Chapter 23: Answers

Data consists of numbers, letters and raw factsthat have been recorded but not yet processed into a suitable form.Data that has been processed so as to make it meaningful is known asinformation.

This method is often applied if the population is particularly large, for example all TV viewers in the UK.

B is a non-production costs and as such should not be used to value inventory.

A Indirect and fixed

B Indirect and fixed

C Direct and variable

D Indirect and variable

Telephone costs are likely to consist of a fixed element for linerental and a variable element for calls, hence are semi-variable.

Take the highest and lowest output and associated costs.

Hence VC = $4,800/1,200 = $4 per unit.

FC = 3,950 – (800 × 4) = 750 this year and therefore 850 next.

So cost of 1,500 units = 850 + (1500 × 4) = 6850

Take the highest and lowest output and associated costs.

Hence VC = $16,000/2,000 = $8 per unit.

FC = 102,000 – (9,000 × 8) = 30,000 at output under 10,000 units.

So cost of 14,000 units = 30,000 + 15,000 + (14,000 × 8) = 157,000

The statement refers to periodic stocktaking.

In continuous stocktaking a business counts and values selecteditems of inventory on a rotating basis. Specialist teams count and checkcertain inventory items on each day.

Such waste may be written off but an alternative treatment is toincrease the issue price to production to compensate for the expectedwaste.

Closing inventory 110 × $2.20 = $242

Closing inventory 110 × $2.582 = $284

The objective of holding buffer inventories is to reduce the riskof a stockout occurring e.g. where supplier lead times are uncertain(the time taken between placing and receiving an order).

The availability of quantity discounts would affect the order quantity not the reorder level.

ROL = demand in the lead time

Demand per day = 1,000,000 / 250 = 4,000 units.

So expected demand in the lead time and hence ROL is 8,000

C is the EOQ and A the number of orders that would be placed p.a.

Idle time = 150 hours @ $5 = $750

Overtime (premium only) = 100 × 5 × 4 @ $2.50 = $5000

Total indirect labour element = $5,750

Basic rate = 40/60 × $6 = $4

Bonus = 40/60 × $6/60 × 20 = $1.33

Total payment = $5.33

Note: Under Halsey scheme, bonus payment would be:

Expected hours to produce actual output (standard hours):

600 units × 20/60 = 200 hours

Labour efficiency ratio = 200/220 × 100 = 90.91%

Labour capacity ratio = 220/ 210 × 100 = 104.76%

Production volume ratio = 200/210 × 100 = 95.24%

Product beta: (1 hr @ $2.5) + (0.5 hrs @ $3) = $4

Pre-determined overhead rate = $504,000/42,000 = $12 per hour

(1) Q = 140,000 + 0.3M

(2) M = 113,000 + 0.2Q

Substitute (1) in equation (2):

M = 113,000 + 0.2 (140,000 + 0.3M)

M = 113,000 + 28,000 + 0.06M

0.94M = 141,000

M=150,000

Substituting this into equation (1)

Q = 140,000 + 0.3(150,000) = 185,000

Total overheads for departments

(i) Incorrect. Smaller volume products often cause a disproportionate amount of cost.

(ii) Correct

(iii) Incorrect. Marginal costing gives a higher profit.

(iv) Correct

The absorption costing approach charges fixed overheads to unitsproduced and as a result achieves a better matching of sales and costsduring a period and a more realistic measure of profit.

Closing inventory = 5,000 units

Under full absorption costing a proportion of the fixed manufacturing overhead will be carried forward in this inventory.

This is the difference in annual net income

Statement (2) is true for job costing but not process costing.

Expected output = 90% × 500 = 450 litres

Cost per unit = ($3,000 + $2,670)/450 = $12.60

Cost per unit = $12,600/3,600 = $3.50

Abnormal loss = 3,600 – 3,550 = 50kg

Cost of abnormal loss = 50 @ ($3.50 + $2) = $275

Physical flow:

Equivalent units calculation:

Cost per EU:

Value of finished output:

Completed units = 45,000 @ ($2.96 + $6.12) = $408,600

Closing WIP:

Material 15,000 @ $2.96 = $44,400

Conversion costs 9,000 @ $6.12 = $55,080

Total closing WIP = $99,480

Physical flow:

Value of finished output = value of units start to finish + completed opening WIP:

Units start to finish = 33,000 @ ($3 + $6.25) = $305,250

Completed Opening WIP:

Hence total value of finished production = $305,250 + $101,580 = $406,830

Note: Closing WIP
Material 15,000@$3 = $45,000
Conversion 9000 @ $6.25 = $56,250
Total value = $101,250

Many service applications do involve high fixed costs but ahigher number of cost units will result in a lower fixed cost per unit.

Total km travelled per vehicle per day = 4 journeys × 25 km (one-way) × 2 = 200km

Total km travelled p.a. = 200km × 5 days x 50 weeks × 6 vehicles = 300,000 km

Total VC = 300,000 km @ $0.50 = $150,000

Total Running costs = $150,000 VC + $225,000 FC = $375,000 p.a.

Total tonne km per vehicle per day = 4 journeys × 25 km × 5 tonnes = 500 tonne km

Total tonne km p.a. = 500 × 5 days × 50 weeks × 6 vehicles = 750,000 km

Standard cost per tonne km = $375,000 / 750,000 = $0.50

ABC is fairly complicated, is a form of absorption (not marginal)costing and is particularly useful when fixed overheads are high andnot primarily volume driven.

A customer service team deals with customer queries andcomplaints from outside the organisation, typically after goods havebeen delivered to the customer. The costs of this team arise fromquality failures and are preventable. They are external failure costs.Maintenance is intended to prevent machine breakdowns and so to preventquality failures, and they are therefore prevention costs. Testequipment is used for inspection.

A product's life cycle costs are very inclusive; none of these would be excluded.

Value analysis involves identify why and how customers value aproduct to enable cost savings to be made without compromising the valueto the customer.

The correlation coefficient measures the strength of theconnection between two variables. A correlation coefficient of 0suggests that the two variables are unrelated and as a result there isno linear relationship between them. The closer the value to +1 or -1the greater the correlation and the more reliable the line of best fit.

The calculation of the index for each year is as follows:

20X3 25/22 × 100 = 114

Difference between Q1 and Q4 budgeted sales = 11,014.7 – 8,075.0 =2,939.7 units

Budgeted production each quarter = 38,169/4 = 9,542.25 units

X is the time period reference number and for the first quarterof year 1 is 1. The time period reference number for the third quarterof year 7 is 27. 

y = 25,000 + 6,500 × 27 = 200,500 units

Using the line to predict values within the range observed is known as interpolation.

y = (10 × 19) + 150 = 340

(i) Correct

(ii) Correct

(iii) Incorrect, e.g. budget for number of employees required

(iv) Incorrect. Master budget also includes budgeted cash flow

(v) Incorrect. Adjusts variable costs. Fixed are fixed.

Profit = $300,000 x 0.2 = 60,000
Cost of sales = $240,000
Cost of sales = opening inventory + purchases – closing inventory
240,000 = 40,000 + P – 60,000
P = 240,000 – 40,000 + 60,000
P= $260,000

Month 4 production = 120,000 + 8,000 – 6,000 = 122,000 units

Month 4 usage = 122,000 units @ 2kg = 244,000 kg

Total hours required = 16,000 + 36,000 = 52,000

2 years and 4 months

Months calculated = 6,000/20,000 × 12 = 3.6 months

2 years and 10 months

Months calculated = 11,830/15,020 × 12 = 9.5 months

IRR = 15 + [8,800/(8,800 – 225) × 5] =19.9%

$100,000/$20,000 = 5 Years

IRR = 10 + [12,304/(12,304 – 3,216) × 5] = 13.96% therefore 14%

IRR = 10 + [87,980/(87,980 – 32,000) × 10] = 17.3%

IRR = 10 + [48/(48 – 41.24) × 10] = 15.4%

Answers A and B refer to profit-related pay and answer C describes either piece work payment or payment by the hour/day.

Where there is goal congruence, managers who are working toachieve their own personal goals will automatically also be working toachieve the organisation's goals. Although the use of aspiration levelsto set targets (option D) is likely to help in the achievement of goalcongruence, it is not of itself a definition of the term.

Statement (i) is incorrect. Managers at an operational level aremore likely to know what is realistically achievable than a seniormanager imposing budget targets from above. Statement (ii) is arguablycorrect: participation in budgeting could improve motivation. Statement(iii) is correct: imposed budgets should be much quicker to prepare,because less discussion time and negotiation time is required than withparticipative budget-setting.

Option C is a fixed budget and option D is a rolling budget. Option A is incorrect as a flexible budget includes all costs.

A flexible budget helps to control resource efficiency byproviding a realistic budget cost allowance for the actual level ofactivity achieved. Control action can therefore be more effectivebecause the effects of any volume change have been removed from thecomparison.

A fixed budget is a budget prepared for a planned single level ofactivity. It does not ignore inflation (option C is incorrect) and itincludes direct costs as well as overhead costs (option D is incorrect).A fixed budget can be prepared for a single product as well as a mix ofproducts (option B is incorrect).

The production-line manager does not control prices or rates 

$105,000 – 30,000 × $3.30 = $6,000 adverse

Budget selling price = $108,000/9,000 = $12

$104,500 – 9,500 × $12 = $9,500 adverse

Standard contribution = $36,000/9,000 = $4 per unit

Volume variance = 500 × $4 = $2,000 favourable.

Therefore actual rate per hour = $56,576/8,320 = $6.80

The fixed overhead volume variance can be subdivided into a capacity and an efficiency variance.

Standard fixed overhead rate per unit = $280,000 / 7,000 = $40 per unit

Fixed overhead volume variance = 200 units × $40 = $8,000 favourable (over-absorbed)

RI = Net profit before interest – (10% × invested capital)
Therefore £240,000 = £640,000 – (10% × invested capital)
So 10% × invested capital = £400,000
Therefore invested capital = £4m
ROI = Net profit before interest/Invested capital
ROI = £640,000/£4,000,000 × 100 = 16%

Output per standard hour is 2 units as each unit has a standard time allowance of 30 minutes.
Budgeted labour hours are 1,500/2 = 750
The actual output measured in standard hours is 1,400/2 = 700 standard hours

The PV ratio = 700/750 x 100% = 93.3%

The capacity ratio = 720/750 x 100% = 96%

The efficiency ratio = 700/720 x 100% = 97.2%

The current ratio is all current assets including inventorydivided by current liabilities, while the acid test is the current assetfigure less inventory divided by current liabilities. These can only beequal if a firm carries no inventory.

Reducing mortality rates is likely to be a stated objective of the hospital and as such is a measure of output, or effectiveness

The manager of a profit centre can exercise control over revenuesand controllable costs, but has no influence concerning the capitalinvested in the centre.

Contribution (i) would be a useful performance measure because aprofit centre manager can exercise control over sales revenue andvariable costs. Controllable profit (ii) would also be useful as long asany overhead costs charged in deriving the profit figure arecontrollable by the profit centre manager. Apportioned central costswould not be deducted when calculating controllable profit. Return oninvestment (iii), residual income (iv) would not be useful because theyrequire a measure of the capital invested in the division.

A database would be more useful.

Spread sheets are designed to analyse data and sort list items, not for long-term storage of raw data.

Spreadsheet packages do include a graphical function.

Where a database would be more suitable.