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The following questions will be used as part of tutorial for students following the

CMA and MA modules

Activity 3.0

The following cost and activity data were recorded for School of Software engineering
during semester 1 of the two academic years to 2002/2003.
Semester 1 Semester 1
400 700
Lecturers’ fees 337,500 560,000
Materials 30,000 52,500
Administrative salaries 500,000 800,000
Depreciation 100,000 100,000
Cost of utilities 150,000 220,000
Cleaning 75,000 150,000


(a) Classify each type of cost with a brief explanatory and where appropriate
separate the fixed and variable elements of each cost.
(b) Assuming that the pattern of cost behaviour remains the same calculate the
expected cost for each item for 1000 students.

Activity 3.1

Budgeted and actual data for Korman and Gowan Ltd for the year to 31 December 19X1
is as follows:
Budget Actual
Fixed production overhead
Department P £78,000 £81,000
Department Q £114,000 £ 112,000
Direct labour hours
Department P 1,500 1,000
Department Q 8,000 10,000

Machine hours
Department P 2,500 2,000
Department Q 500 600

Fixed production overhead is absorbed on a machine hour basis in Department P and a

direct labour hour basis in Department Q.
1. Calculate the amount of fixed production overhead absorbed
2. Calculate the over/under absorbed of Fixed overhead and analyse the value.

Activity 3.2

The Droom Creation, located in Mallinga, makes Christmas Nutcrackers and has an
annual plant capacity of 2,400 product units. Its predicted operating results for the year
Production and sales of 2,000 units, total sales 180,000
Manufacturing costs
Fixed (total) 60,000
Variable (per unit) 26
Selling and administrative expenses
Fixed (total) 30,000
Variable (per unit) 10

(a) If the company accepts a special order for 300 units at a selling price of Rs40
each, how would the total predicted net income for the year be affected,
assuming no effect on regular sales at regular prices? (3 marks)
(b) What factors should the company consider before finally deciding
whether to accept the offer? (5 marks)

Activity 3.3

Auto Parts Ltd has an annual production of 90,000 units for a motor component. The
component’s cost structure is provided below:
Rs per unit

Materials 270
Labour (25% Fixed) 180
Variable expenses 90
Fixed expenses 35

(a) The purchase manager has an offer from a supplier who is willing to supply the
component at Rs 540. Should the component be purchased and production
(b) List four qualitative factors that you would consider before finalizing your decision

Activity 3.4

Quintus Ltd makes three products, all of which use the same machine which is
available for 30,000 hours per period.
The standard costs of the products per unit are as follows
Rs. Rs. Rs.
Direct materials 70 40 80
Direct labour:
Machinist (Rs12 per hour) 48 36 60
Assemblers (RS8 per hour) 24 32 40

Total variable cost 142 102 180

Selling price per unit 200 158 224

Maximum demand (units) 1500 2500 4000
Fixed costs are budgeted at Rs 300,000 per period and are to be absorbed on the basis of
machine hours.

Quintus Ltd could buy in similar quality products at the following unit prices:
Product R 175
Product S 140
Product T 200

(a) Calculate the shortfall in machine hours for the next period. (5 marks)
(b) On the basis of present machine hours, decide on the product mix which will
maximize profit for the next month and calculate the amount of this profit.
(12 marks)
(c) Determine which product(s) and quantities (if any) should be bought externally.
(5 marks)
(d) What factors other than the buying price should the company take into
consideration in a make or buy decision? (8 marks)

Activity 3.5

Buttercup Ltd manufactures and sells three products (R, S and T). These products are made using the
same machinery. The total machining time available each month is 10,500 hours but this is insufficient to
produce all the units of R, S and T required to meet maximum demands. No stocks of these products are
The following information is available:
Product R Product S Product T
Selling price per unit £60 £75 £84
Contribution to sales ratio 20% 24% 25%
Machining minutes per unit 40 54 75
Maximum monthly demand (units) 9,000 6,000 3,000


(a) Calculate the monthly shortfall in machining hours. (2 marks)

(b) Determine the monthly production plan in units that will maximise the company’s total contribution
from products R, S and T and calculate this total contribution. (6 marks)

Activity 3.6
A company manufactures two products, Patrox and Warrior. No stocks are held.
The following data relates to the budget for each unit of product.
Selling price Rs 1000 Rs 1200
Direct material costs Rs 200 Rs 240
Machining department time 6 hours 4 hours
Finishing department time 45 minutes 75 minutes
Variable overheads Rs 50 Rs 60
Expected weekly demand (units) 200 150

Fixed costs are Rs 130, 000 per quarter. Direct materials are known to be in short supply with
only Rs 6 000 worth being available to purchase each week.

There are currently 15 people working in the machining department (paid Rs 60 per hour) and
two in the finishing department (paid Rs 80 per hour). Due to the specialised nature of the work
involved in each area, skills are not transferable between the departments. All employees work
a 40-hour week. In view of the constraints, the company plan to purchase any shortfall in
Assume that there are twelve weeks in the three month period.

(a) Calculate the shortfall (in hours) in each department if production were to reach the
expected demand levels at the budgeted selling prices.
(b) Formulate the LP model and determine the optimal solution.

Activity 3.7

Keaton Co operates a chain of bakery shops, with each shop baking its own bread. The
management accountant of Keaton Co is reviewing a proposal to open a new shop. The
following estimates for the new shop are available:

1. Standard price and variable costs

$ per loaf
Sales price 2.00
Ingredients (0.70)
Electricity (0.10)
1.2 0
2. Fixed costs per annum $
Bakery Labour 20,000
Shop labour 16,000
Rent of bakery and shop 30,000

Total fixed costs per annum $66,000

3. Budgeted sales per annum are 70, 000 loaves

(a) Calculate the following figures for the proposed new shop:
(i) The contribution to sales ratio;
(ii) The break-even point in sales revenue per annum;
(iii) The break-even point in loaves sold per annum;
(iv) The margin of safety in loaves per annum. (8 marks)

(b) Using the graph paper provided, draw and label a break-even chart for the proposed
new shop. (6 marks)

(c) At the end of the first year of operations the new shop had sold 50,000 loaves at an
average price of $2.20 per unit.

Calculate the sales price and sales volume contribution variances and explain the meaning
of each variance. (6 marks)

Activity 3.8

Seaview is a small bed and breakfast beach hotel, which can accommodate 10 guests
per night. The charge of Rs500 per person is for one night’s accommodation with a full
breakfast in the morning. The manager estimates the variable costs (such as food,
cleaning and utilities) per person to be Rs200. The hotel’s fixed costs amount to Rs

- The contribution margin per unit of service
- The contribution margin ratio
- The annual break even point in units of service and in revenue value
- The number of units of service provided to earn a target profit of Rs 600,000 for
the year

Activity 3.9

The Tax Training School has 20 rooms which are used mainly during the day by the
Revenue Authority for dispensing training courses. A total fixed cost of Rs 200,000 is
incurred per month. Following the recent budgetary measures, the MRA has decided to
rent out these rooms to UTM for its evening courses. It is estimated that a quarter of the
fixed costs will be attributed to UTM. Room rates average Rs 250 per day with variable
costs of Rs 50 per rented room per day. Assume a 25-day month.
(a) Calculate the number of rooms that must be rented per day to break even.

(b) Calculate the number of rooms that must be occupied per month to make a
monthly profit of Rs 100,000.
(c) Draw a profit - volume (P/V) graph, showing clearly the breakeven point and the
margin of safety based on the above data. Determine the level of margin of
safety and interpret briefly.

Activity 3.10

Daylight Ltd makes one kind of sanitary fitment, and has provided you with the following data:
Rs Rs
Sales 300,000
Direct materials 60,000
Direct labour 40,000
Other variable costs 50,000


Contribution 150,000
Fixed costs 120,000

Net profit 30,000

a) Prepare a Profit/Volume chart from the above data, and determine the breakeven point
and margin of safety. (8 marks)
b) Discuss the effects of the following changes to your answers in part (a), stating any
assumptions you feel necessary:
i) an increase in fixed costs;
ii) a decrease in variable costs;
iii) an increase in selling price;
iv) an increase in sales volume. (8 marks)