inappropriate to set prices with reference only to a companys internal cost structure.
Of equal importance is the wider market environment and the pricing strategy of
competitors.

o Triple-A must take into account the likely reaction of competitors. For example, such a
policy could trigger off a price war in which the company could lose more than it gains.

o Triple-A cannot continue to sell at the minimum price indefinitely. It must therefore decide
its future plans for the component. Will it reduce costs or increase prices? It may, however,
take longer than the company imagines to be able to charge the full price for the
component.

o Triple-A should considr the approach to be taken if existing customers for the component
discover the special price being offfered to other customers. Will Triple-A gain a few new
customers at the expense of alienating existing valuable customers?

(10 x 1 = 10 m)

B- DM ROBBER make or Buy/J12

1 (a) W1

Current no. of batches produced = 80,000/500 = 160.

New no. of batches produced = 80,000/400 = 200.
Current cost per batch for keypads = ($26,000 $4,000)/160 = $1375.
Therefore new activity related batch cost = 200 x $1375 = $27,500.
Current cost per batch for display screens = ($30,000 $6,000)/160 = $150.
10

Therefore new activity related batch cost = 200 x $150 = $30,000.

Keypads

Display
Screens
$

$
Direct materials ($160,000/2) + $160,000/2 x 105
164,000
$116,000 x 102
118,320
Direct labour
40,000
60,000
Heat and power $64,000 (50% x $40,000)
44,00
$88,000 (50% x $60,000)
58,000
Machine set up costs:
Avoidable fixed costs
4,000
6,000
Activity related costs (w1)
27,500
30,000
Avoidable depreciation and insurance costs:
40% x $84,000
33,600
40% x $96,000
______
38,400
Total relevant manufacturing costs
313,100
310,720
Number of units
80,000
80,000
Relevant cost per unit
391375
3884
Cost per unit of buying in
41
43
Incremental cost of buying in
018625
0416
As each of the components is cheaper to make in-house than to buy in, the company should
continue to manufacture keypads and display screens in-house.
(b) The attributable fixed costs remain unaltered irrespective of the level of production of
keypads and display screens, because as long as one unit of either is made, the costs incur.
We will make at least one unit of each component as both are cheaper to make than buy.
Therefore they are an irrelevant common cost.
Keypads
Display screens
$
$
Buy
41
43
Variable cost of making ($275,500/80,000)
344
($266,320/80,000)
3.33
Saving from making per unit
0.66
0.97
Labour hour per unit
05
075
Saving from making per unit of limiting factor
132
1.29
Priority of making
1
2
Total labour hours available = 100,000.
Make maximum keypads i.e. 100,000
(100,000 x 05 hours)

use 50,000 labour hours

Make 50,000/075 = 66,666 display screens Therefore buy in 100,000 66,666 = 33,334
display screens.
(c) Non-financial factors
o

The company offering to supply the keypads and display screens is a new company. It
risky to rely on it for continuity of supplies. Many new businesses go out of business within
the first year of being in business and, without these two crucial components, Robber Co
would be unable to meet demand for sales of control panels.
Robber Co need to consider whether there are any other potential suppliers of the
components. This would be useful as a price comparison now and to establish the level of
11

dependency that would be committed to if this new supplier is used. If the supplier goes
out of business, will any other company be able to step in? If so, at what cost?
o

The supplier has only agreed to these prices for the first two years. After this, it can
increase its prices dramatically. By this stage, Robber Co would probably be unable to
begin easily making its components in house again, as it would probably have sold off its
machinery and committed to larger sales of control panels.

The quality of the components could not be guaranteed. If they turn out to be poor quality,
this will give rise to problems in the control panels, leading to future loss of sales and high
repair costs under warranties for Robber Co.
The supplier is based overseas increases the risk of quality and continuity of supply, since
it has even less control of these than it would if it was a UK supplier.

o
o

Robber Co would need to establish how reliable the supplier is with meeting promises for
delivery times. This kind of information may be difficult to establish because the supplier is
a new company. Late delivery could have a serious impact on Robber Cos production and
delivery schedule.

BCC-BUDGET LCURVE
(a)

$
Frame and massage mechanism
Leather
2 m x $10 x 100/80
Labour (W1)
Total

9695

Target cost $120 x 80%

Cost gap

96.00
095 per chair

(W1)

5100
2500
2095

Y = axb
Y = 2 x 1280074000581
Y = 1396674592
Average cost per chair = 1396674592 x $15 = $2095

Alternative calculations
Cumulative output Average time
(units)
per unit (hrs)
1
2
2
19
4
1805
8
171475
16
16290125
32
154756188
64
147018378
128
139667459
12

Average cost per chair = 1396674592 x $15 = $2095

(b)
o Re-design the chair to remove unnecessary features and reduce cost
o Negotiate with the frame supplier for a better price/cost. This may be easier when sales
volume increase as suppliers are willing to give discounts for bulk buying.
o Alternatively find a different frame supplier that offers a better price. Must maintain the
required quality.
o Buy leather from different suppliers at a better price.
o Reducing the level of waste to save cost.
o Improve the rate of learning by better training and supervision
o Employ cheaper labour by reducing the skill level expected. Care would be needed here not
to sacrifice quality or push up waste rates.
(c) The cost of the 128th chair
$
Frame and massage mechanism
5100
Leather
2500
Labour
129 hours x $15 p.h. (W2)
1935
Total
9535
Against a target cost of $96 the production manager is correct in his assertion that the
required return is now being achieved.
(W2) Calculate the cost of the first 127 chairs and deduct that cost from
the cost of the first 128 chairs.
Y = 2 x 1270074000581
Y = 139748546
Total time for 127 chairs = 127 x 139748546 = 17748 hours
Total time for 128 chairs = 128 x 1396674592 = 178.77 hours
Time for the 128th chair =

129 hours

Truffle D12
SH

RSH

RSH

AH

AH

SR

SR

RSR

RSR

AR

PE

PR

OE

OR

HOW TO USE
PE

(SH-RSH)SR

PR

(SR-RSR)RSH

(a)
13

Standard rate of labour per hour = $6/05 = $12 per hour

TOTAL VARIANCES MEAN SC - AC (conventional) aka overall variances
TOTAL Labour rate variance = (SR x AH) - (AR x AH) = ($12 x 12,000) $136,800 = $7,200 F
TOTAL Labour eff. var.= (SH AH) x SR

= [(20,500 x 05) 12,000] x $12 == $21,000 A

(b) Labour rate planning var. = (SR Revised SR) x RSH

= [$12 ($12 x 095)] x (20,500 x 05 x 12) = $7,380 F
Labour rate operational var. = (RSR AR) x AH
= ($1140 $1140) x 12,000 = 0
Labour eff. planning var. = (SH Revised SH) x SR
= [(20,500 x 05) (20,500 x 05 x 12)] x $12 = $24,600 A
Labour efficiency operational var. = (RSH AH) x RSR
= (12,300 12,000) x $11.40 = $3,420 F
(c) Discussion
Looking at the total variances alone which is UNFAVOURABLE OVERALL 13,800 , it looks like
the production manager was unable to control his staffs efficiency, since the labour efficiency
variance is $21,000adverse. It also looks like he has managed to secure labour at a lower
rate. Perhaps the lower efficiency caused by the lower skilled staff used.
HOW TO assess
To assess the production managers performance fairly, only the operational variances should
be taken into account.
REASON: differentiate between PLANNING and OPERATIONAL
This is because planning variances reflect differences that arise because of factors that are
outside the control of the production manager such as faulty budgets .
Operational variances can arise through factors that are almost entirely within the control of
operational managers.
The operational variance for the labour rate was $0, which means that the labour force were
paid exactly what was agreed at the end of October: their reduced rate of $1140 per hour.
The manager clearly did not have to pay anyone for overtime, for example, which would have
been expected to push this rate up.
The rate reduction was secured by the company and was not within the control of the
production manager, so he cannot take credit for the favourable rate planning variance of
$7,380. The company is the source of this improvement.
For labour efficiency, the planning and operational variances give us more information about
the total efficiency variance of $21,000A. When this is broken down into its two parts, it
becomes clear that the operational variance, for which the manager does have control, is
actually $3,420 favourable.
This is because, when the recipe is changed as it has been in November, the chocolates
usually take 20% longer to make in the first month whilst the workers are getting used to
handling the new ingredient mix.

14

When this is taken into account, by REVISING THE STANDARDS it can therefore be seen that
workers took less than the 20% extra time that they were expected to take, hence the
positive operational variance.
The planning variance, on the other hand, is $24,600 adverse. This is because the standard
labour time per batch was not updated in November to reflect the fact that it would take
longer to produce the truffles. The manager cannot be held responsible for this.
Overall, the manager has performed well, given the change in the recipe. Additionally we can
see overall operational variance of 0+3420 = $3420

D-STD-PO/REBYC/TRIALN09
a) Workings

Materials
Labour
V. OH

Selling price
Standard contribution

Original standard
$
6 x $2
12.00
1.5 x $5
7.50
1.5 x $2
3.00
22.50
30.00
7.50

Revised standard
$
6 x 1.05 x $2.10
13.23
1.5 x $5.30
7.95
1.5 x $2

Planning var
Material price var =(SP RSP)RSQ
= [($2 - $2.1] [11,400 x 6 x 1.05] = $7,182 A
Material usage var = (SQ RSQ)SP
= [(11,400 x 6) (11,400 x 6 x 1.05)]$2 = $6,840 A
Labour rate var = (SR RSR)RSH
($5 $5.3) 11,400 x 1.5 = $5,130 A
Operating var
Sales price var = (AP SP)AS = AP(AS) SP(AS)
= $330,600 ($360,000/12,000)(11,400) = $11,400 A
Sales volume contribution var = (AS BS) Standard contribution per unit
= (11,400 12,000)$7.5 = $4,500 A
Material price var =(RSP AP) AQ = RSP(AQ) AP(AQ)
= $2.1(64,500) - $138,000 = $2,550 A
Material usage var = (RSQ AQ) RSP
= [(11,400 x 6 x 1.05) 64,500] $2.1 = $15,372 F
15

3.00
24.18

Labour rate var = (RSR AR)AH = RSR(AH) AR(AH)

= $5.3(17,600) $91,520 = $1,760 F
Labour efficiency = (RSH AH)RSR
= [(11,400 x 1.5) 17,600] $5.3 = $2,650 A
b) The planning and operational variance approach attempts to divided a total variance into a
group of varainces which have arisen because of inaccurate planning or faulty standards
(planning variance) and a group of variances which have been caused by adverse or
favourable operational performance (operational variances).

A planning variance compares an original standard with a revised standard that should or
would have been used if planners had known in advance what was going to happen. Planning
variances are uncontrollable by managers.

An operational variance compares an actual result with the revised standard. Operational
variances are controllable by managers.

Planning and operational variances are based on the principle that variances ought to be
reported by taking as the main starting point a standard which can be seen, in hindsight, to
be the optimum that should have been achievable. For example, in the question, the standard
direct labour rate should have been $5.30 rather than $5.

Exponents of this approach argue that the monetary value of variances ought to be a realistic
reflection of what the causes of the variances have cost the organisation. In other words thay
should show the cash (and profit) gained or lost as a consequence of operating results being
different to what should have been achieved. Variances can be valued in this way by
comparing actual results with results with a realistic standard or budget.

Planning variances arise because the original standard and revised (more realistic) standards
are different, and these have nothing to do with operational performance. In most cases, it is
unlikely that anything could be done about planning variances: they are not controllable by
operational managers but by senior managment.
(6 x 1m = 6m)
Problems
The reasons behind why planning variances arise may need to be investigated. It needs to be
understood how certain pieces of information are missed or otherwise omitted from the
standard setting process.

It can also be too easy to justify all the variances are being due to bad planning, so no
operational
variances
will
be
highlighted.

16

It is difficult to decide in hindsight what the realistic standards should have been and
establishing
the
standards
is
time
consuming.

(3 x 1m = 3m; max 2m)

ABB
c) ABB is use of cost determined under ABC as a basis for preparing budgets. ABB defines activit
underlie
the financial figures in the budgets. It uses the level of activity to determine how much resources
be
allocated. From this it looks at how well the activity is being managed by the managers. Observ
the
activities
between
budget
and
actual
is
used
to
explain
va
2m

Benefits
o Using different activity levels supports the practice of Zero Based Budgeting in preparing th
base and
incremental
package

o Managers become more aware of the significance of activities on cost incurred and it is mor
effective in
managing
costs

o ABB focuses on whole complete activity, so all the related parts are managed well to get it righ
the first
time
and
also
achieve
the
final
objective

o Easier to identify critical success factors and company can monitor them to ensure
business is performing well.

o There is continuous improvement as ABB focus on cost driver and activities can highlight no
value
added
activitie

(5 x 1 = 5 m; max 3 m)
d) Implementing budgets means carrying out the necessary tasks needed to achieve those budget
targerts.

o Goals of the company expressed in the budget which the staff must comply with may not be i
line with
their
personal
goal

o Managers focus when doing their job is on just achieving the targets and not trying to do bette

o Managers who are responsible for budgets are not the ones who set them which can lead to them
being less
committed
to
the
budget
or
poor
understanding
of
the
budge

o Poor or minimal communication and cooperation between staff or managers can hinde
achievement
of
budget

o Use of
formal budget will restrict flexibility and promote rigidity in decision making

17

(5 x 1m = 5m)

E-PM/LORA/TRIAL N09
a) Sales growth
Lora has had an excellent start to the business. She had made $400,000 of sales and then
achieved growth of 50% in the following quarter. This is impressive particularly given that we
know that the clothing business is very competitive. It is often the case that new business
makes slow start but this does not look to be the case here.
(Any point 1m)
Gross profit
The gross profit for the business is 50% for quarter 1 and 2. We have no comparable industry
data so no comment can be made. However, we can see the gross profit has remained stable.
This is not a good sign because business needs to grow in terms of profitability as well. It
could also be that the cost of sales are also rising.
(Any point 1m)
Website development costs
These costs are written off as incurred to the management accounting profit and loss account.
They should be seen as long-term investment in the future. Website development has been
made with the future in mind; we can assume that future website related costs will be lower
than present. Since the new start tech-ventures such as Loras require ample training and setup cost of the business, therefore, we should take into account these costs as start-up cost of
ventures
and
these
do
not
look
as
serious
as
they
first
appear.
(Any 2 point = 2m)
Administration staff salary costs
These are 30% of sales in quarter 1 and then 15% in quarter 2. This seem to indicate good
cost control and impressive given the young nature of business. Any fixed costs included here
are spread over greater volume. This would also reduce the percentage of cost against sales
figure. This is an example of a business gaining critical mass. The bigger it gets the more it is
able to absorb costs. They may have some way to go in this regard, gaining a much greater
size
than
at
present.
(Any point 1 m)
Distribution costs
These are a relatively minor cost that again appears under control. Distribution costs are likely
to be mainly variable (postage) and indeed the proportion of this cost to sales is constant at
25% of sales.
(Any point 1 m)
Launch costs
Another cost that is shown in table 1 is cost incurred during the launch phase of the business.
Given the nature of business, such costs can be extremely high and so the profits are more
likely to be affected by their size. These costs have also remained constant i.e. 5% for quarter
1 and 5.5% for quarter 2. Therefore business seems to be doing well in controlling the size of
these costs as well.
(Any point
1 m)
Other expense (variable) costs
There has been an increase in these costs from 12.5% in quarter 1 to 13% in quarter 2. It
seems that magnitude of these costs have somehow affected the business. Although we are
not sure the nature of these variable costs but if these costs are incurred on handling returns
and other complaints then it is high time for Lora to control over these costs as well as ensure
correct order filling and quality inspection of the products from time to time. (Any point 1 m)
18

(b) Loras business has lost $243,000 in the first two quarters of her new venture. These
figures are not alarming because new businesses rarely breakeven within 6 months of launch.
The profit (loss) has been calculated after full website development costs have been charged,
which might not happen in future. There are also marketing costs deducted from the business
sales, as such these costs might not be that high in the future. If business continues to attract
more online buyers then it is well placed to get decent profits in future. The current profit (or
loss)
does
not
always
reflect
business
future
prospects.
(4m)

(c) Website hits is a good indicator of an online business success as it indicate the visibility of
the business to potential customers as well as increase their intention to buy products in
convenience. The homepage hits suggest an increase of 15% which is impressive start. If this
trend continues then hits by the end of the year might be over 1 million which is wonderful for
the new start-up business. The internet enables the company to impact in the market quickly.
(1m)
Number of lingerie sold
The conversion rates are 4% for quarter 1 and 4.3% in quarter 2 both these figures are higher
than industry average of 2%. It seems that Lora has got some unique collection of lingerie
that has attracted mass market in short time period. We can calculate average price for
lingerie in both quarter 1 and 2.
Quarter 1: $400,000/27,000=$14.81
Quarter 2: $600,000/35,000=$17.41
This suggests that rise in the gross profit might have something to do with the higher prices.
(2m)
On time delivery
Clearly the business has made wonderful progress in the on time deliveries of the products
which might be one factor of attraction for customers towards the online purchases. Customer
expectations
are
destroyed
when
deliveries
are
not
met
on
time.
(1m)
Sales returns
Returns are common in the online business as well which may be due to several factors such
as order input error, shipment errors or quality of products itself. The concern here is that
business sales returns level has reduced from 15% to 10% which is a good sign of recovery
but business should not become complacent about the order quality and shipment to maintain
its
reputation
in
the
market.
(2m)
System downtime
System slowdown or hang-ups are nightmare scenarios for the online retailers and they would
like to avoid these as much as possible. These errors might be caused due to inadequate
spending in the server technologies or other computer parts and equipments. In Lora
business, impressively downtime has reduced from 2% to 0.5% which is healthy sign and it

19

also reflects that Ashley investment decision was able to yield quicker results in quarter 2.
(2m)

HSC/PAFd13
Ratio analysis
Division S
Year on year
Increase in revenue
44%
Increase in material costs
36%
Increase in payroll costs 70%
Increase in property costs
78%
GPM in 2013
56%
GPM in 2012
61%
Increase in D & M costs 38%
Increase in admin costs 6%
NPM in 2013
11%
NPM in 2012
9%

Division C
Year on year
9%
25%
15%
6%
65%
67%
18%
0%
21%
22%

Revenue per employee in 2013 $102,224 $104,917

Revenue per employee in 2012 $111,772 $104,828
Payroll cost per employee in 2013 $27,000 $21,000
Payroll cost per employee in 2012 $25,020 $20,000
Total market size ($ revenue) in 2013 (w.1) $12948m $8012m
Total market size ($ revenue) in 2012 (w.1) $10775m $7761m
Working 1 for market size
Division S 2013: $38,845m/30% = $12948m Division C 2013: $44,065m/55% = $8012m
Division S 2012: $26,937/25% = $10775m Division C 2012: $40,359m/52% = $7761m
Note: Percentages have been calculated to the nearest 1%.
Commentary
General overview
Overall, Division S has performed well in 2013, although it has not managed to meet its
objective of becoming market leader despite its $2m advertising campaign. Since it has 30%
of the market in 2013 and there are only two competitors holding 70% of the market between
them, at least one of those competitors must hold 35% or more of the market.
Revenue and market share
This has increased by a huge 44% in the last year. This compares to an increase of only 9% in
Division C. However, part of the reason that this has been achieved is because the changes in
fire safety laws introduced by the government at the end of 2012 have caused the market for
fire products and services to increase from $10775m to $12948m. Part of Division Ss
success is therefore down to increased opportunity. However, Division S has also increased its
market share by a further 5 percentage points compared to 2012. Division C has only
managed a 3 percentage point increase in its market share, so this is a good result by
Division S. One can assume that this is at least partly as a result of the advertising campaign
carried out by Division S. However, this did cost a large amount, $2m, and it did not quite
enable the Division to achieve its aim of becoming market leader.
Materials costs
The increase in materials costs is 36%, compared to an increase in revenue of 44%. It is
difficult to say whether this is good or bad since the increase in revenue includes revenue
20

from services, for which no materials costs would be expected to arise. Further information is
needed on the split of revenue between products and services.
Payroll costs, revenue per employee and cost per employee
Payroll costs have increased by a massive 70% and far more than Division Cs 15% increase.
This is largely due to the fact that Division Ss employee numbers increased from 241 in 2012
to 380 in 2013. This is a really big increase in employee numbers and has been accompanied
by a fall in revenue per employee from $111,772 in 2012 to $102,224 in 2013. It is possible
that Division S over-recruited as it hoped to secure a greater level of business than it did
through its advertising campaign. Division Ss payroll cost per employee also increased from
$25,020 in 2012 to $27,000 in 2013. Presumably, this is because of the fact that there is high
demand for staff skilled in this area and Division S has probably had to increase pay in order
to attract the calibre of staff which it needs.

Increase in property costs

In percentage terms, the biggest increase in costs which Division S has suffered is in relation
to its property costs. They have increased by 78%, compared to Division Cs 6% increase. It
would appear that this increase is due to the increased rent charged by Division Ss landlords
on its business premises, which in turn has risen because of the increased tax charges.
However, it is not possible to quantify this precisely without further information on rent
increases.

Gross profit margin

This has actually fallen from 61% to 56%. Division C has also seen a fall in its GPM, but only a
2 percentage point fall as opposed to Division Ss 5 percentage point fall. The reasons for
Division Ss lower GPM are the higher material, payroll and property costs.Also, Division S did
not try to pass on any of its increased costs to its customers in the form of higher prices.
Distribution and marketing costs
These have increased by 38% compared to Division Cs 18%. However, when you take out the
advertising costs in both years figures and work out the cost increase without them ($8522m
$7102m/$7102m), it leaves an increase of only 20%. This increase would be expected
given the 20% increase in world fuel prices which occurred. Division S has to deliver to a
wider geographical spread of customers than Division C, so it would be expected to feel the
full brunt of fuel price increases.
Administrative costs
These have increased by 6% compared to Division Cs less than 1% increase (0% when
rounded down to the nearest percent).
Further information is needed about the items included in these cost figures to explain why
this increase has arisen.
Net profit margin
Despite challenging cost increases in all categories, Division S has still managed to increase
its NPM from 9% to 11%. However, this is substantially lower than the NPM in Division C,
which has fallen slightly but is still 21%, almost twice that in Division S.
As we have seen, Division Ss GPM is lower than Division Cs anyway and, on top of that,
Division C has not suffered a big increase in advertising costs like Division S; nor have
administrative costs risen inexplicably.
Head Office
21

There is no information given about Head Office. If the Costa Division is also the Head Office,
there could be Head Office costs included in Costas figures, which would affect the
comparisons being made. Further information is required here.

(a) Transfer price using machine hours

Total machine hours = (3,200 x 2) + (5,450 x 1) = 11,850
Overhead absorption rate = $877,620/11,850 = $7406
Product S

Product R

$
Materials cost

117

Labour cost

95

Overhead costs (2 x $7406)

14812

Total cost

27112

10% mark-up

9
(1 x $7406) 7406
17806

2711

Transfer price

1781

29823

19587

(b) Transfer price using ABC

OH

Driver

Machine set-ups
Machine maintenance

Production runs
Machine hrs

OH costs
$
306,435
415,105

Ordering
Delivery

Purchase orders
Deliveries

11,680
144,400

Activity volume

Product S
Machine set-ups
Machine maintenance
Ordering
Delivery

82 + 64 = 146
64 + 80 = 144

80.00
1,00278

Product R

$
7,29607 x 30 =
218,882
3503 x (3,200 x 2) =
224,192

$
7,29607 x 12 =
87,553
3503 x 5,450 =
190,913

80 x 82 =
6,560
1,00278 x 64 =
64,178

80 x 64 =
5,120
1,00278 x 80 =
80,222

513,812

363,808

3,200

5,450

16057

6675

Total overheads
Units
OH cost p.u.
Materials

30 + 12 = 42
11,850

Cost driver rate

$
7,29607
3503

117.00

Labour
Cost p.u.
22

95.00

6.00

9.00

28357

17075

10% mark up

2836

1708

Transfer price

31193

18783

(c) (i) ABC monthly profit

Assembly division

Product S

Production and sales

3,200
$

10% mark up
Profit

1708
93,086

Product S

Selling price

Total
5,450

$
320

(31193)

Profit per unit

183,838

Product R

3,200
$

Total profit

5,450$

2836

Production and sales

Cost price

Total

90,752

Retail division

Product R

807
25,824

260
(18783)
7217
393,327

419,151

(c) (ii)

There is very little difference between the total profits of each division whichever method
is used, except for differences arising from rounding.

In each case, the total profit made by the assembly division is approximately
$183,000 and $419,000 for the retail division.

It is the reallocation of profits from R to S or S to R that is the important factor in this

situation, given that the retail division wants to reduce prices but increase sales
volumes for R.

For the assembly division, when labour hours are used to allocate overheads, there is a big
difference between the profits that each of the two products makes. When machine hours
or ABC are used, this difference becomes much smaller.

For the retail division, when labour hours are used, product S generates 76% of the profit.

When this method of allocation is changed so that either machine hours are used or
ABC is used, the main share of the profit then moves to product R.

In the case of ABC, the profit moves so much to R that S only generates a profit per
unit of $807 for the retail division, which is very low for a selling price of $320.

From the assembly division managers point of view, any change that results in increased
sales of either R or S to the retail division would be a good thing for the assembly division,
given that both products are profitable.

However, the assembly divisions manager may not like the implementation of ABC to
achieve this result because firstly, it is complex and secondly, it is unnecessary here.
23

The aim of this exercise is to set more accurate transfer prices for R and S, which
should mean a reduction in Rs transfer price and an increase in Ss, according to the
information given.

This would enable the retail division to lower its price for R and increase sales
volumes.

This goal is achieved simply by changing the basis of overhead absorption from
labour hours to machine hours, without the need for activity based costing.

The retail managers view is likely to be exactly the same.

If the basis of absorption is changed so that a lower transfer price is charged, the
retail division can reduce their selling price for R, provided that the increased sales
volumes more than make up for the reduced margin. There is no need to get into the
complexities of ABC when the results it produces are not very different.

24