Question Tag: Cost Analysis

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  • 15 Marks

MI – May 2016 – L1 – SB – Q2b – Accounting for Cost Elements

Perform cost analysis for a small manufacturer with given data.

Mr. Kogberegbe, a small manufacturer, has approached you as a Cost Accountant with the following data:

Sales Forecast

Additional information:
• Purchases are 45% of selling price and are paid for two months after
delivery. Delivery is in the month of sales.
• Collections from sales are 25% in the month of sales less 2% cash discount,
55%in the month after salesand the balance in the third month after sales.
• Production overheads are paid in the same month in which they are
incurred and this amounts to N1,240,000 per month. Included in
this amountaredepreciationof N70,000 andprepaidrent of N500,000.
• Other expenses are paid for in arrears and these amount to N620,000 per
month.
• New plant of N540,000 will be bought in the month of January and
installed at acostof N75,000 the following month.
• Bank opening balance as at August 2016 shows an overdraft of
N2,150,000 and interest is charged at 3% of drawn down balance. I g n o r e
other bank charges

Required:
Prepare a cash budget for Mr. Kogberegbe’s business for the three months i.e,
September to November, 2016. Calculate the values to the nearest naira and show
all your workings.

MR KOGBEREGBE
CASH BUDGET FOR THE THREE MONTHS SEPTEMBER TO NOVEMBER 2016

 

  • 1 Marks

MI – May 2016 – L1 – SA – Q1 – Cost Classifications

Identifying cost behavior type when production hours vary and managerial requirements change.

A company pays a manager a salary of N40,000 monthly when production is below 320 hours. When the production is between 320-640 hours, two managers would be required. This type of cost is called:

A. Fixed cost
B. Variable cost
C. Stepped variable cost
D. Stepped fixed cost
E. Semi-variable cost

Answer: D

Explanation:

  1. Reason for Selection:
    • The cost is termed a Stepped Fixed Cost because the cost increases in a step-like manner as the production hours exceed specific thresholds.
  2. Cost Behavior Analysis:
    • At less than 320 hours, the company incurs a fixed cost of N40,000 for one manager.
    • Between 320-640 hours, two managers are required, doubling the cost to N80,000, thus it jumps or “steps” up when the production hours increase beyond a certain point, but it remains fixed within those production brackets.
  3. Understanding the Behavior:
    • Stepped fixed costs remain constant within a certain range of activity but jump to a higher level once that range is exceeded, which perfectly describes the scenario given.
  • 1 Marks

MI – May 2024 – L1 – SA – Q5 -Budgeting

Identifies the budgeting process that adjusts costs based on activity levels.

A budgeting process that analyses costs into their fixed and variable elements using the actual activity levels is referred to as:

A. Fixed Budgeting
B. Flexible Budgeting
C. Activity Based Budgeting
D. Zero Based Budgeting
E. Marginal Costing

 

Answer: B. Flexible Budgeting

Explanation: Flexible budgeting involves adjusting the budget to reflect actual activity levels, categorizing costs as either fixed or variable. Unlike fixed budgets, which remain static regardless of production levels, flexible budgets allow for a more accurate reflection of expenses based on actual operations. This makes it particularly useful in industries where costs fluctuate with changes in production or service activity.

  • 20 Marks

QT – May 2019 – L1 – Q3 – Probability

Draw a decision tree and determine the optimal strategy for managing the cost of an art exhibition.

The Business Manager of Omaya Art Gallery has rented a hall to display the artworks of the artists of the gallery. She is considering organizing an exhibition of a number of rare painting masterpieces. In the past, only 70% of the paintings were sold in the first week. Moreover, if no painting is sold in the first five (5) days, the exhibition could be extended for another two (2) days but only 20% of the paintings would be sold.

The cost of the exhibition is GH¢500 per day. The manager estimated that in case she does not make any sales, she will have to pay GH¢15,000 to cover the costs of renting the exhibition hall for the same period.

Required: a) Draw a decision tree representing the Business Manager’s decision-making process. (8 marks)

b) Calculate the expected monetary cost of each decision node. (6 marks)

c) Determine the Business Manager’s optimal strategy. (6 marks)

  • 6 Marks

AFM – Nov 2017 – L3 – Q1b – Sources of finance and cost of capital

Analyzing financing alternatives for working capital of GH¢100,000 through bank loan, promissory notes, and cash discount.

Abbot Ltd needs to increase its working capital by GH¢100,000. It has decided that there are essentially three alternatives of financing available. They are:

i) Borrow from a bank at 8%. This alternative would necessitate maintaining a 25% compensation balance.

ii) Issue promissory notes at 7.5%. The cost of placing the issue would be GH¢500 each six months.

iii) Forego cash discount, granted on the basis of 3/10, net 30.

The firm prefers the flexibility of bank financing, and has provided an additional cost of this flexibility to be 1%.

Required: Assess which alternative financing method should be selected.

The costs of the three alternatives are:

 

 

  • 4 Marks

MA – May 2020 – L2 – Q5c – Decision making techniques

Determine the optimal selling price for a new product by analyzing cost and revenue data.

Blasius Ltd has just decided to produce a new line of item, namely bed, that can be sold in its retail shops throughout the country. It has provided you with the following information concerning the total cost of annual production and the prices at which that production could be sold:

Annual production units Total cost (GH¢000) Selling price (per unit) (GH¢)
2,500 100.3 70.8
5,000 186.3 66.7
7,500 287.8 62.5
10,000 405.0 58.3
12,500 537.8 54.2

Required:
Determine the optimal selling price for the bed. (4 marks)

Tabulated below are the total cost and revenue figures together with profit at each activity level to determine optimal selling price. The same result has been reached by comparing marginal cost and revenue figures.

Selling Price (GH¢) Production and Sales Total Revenue (GH¢000) Total Cost (GH¢000) Profit (GH¢000)
70.8 2,500 177.00 100.30 76.70
66.7 5,000 333.50 186.30 147.20
62.5 7,500 468.75 287.80 180.95
58.3 10,000 583.00 405.00 178.00
54.2 12,500 677.50 537.80 139.70

It can be seen from the profit column that profit is maximized where the selling price is set at GH¢62.5, as this gives the highest profit of GH¢180.95.

  • 10 Marks

MA – May 2019 – L2 – Q3b – Relevant cost and revenue

Explain lifecycle costing and calculate the cost per unit of software considering the entire lifecycle.

Oria Software Ltd, a computer software company, is developing a new accounting package, “Future Accounting”. The following are the budgeted amounts for the product over a four-year product life-cycle:

Year Year 0 Year 1 Year 2 Year 3 Year 4
Estimated quantity in units 3,500 5,000 2,000 500
GH¢ GH¢ GH¢ GH¢ GH¢
Research & Development costs 360,000
Design costs 240,000 250,000
Production costs:
Variable cost per unit 42 35 35 40
Fixed costs 150,000 150,000 120,000 100,000
Marketing costs:
Variable cost per unit 40 35 10 22
Fixed costs 30,000 20,000 12,000 15,000
Distribution costs:
Variable cost per unit 20 22 18 10
Fixed costs 50,000 60,000 40,000 30,000
Customer service costs:
Variable cost per unit 8 12 14 10
Fixed costs 80,000 85,000 45,000 –

To be profitable, Oria Software Ltd must generate revenues to cover costs for all six business functions taken together and, in particular, its high non-production costs. The company has therefore proposed a selling price of GH¢250 per software over the entire product life cycle.

Required:
i) Explain lifecycle costing and identify TWO (2) benefits Oria Software Ltd will derive from using lifecycle costing. (3 marks)
ii) Calculate the cost per software taking into account the entire lifecycle and comment on the proposed selling price. (7 marks)

i) Lifecycle Costing:

Lifecycle costing is a concept that traces all costs to a product over its complete lifecycle, from design through to cessation. It recognizes that for many products there are significant costs incurred in the early stages of their lifecycle. This is particularly relevant for Oria Software Ltd, as the design and development of software is a long and complex process with significant associated costs.

Benefits of Lifecycle Costing:

  1. The profitability of a product can be assessed by taking all costs into consideration, not just those incurred during production.
  2. It enhances decision-making regarding product introduction, product mix, and discontinuation by providing a comprehensive view of costs.
  3. It helps in pricing decisions, thereby preventing underpricing at the launch point and ensuring that all costs are covered over the product’s lifecycle.

(3 marks)

Conclusion:
Clearly, proposed selling price per software of GH¢250 is not advisable as it is
lower than cost of production. Oria Software Inc. may either increase the selling
price or undertake cost reduction techniques like value engineering, quality cycle
or alternative source of cheaper material to be able to reduce the cost to be lower
than GH¢ 250 per unit.

  • 20 Marks

MA – May 2021 – L2 – Q5b – Decision making techniques, Budgetary control

Recommend the quantities Agrow Ltd should produce in-house and purchase externally, along with the total annual cost.

Agrow Ltd is a community company that manufactures and sells car components; Wiper, Driving mirror, and Brake pad. The budgeted information for the next year is expected to be as follows:

WIPERS DRIVING MIRROR BRAKE PAD
Production (units) 50,000 25,000 35,000
GH¢ GH¢ GH¢ GH¢
Selling price per unit 34 30 28
Direct material per unit 9 10 5
Direct labour cost per unit 18 3 12
Variable production overhead 1 2 1

Direct labour is paid at GH¢12 per hour. While other production factors are unlimited, labour is limited to 102,500 hours. Hence, an extra component must be purchased from an external supplier.

Total fixed cost per annum is expected to be as follows:

Cost GH¢
Incurred as a direct consequence of making any quantity of Wiper 140,000
Incurred as a direct consequence of making any quantity of Driving mirror 255,000
Incurred as a direct consequence of making any quantity of Brake pad 150,000
Other Fixed Cost 60,000
Total Fixed Cost 605,000

An external supplier has offered to supply a unit of the following at their respective prices:

Component GH¢
Wiper 32
Driving mirror 24
Brake pad 23

Required:

a) Advise which of the products Agrow Ltd should make in-house or outsource. (7 marks)

b) Recommend the quantities that Agrow Ltd should make and the quantities it should buy externally to obtain the required quantities of all the parts and calculate the total annual cost. (10 marks)

c) State THREE (3) factors to consider before setting a selling price of a product. (3 marks)

(Total: 20 marks)

a) Make or Buy Decision for Agrow Ltd

Component Wiper Driving Mirror Brake Pad
Marginal cost per unit (GH¢) 28 15 18
Demand (units) 50,000 25,000 35,000
Total variable cost 1,400,000 375,000 630,000
Cost incurred as a direct consequence of making 140,000 255,000 150,000
Total cost of making the product 1,540,000 630,000 780,000
Cost of buying:
50,000 x GH¢32 1,600,000
25,000 x GH¢24 600,000
35,000 x GH¢23 805,000
Cost saving / (extra) for making the product 60,000 (30,000) 25,000

Decision:

  • Wiper: Make in-house (as the cost saving is GH¢60,000).
  • Driving Mirror: Buy externally (as buying saves GH¢30,000).
  • Brake Pad: Make in-house (as the cost saving is GH¢25,000).

(7 marks)

b) Production and Purchase Plan for Agrow Ltd

Product Quantity Contribution per unit Labour hour per unit Contribution per labour hour Rank
Wiper 50,000 GH¢6 1.5 GH¢4 2nd
Brake Pad 35,000 GH¢10 1 GH¢10 1st

Production Plan:

Product Quantity to Make Labour Hours Hours Available
Brake Pad 35,000 35,000
Wiper 45,000 67,500
Total Hours 102,500

Buying Plan:

  • Wiper: Buy 5,000 units.
  • Driving Mirror: Buy 25,000 units.

Total Annual Cost:

Product Quantity Cost per unit (GH¢) Total Cost (GH¢)
Brake Pad (make) 35,000 18 630,000
Wiper (make) 45,000 28 1,260,000
Wiper (buy) 5,000 32 160,000
Driving Mirror (buy) 25,000 24 600,000
Direct consequence of making Wiper – – 140,000
Direct consequence of making Brake Pad – – 150,000
Other Fixed Cost – – 60,000
Total Cost 3,000,000

(10 marks)

c) Factors to Consider in Setting a Selling Price

  1. Cost of production: Ensures that the selling price covers all costs and yields a profit.
  2. Price of competing firms: Helps to position the product competitively in the market.
  3. Purchasing power of customers: Ensures the price is aligned with what customers can afford.

(3 marks)

Total Marks for Question 5: 20 marks

  • 15 Marks

MA – May 2017 – L2 – Q4a – Relevant cost and revenue, Decision making techniques

Advise on the selection of a camp meeting venue using relevant costing.

Straight-to-Heaven Church is planning its annual camp meeting in December 2017. The church has four branches, and the annual camp meeting is the first major program after all the head pastors attended a leadership conference on the theme “Blending faith and Science in Church Decision Making.”

The General Overseer of the church wishes to apply the scientific principles learned at the conference in deciding between two major venues for the 2017 annual camp meeting. Hitherto, the General Overseer or his wife would veto where annual camp meetings are held. The following information is relevant for the decision:

  1. Seven pastors will facilitate the camp meeting. ‘Food 4 All’ restaurant will be assigned the responsibility of providing food for the pastors. They have indicated that a meal for a pastor would cost GH¢5. This cost is expected to increase by one-half if a pastor attends the camp with his wife. All pastors will be fed three times daily, but only three pastors plan to attend the conference with their wives. Church members will take care of their own feeding, but all camp expenses of pastors will be borne by church members.
  2. Water to be served at the camp meeting: 100 bags of sachet water at GH¢2 each and 25 boxes of 750ml bottled water at GH¢13 per box.
  3. The church plans to either have the conference at Ahayede (A) or Bonebon (B) camp sites. Accommodation cost per head per day at Ahayede is GH¢2 for the first 400 participants and GH¢1.5 for any additional participant. Bonebon will not charge any fee, but the church will have to show appreciation, which will be in the neighborhood of GH¢2,000 after the camp.
  4. Ahayede Campsite will require the payment of electricity and water bills of GH¢300 and GH¢500, respectively.
  5. It is expected that 96 liters of fuel at GH¢3.12 per liter will be needed at Bonebon campsite.
  6. Transportation cost for chairs and canopies will be GH¢400 if the camp is undertaken at Ahayede and GH¢300 if the camp is sited at Bonebon. Each church member’s transportation cost will be GH¢3 if Ahayede is chosen as the venue, but this figure is expected to double if the camp is taken to Bonebon.
  7. Pastors’ appreciation: Apart from the General Pastor, who will receive GH¢500, each pastor will receive GH¢300 as appreciation support.
  8. The church plans that 700 church members and pastors will take part in the annual camp meeting if it is undertaken at Bonebon, while 500 members will attend the camp if it is held at Ahayede, even though the two camp sites can each take 1,000 people. The camp will last for 5 days.

Required:

i) Using relevant costing, advise management of the church on the site they should hold the annual camp meeting.

(8 marks)

ii) Suggest TWO qualitative factors that should be considered in deciding on the venue. (4 marks)

iii) Explain the term “sunk costs” and identify THREE examples of sunk costs. (3 marks)

i) Relevant Costing for Ahayede and Bonebon Camp Sites:

Cost Item Ahayede (GH¢) Bonebon (GH¢)
Food (7 Pastors × GH¢5 × 3 meals × 5 days) 525 525
Additional Food Cost (3 Pastors × 0.5 × GH¢5 × 3 meals × 5 days) 112.50 112.50
Water (100 bags × GH¢2 + 25 boxes × GH¢13) 525 525
Accommodation (500 participants × GH¢2/day × 5 days) 5,000 2,000 (appreciation)
Utilities (Electricity + Water) 800 –
Fuel (96 liters × GH¢3.12) – 299.52
Transportation of Chairs/Canopies 400 300
Transportation (Participants) (500 members × GH¢3/day) 1,500 4,200 (700 members × GH¢6/day)
Pastors’ Appreciation 2,300 2,300
Total Cost 10,912.50 10,262.02

Decision: The total cost for holding the camp meeting at Bonebon (GH¢10,262.02) is lower than that of Ahayede (GH¢10,912.50). Therefore, based on relevant costing, the camp meeting should be held at Bonebon.

(8 marks)

ii) Qualitative Factors to Consider in Deciding on the Venue:

  1. Safety and Security:
    • The venue must ensure the safety and security of all participants during the camp meeting. This includes assessing the availability of security services and the overall safety record of the venue.
  2. Accessibility and Proximity:
    • The location’s accessibility and proximity to the majority of participants should be considered. A venue that is easier and more convenient to reach may encourage higher attendance and participation.

(4 marks)

iii) Explanation of Sunk Costs and Examples:

Sunk Costs:

  • A sunk cost is an expense that has already been incurred and cannot be recovered. Sunk costs should not be considered in future decision-making because they remain unchanged regardless of the outcome of a decision.

Examples of Sunk Costs:

  1. Marketing Study Cost:
    • If a company spends GH¢50,000 on a marketing study for a product that later proves unviable, this GH¢50,000 is a sunk cost.
  2. Research and Development Expense:
    • A company invests GH¢2,000,000 in developing a product that fails to generate sales. The GH¢2,000,000 is a sunk cost.
  3. Training Costs:
    • If a company spends GH¢20,000 to train staff on a new system that is later abandoned, the training expense is a sunk cost.

(3 marks)

  • 13 Marks

MA – May 2016 – L2 – Q4b – Decision Making Techniques,Relevant Cost and Revenue,

Evaluate a supplier's offer based on Economic Order Quantity and differentiate between a bin card and a store ledger card.

MM Company Ltd., a manufacturer of groundnut paste, wishes to know whether it is advisable to stick to its economic orders or accept a special order from a foreign supplier for the supply of groundnuts. The following information has been provided:

  • Purchase price per bag of groundnut: GH¢360
  • Holding cost per annum is 10% of the cost of a bag of groundnut
  • Ordering cost per annum: GH¢7.7
  • Annual demand of groundnut paste: 6,000 bags
  • Normal usage per month: 520 bags
  • Minimum usage per month: 500 bags
  • Maximum usage per month: 700 bags

Required:

i) The foreign supplier promises a reduction in the price of a bag of groundnut by 8% if MM Company is willing to order 3,000 units each time it wants to order. Advise MM.
(10 marks)

ii) What is the difference between a bin card and a store ledger card?
(3 marks)

 

i) Economic Order Quantity (EOQ) and Cost Analysis:

  1. Calculate EOQ:

    EOQ=2×D×SH\text{EOQ} = \sqrt{\frac{2 \times D \times S}{H}}Where:

    • D=6,000D = 6,000 bags (Annual Demand)
    • S=GH¢7.7S = GH¢7.7 (Ordering Cost)
    • H=10%×GH¢360=GH¢36H = 10\% \times GH¢360 = GH¢36 (Holding Cost)

    EOQ=2×6,000×7.736≈51.67 bags (rounded up to 52 bags)\text{EOQ} = \sqrt{\frac{2 \times 6,000 \times 7.7}{36}} \approx 51.67 \text{ bags (rounded up to 52 bags)}

  2. Total Material Cost Using EOQ:

    Total Cost=Purchase Cost+Ordering Cost+Holding Cost\text{Total Cost} = \text{Purchase Cost} + \text{Ordering Cost} + \text{Holding Cost} Total Cost=(6,240×360)+(6,24052×7.7)+(522×36)\text{Total Cost} = (6,240 \times 360) + \left(\frac{6,240}{52} \times 7.7\right) + \left(\frac{52}{2} \times 36\right) Total Cost=2,246,400+924+936=GH¢2,248,260.00\text{Total Cost} = 2,246,400 + 924 + 936 = GH¢2,248,260.00

  3. Total Material Cost if Foreign Supplier’s Offer is Accepted:

    Total Cost=(6,000×0.92×360)+(6,0003,000×7.7)+(3,0002×0.92×36)\text{Total Cost} = (6,000 \times 0.92 \times 360) + \left(\frac{6,000}{3,000} \times 7.7\right) + \left(\frac{3,000}{2} \times 0.92 \times 36\right) Total Cost=1,987,200+15.4+49,680=GH¢2,036,895.40\text{Total Cost} = 1,987,200 + 15.4 + 49,680 = GH¢2,036,895.40

Decision: It is advisable to accept the order from the foreign supplier because it results in cost savings of GH¢211,364.60 (GH¢2,248,260.00 – GH¢2,036,895.40).

ii) Difference between a Bin Card and a Store Ledger Card:

  1. Bin Card: A bin card is a record kept in the store that shows the quantity of inventory for each item. It records the receipts and issues of inventory but does not include valuation. It is usually maintained by the storekeeper.
  2. Store Ledger Card: A store ledger card is maintained by the cost accountant and records both the quantities and values of receipts, issues, and the balance of inventory items. It provides a complete financial record of inventory movement.

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