Sem 1 2014 2015 (Page 1)

AMAB 333: ADVANCED MANAGEMENT ACCOUNTING SEMESTER 1 2014 / 2015

TUTORIAL

TOPIC 2: COST ESTIMATION & COST BEHAVIOUR Question 1 A company has developed a new product which is planned to be launched in the next month. The product will be sold at RM130 per unit. However similar product was launched by a competitor a week ago at a price of RM100 per unit. The company’s managing director has instructed the management accountant to review the company’s new product price. The company’s pricing policy is based on 150% of total variable production costs. After several meetings between the management accountant with the sales manager, production manager and the production engineer, the following additional information has been observed. 1. Total production of the new product will be 100,000 units in batches of 200 units 2. Direct material

Each unit of the product for the 1st batch of 200 units uses 0.5 kilogram of material. However the 2nd and 3rd batches are expected to use only 90% direct material of the initial batch and the remaining batches are expected to use 90% of the 2nd (and 3rd) batch usage. The direct material cost is RM25 per kilogram.

3. Direct Labour The first batch has taken 300 hours and it was observed the learning rate at 90%. It is expected the learning effect will reach its optimum when 50 batches have been produced and all batches after that will take the same time as batch 50th. The direct labour rate is RM30 per hour.

4. Overhead Variable overhead is absorbed based on direct labour hours. Based on the production record of previous year, the following overhead costs were incurred: Quarter Hours worked Overhead costs RM 1 20,300 1,190,550 2 19,800 1,186,030 3 21,000 1,254,470 4 22,500 1,296,020

5. The learning curve formula yx = axb is applicable in this situation. Where; y = average labour hours per batch a = labour hours for the initial batch x = total number of batches

b = log of learning curve log 2

Required: a) Calculate the new product price based on the company’s existing pricing policy and after taking

into consideration the additional information. [18 marks] b) Explain the importance of recognizing the effects of the learning curve in costing and pricing.

[2 marks]

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Question 2 Dayzel Sdn. Bhd. is investigating the financial viability of a new product, the Mex-V. The Mex-V is a short-life product for which a market has been identified at an agreed design specification. The product will only have a life of 12 months. A target net cash flow of RM150,000 is required in order for this project to be acceptable. The following estimated information is available in respect of Mex-V: 1. Sales should be 120,000 in the year in batches of 100 units. An average selling price of RM1,100 per

batch of 100 units is expected. All sales are for cash. 2. An 80% learning curve will apply for the first 800 batches after which a steady state production time

will apply, with the labour time per batch after the first 800 batches being equal to the time for the 800th batch. The cost of the first batch was measured at RM2,750 (at RM5 per hour). At the learning rate of 80%, the learning factor (b) is equal to -0.3219.

4. Variable overhead is estimated at RM1.50 per labour hour. 5. Direct material will be RM490 per batch of Mex-V for the first 300 batches produced. The second

300 batches will cost 90% of the cost per batch of the first 300 batches. All batches from then on will cost 90% of the batch cost for each of the second 300 batches. All purchases are made for cash.

6. Mex-V will require additional space to be rented. These directly attributable fixed costs will be RM15,000 per month.

Required: (a) Prepare detailed calculations to show whether product Mex-V will provide the target net cash

flow. [16 marks]

(b) Examine the problems which may be created for budgeting by the presence of the learning effect. [4 marks]

Question 3 The WMAM is a Malaysia local government organisation responsible for waste collection from domestic

households. The new management accountant of WMAM has decided to introduce some new forecasting

techniques to improve the accuracy of the budgeting. The next budget to be produced is for the year

ended 31 December 2012.

Waste is collected by the tone and the number of tonnes collected each year has been rising. Once

number of tonnes is predicted, the new management accountant hopes to use the values to predict the

variable operating costs and fixed operating costs that The WMAM will be subjected to in 2012. To this

end he has provided the following operating cost data for 2011.

Month Volume of waste (tones)

Total operating cost (RM)

Month Volume of waste (tonnes)

Total operating cost (RM)

January 26,000 500,000 July 34,000 640,000

February 26,000 500,000 August 30,000 620,000

March 31,000 530,000 September 34,000 620,000

April 35,000 550,000 October 39,000 590,000

May 43,000 580,000 November 42,000 500,000

June 48,000 680,000 December 32,000 530,000

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Required:

(a) Calculate the variable operating cost per unit and total fixed operating cost to be expected in

2012 using a high-low method on the 2011 data. [4 marks]

a) Estimate the variable cost per unit and total fixed using linear regression, showing full workings.

The following formula can be used.

y= a + bx b = n∑xy - ∑x∑y n∑x2 –(∑x)2

a = ∑y - b∑x n n

[10 marks]

b) Explain the major limitation of the high low-method. [3 marks]

c) Linear regression model can be useful in overcoming problems arising from using high-low

method in estimating the variable cost per unit and total fixed. Describe THREE (3) advantages of

linear regression. [3 marks]

Question 4 Product Focus Bhd produces a single product. The company’s directors want to explore new markets, and they require an accurate analysis of the firm’s cost structure for both forecasting and pricing purposes. An attempt to provide this analysis from the aggregation of individual costs has produced a poor correspondence between actual and predicted costs. You are the accountant of Product Focus Bhd, and you have been asked to provide a statistical approach to the problem. The financial director has given you the following data:

Month Output (000 units)

Average unit cost (RM)

January 9 12.8

February 14 13.0

March 11 11.4

April 8 12.0

May 6 13.0

June 12 11.7

You have obtained the following further information: 1. The costs from which the averages have been computed consist of the company’s entire costs for

the relevant month. 2. Fixed costs can be assumed to be unaffected by seasonal factors except for January and February, a

supplementary cooling system was employed costing RM10,000 per month to operate.

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Required: a) Determine the variable cost per unit and total fixed cost using a high-low method. [4 marks]

b) Estimate the variable cost per unit and total fixed using linear regression, showing full workings.

The following formula can be used.

y= a + bx b = n∑xy - ∑x∑y n∑x2 –(∑x)2

a = ∑y - b∑x n n

[10 marks]

c) Explain why the two methods used in (a) and (b) above produced different answer. Which of the methods would you recommend and why? [3 marks]

d) Describe THREE (3) factors need to be considered when past data is being used to estimate future

costs. [3 marks]