QUESTION 2

Sadet Nigeria Limited assembles three types of motorcycle in the same factory;
the 50cc Prelude, the 100cc Roadmaster and the 150cc Roadstar. It sells the
motorcycles throughout the West African Coast. In response to market pressure,
Sadet has invested heavily in new manufacturing technology in recent years and,
as a result, has significantly reduced the size of its workforce. Historically, the
company has allocated all overhead costs using total direct labour hours but is
now considering introducing activity-based costing (ABC). Sadet’s Accountant has
produced the following analysis.

Types of Annual Output Annual direct Selling price Raw Material

Motorcycles (Units) labour hours (N/ unit) cost (N/ unit)
Prelude 5,000 500,000 25,000 4,000
Roadmaster 4,000 550,000 30,000 6,000
Roadstar 1,400 200,000 40,000 9,000

The three cost drivers that generate overheads are:

Deliveries to retailers - the number of deliveries of motorcycles to retail

showrooms.

Set – ups - the number of times the assembly line process is re-set to
accommodate the production run of a different type of
motorcycle

Purchase orders - the number of purchase orders.

The annual cost driver volumes relating to each activity and each type of
motorcycle are as follows:

Number of Number of Number of

deliveries to set-ups purchase orders
retailers
Prelude 200 70 400
Roadmaster 160 80 300
Roadstar 140 50 100

The annual overhead costs relating to these activities are as follows:

N‟000

Deliveries to retailers 24,000

Set –ups costs 60,000

Purchase orders 36,000

Direct labour is paid at N50 per hour. The company holds no inventories

You are required to:

a) Calculate the total profit on each of Sadet’s three types of product, using
the following methods to absorb overheads:

I. The existing method based upon labour hours.

II. Activity-based costing. (14 marks)
b) Write a report to the Directors of Sadet, as a Management Accountant,
evaluating the labour hours and the activity- based costing methods in
the circumstances of Sadet.

Refer to your calculations in requirement (a) above, where appropriate. (6

marks) (Total 20 marks)

NOVEMBER 2016

Adelab Nigeria Limited is a manufacturer of industrial gear. Over the years, the
company has collected, allocated and absorbed overhead cost based on the
traditional absorption costing technique.

The current economic recession in the country and stiff competition in the
market are seriously affecting the company‟s performance and market share as
its competitors have in recent times, introduced discounts to their customers.
The customers of Adelab have therefore been putting pressure on the company
to follow suit and few of these customers have started patronising the company‟s
competitors who offer discounts on every purchase.

To address these problems and other strategic and operational issues affecting
the company, the Board of Directors of Adelab decided recently to appoint a
seasoned management expert as Business Process Executive (BPE). The BPE
recently advised the Board to organise a management retreat. The focus of the
retreat is strategic management, cost control and performance management.
During the course of the retreat, new costing techniques such as activity-based
management, life cyclecosting, target costing, Kaizen costing, throughput
accounting, backflush accounting, just in time approach to inventory
management, etc., were discussed by the BPE. The need to also consider both
financial and non-financial performance measurements was also discussed. The
BPE further highlighted the need for the company to link its Key Performance
Indicators (KPIs) to its strategic and operational Critical Success Factors (CSF), to
achieve a better focus and improve its financial performance. In a board meeting
after the retreat, the following discussions took place:

Technical Director: “To improve our financial performance I think I will have to
agree with the BPE‟s submission at the retreat that we replace absorption costing
approach with an Activity Based Costing (ABC) system. I believe this will help us
to put a tap on cost and thus improve cost control and increase profit margins.
We can then pass some of these costs reduction to our customers in form of
discounts”.

Managing Director: “Yes, I agree with your opinion, but I also think we need to
monitor our performance in both financial and non-financial terms. For example,
loss of sales could be due to charging a higher price than our competitors and as
well as producing bad quality product. I therefore think that, while we should
consider introducing activity-based costing, we should also consider ways in
which the company could monitor and assess performance on a wider basis”.

You are required to: a.

a) Describe FIVE key features of Activity Based Costing (ABC) and provide SIX
advantages and FOUR disadvantages of adopting Activity Based Costing
(ABC) approach to cost accumulation. (10 Marks) b. Explain the need for the
measurement of organisational and managerial performance giving
examples of the range of financial and non-financial performance measures
that might be used. (10 Marks) (Total 20 Marks)

MAY 2015

QUESTION 1

TADEFO Limited is a manufacturing company which produces and assembles car

components. The company has two main production departments: Machining
and Assembling. Each of the two departmental managers is responsible for
producing annual budgets based on targets set by the management. From last
year’s budget, TADEFO Limited hoped to turn an expected 10 percent rise in total
revenue into a 20 percent increase in the company’s profits. The following
budgeted information relates to TADEFO Limited for the forthcoming period:

Products

ACQ BEZ
CFJ

Sales and production (units) 30,000 50,000

40,000

N N N

Selling price (per unit) 73 45

95

Prime cost (per unit) 65 32

84

Hours Hours
Hours

Machine Department (machine hours per unit) 4 2

5
Assembly Department (direct labour hours per unit) 2 7
3

Overheads can be re-analysed into ‘cost pools’ as follows:

Cost pool N‘000 Cost driver Quantity

for the period

Machine services 359 Machine hours 425,000

Assembly services 328 Direct labour hours 532,000

Set-up costs 36 Set-ups

720

Order processing 165 Customer orders 34,000

Purchasing 88 Suppliers’ orders

12,400

976

You have also been provided with the following estimates for the period:

ACQ BEZ CFJ

Number of set-ups 220 130 210

Customers’ orders 18,000 10,000 10,000

Suppliers’ orders 5,200 3,600 4,200

Required:

a) Prepare and present a profit statement using activity-based costing. (14

Marks)

b) What would you consider to be the weaknesses of an incremental budgeting

system for a company such as TADEFO Limited? (5 Marks)

c) Describe Activity-Based Budgeting (ABB) and comment on the advantages

of its use by TADEFO Limited. (5 marks)