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ACMA Work Sheet & Asst.

Material December 2018

Arba Minch University


Department of Accounting and Finance
Msc Program
Advanced Cost and Management Accounting
Work Sheet and Assignment Material
General instructions:
- Attempt all of the following questions and submit your answer for
questions number 3, 5, 7, 8, 10, 11, 12 and 13 individually. And the last
five questions (questions 16-20) in Group.
- Last submission date: January 7/2019.
Question 1:
(a) From the following information you are required to construct:
(i) a break-even chart, showing the break-even point and the margin of safety;
(ii) a chart displaying the contribution level and the profit level; (iii) a
profit–volume chart.
Sales 6000 units at Br.12 per unit = Br.72 000
Variable costs 6000 units at Br.7 per unit = Br.42 000
Fixed costs = Br.20 000
(b) State the purposes of each of the three charts in (a) above.
(c) Outline the limitations of break-even analysis.
(d) What are the advantages of graphical presentation of financial data to executives?

Question 2:
A company produces and sells two products with the following costs:
Product X Product Y

Variable costs per Br. of sales Br.0.45 Br.0.6


Fixed costs per period Br.1 212 000 Br.1 212 000

Total sales revenue is currently generated by the two products in the following proportions:
Product X 70%
Product Y 30%
Required:
(a) Calculate the break-even sales revenue per period, based on the sales mix assumed above.

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(b) Prepare a profit–volume chart of the above situation for sales revenue up to Br.4 000 000.
Show on the same chart the effect of a change in the sales mix to product X 50%, product
Y 50%. Clearly indicate on the chart the break-even point for each situation.
(c) Of the fixed costs Br.455 000 are attributable to product X. Calculate the sales revenue
required on product X in order to recover the attributable fixed costs and provide a net
contribution of Br.700 000 towards general fixed costs and profit.
Question 3:
M Ltd manufactures three products which have the following revenue and costs (Br. per unit).
Product 1 2 3
Selling price 2.92 1.35 2.83
Variable costs 1.61 0.72 0.96
Fixed costs:
Product-specific 0.49 0.35 0.62
General 0.46 0.46 0.46
Unit fixed costs are based upon the following annual sales and production volumes (thousand
units):
Product 1 2 3
98.2 42.1 111.8
Required:
(a) Calculate:
i. the break-even point sales (to the nearest Br. hundred) of M Ltd based on the current
product mix;
ii. the number of units of Product 2 (to the nearest hundred) at the breakeven point determined
in (i) above;
(b) Comment upon the viability of Product 2.
Question 4:
Keppel Manufacturing had a bad year in 2012, operating at a loss for the first time in its history.
The company’s income statement showed the following results from selling 200,000 units of
product: net sales Br.2,000,000; total costs and expenses Br.2,120,000; and net loss Br.120,000.
Costs and expenses consisted of the following.
Total Variable Fixed
Cost of goods sold Br.1,295,000 Br. 975,000 Br.320,000
Selling expenses 575,000 325,000 250,000
Administrative expenses 250,000 100,000 150,000
Br.2,120,000 Br.1,400,000 Br.720,000
Management is considering the following independent alternatives for 2013.

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1. Increase unit selling price 30% with no change in costs and expenses.
2. Change the compensation of salespersons from fixed annual salaries totaling Br.170,000
to total salaries of Br.50,000 plus a 6% commission on net sales.
3. Purchase new high-tech factory machinery that will change the proportion between
variable and fixed cost of goods sold to 40:60.
Instructions
(a) Compute the break-even point in dollars for 2012.
(b) Compute the break-even point in dollars under each of the alternative courses of action.
Which course of action do you recommend? (Round to the nearest dollar.)

Question 5:
McCune Corporation has collected the following information after its first year of sales. Net sales
were Br.1,000,000 on 50,000 units; selling expenses Br.200,000 (30% variable and 70% fixed);
direct materials Br.300,000; direct labor Br.170,000; administrative expenses Br.250,000 (30%
variable and 70% fixed); manufacturing overhead Br.240,000 (20% variable and 80% fixed).
Top management has asked you to do a CVP analysis so that it can make plans for the coming
year. It has projected that unit sales will increase by 20% next year.
Instructions
(a) Compute (1) the contribution margin for the current year and the projected year, and (2)
the fixed costs for the current year. (Assume that fixed costs will remain the same in the
projected year.)
(b) Compute the break-even point in units and sales dollars for the current year.
(c) The company has a target net income of Br.187,000. What is the required sales in dollars
for the company to meet its target?
(d) If the company meets its target net income number, by what percentage could its sales
fall before it is operating at a loss? That is, what is its margin of safety ratio?
(e) The company is considering a purchase of equipment that would reduce its direct labor
costs by Br.70,000 and would change its manufacturing overhead costs to 10% variable
and 90% fixed (assume total manufacturing overhead cost is Br.240,000, as above).
It is also considering switching to a pure commission basis for its sales staff. This would change
selling expenses to 80% variable and 20% fixed (assume total selling expense is Br.200,000, as
above). Compute (1) the contribution margin and (2) the contribution margin ratio, and

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(3) recompute the break-even point in sales dollars. Comment on the effect each of
management’s proposed changes has on the break-even point.
Question 6:
Lorge Corporation manufactures and sells three different models of exterior doors. Although the
doors vary in terms of quality and features, all are good sellers. Lorge is currently operating at
full capacity with limited machine time.
Sales and production information relevant to each model is shown below.
Product
Economy Standard Deluxe
Selling price Br.270 Br.450 Br.650
Variable costs and expenses Br.150 Br.261 Br.425
Machine hours required 0.6 0.9 1.2

Instructions
(a) Ignoring the machine time constraint, which single product should Lorge produce?
(b) What is the contribution margin per unit of limited resource for each product?
(c) If additional machine time could be obtained, how should the additional time be used?
Question 7:
The Cubbie Inn is a restaurant in DeKalb, Illinois. It specializes in deluxe sandwiches in a
moderate price range. Bill Michael, the manager of Cubbie Inn, has determined that during the
last 2 years the sales mix and contribution margin ratio of its offerings are as follows.
Percent of Contribution
Total Sales Margin Ratio
Appetizers 15% 60%
Main entrees 60% 25%
Desserts 10% 60%
Beverages 15% 80%
Bill is considering a variety of options to try to improve the profitability of the restaurant.
His goal is to generate a target net income of Br.120,000. The company has fixed costs of
Br.300,000 per year.
Instructions
(a) Calculate the total restaurant sales and the sales of each product line that would be
necessary to achieve the desired target net income.

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(a) Bill believes the restaurant could greatly improve its profitability by reducing the
complexity and selling price of its entrees to increase the number of clients that it serves.
It would then more heavily market its appetizers and beverages. He is proposing to
reduce the contribution margin ratio on the main entrees to 10% by dropping the average
selling price. He envisions an expansion of the restaurant that would increase fixed costs
by 40%. At the same time, he is proposing to change the sales mix to the following.
Percent of Contribution
Total Sales Margin Ratio
Appetizers 25% 60%
Main entrees 40% 10%
Desserts 10% 60%
Beverages 25% 80%
Compute the total restaurant sales, and the sales of each product line that would be necessary to
achieve the desired target net income.
(c) Suppose that Bill reduces the selling price on entrees and increases fixed costs as proposed in
part (b), but customers are not swayed by the marketing efforts and the sales mix remains what it
was in part (a). Compute the total restaurant sales and the sales of each product line that would
be necessary to achieve the desired target net income. Comment on the potential risks and
benefits of this strategy.

Question 8:
The following variable costing income statements are available for American Company and
National Company.
American Company National Company
Sales Br.1,000,000 Br.1,000,000
Variable costs 500,000 150,000
Contribution margin 500,000 850,000
Fixed costs 300,000 650,000
Net income Br. 200,000 Br. 200,000
Instructions
(a) Compute the break-even point in dollars and the margin of safety ratio for each company.
(b) Compute the degree of operating leverage for each company and interpret your results.
(c) Assuming that sales revenue increases by 30%, prepare a variable costing income
statement for each company.

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(d) Assuming that sales revenue decreases by 30%, prepare a variable costing income
statement for each company.
(e) Discuss how the cost structure of these two companies affects their operating leverage
and profitability.

Question 9:
Huber Beauty Corporation manufactures cosmetic products that are sold through a network of
sales agents. The agents are paid a commission of 15% of sales. The income statement for the
year ending December 31, 2012, is as follows.
HUBER BEAUTY CORPORATION
Income Statement
For the Year Ended December 31, 2012
Sales Br.117,000,000
Cost of goods sold
Variable Br.52,650,000
Fixed 12,915,000 65,565,000
Gross margin 51,435,000
Selling and marketing expenses
Commissions Br.17,550,000
Fixed costs 12,825,000 30,375,000
Operating income Br. 21,060,000
The company is considering hiring its own sales staff to replace the network of agents. It will pay
its salespeople a commission of 10% and incur additional fixed costs of Br.11.7 million.
Instructions
(a) Under the current policy of using a network of sales agents, calculate the Huber Beauty
Corporation’s break-even point in sales dollars for the year 2012.
(b) Calculate the company’s break-even point in sales dollars for the year 2012 if it hires its
own sales force to replace the network of agents.
(c) Calculate the degree of operating leverage at sales of Br.78 million if (1) Huber Beauty
uses sales agents, and (2) Huber Beauty employs its own sales staff. Describe the
advantages and disadvantages of each alternative.

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(d) Calculate the estimated sales volume in sales dollars that would generate an identical net
income for the year ending December 31, 2012, regardless of whether Huber Beauty
Corporation employs its own sales staff and pays them a 10% commission as well as
incurring additional fixed costs of Br.11.7 million, or continues to use the independent
network of agents.

Question 10:
The West Division of Nieto Company reported the following data for the current year.
Sales $3,000,000
Variable costs 1,950,000
Controllable fixed costs 600,000
Average operating assets 5,000,000
Top management is unhappy with the investment center’s return on investment (ROI). It asks the
manager of the West Division to submit plans to improve ROI in the next year.
The manager believes it is feasible to consider the following independent courses of action.
1. Increase sales by $320,000 with no change in the contribution margin
percentage.
2. Reduce variable costs by $100,000.
3. Reduce average operating assets by 4%.
Instructions:
(a) Compute the return on investment (ROI) for the current year.
(b) Using the ROI formula, compute the ROI under each of the proposed courses of action.
(Round to one decimal.)
Question 11:
Presented below is selected information for three regional divisions of Medina Company.
Divisions
North West South
Contribution margin $ 300,000 $ 500,000 $ 400,000
Controllable margin $ 150,000 $ 400,000 $ 225,000
Average operating assets $1,000,000 $2,000,000 $1,500,000
Minimum rate of return 13% 16% 10%
Instructions
(a) Compute the return on investment for each division.
(b) Compute the residual income for each division.

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(c) Assume that each division has an investment opportunity that would provide a rate of
return of 19%.
(1) If ROI is used to measure performance, which division or divisions will probably
make the additional investment?
(2) If residual income is used to measure performance, which division or divisions will
probably make the additional investment?

Question 12:
Presented below is selected financial information for two divisions of Yono Brewing.

Lager Lite Lager


Contribution margin $500,000 $ 300,000
Controllable margin 200,000 (c)
Average operating assets (a) $1,000,000
Minimum rate of return (b) 13%
Return on investment 25% (d)
Residual income $ 90,000 $ 200,000

Instructions
Supply the missing information for the lettered items.

Question 13
Your company currently produces and sells 4 products, Alpha, Beta, Gamma and Delta. The
following information relates to Period 3.

Alpha Beta Gamma Delta


Production (units) 180 150 120 180
Costs per unit:
Direct material Br. 46 Br. 58 Br. 35 Br. 70
Direct labour Br. 21 Br. 14 Br. 7 Br. 14
Machine hours per unit 4 3 2 3
Number of production runs 6 5 4 6
Number of requisitions raised 30 30 30 30
Number of orders completed 18 15 12 18

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Currently the production overhead is absorbed by the machine-hour rate method and the
following are the total production overhead costs for Period 3. Machine Department Br. 24,540
Set-up costs 6,300
Receiving costs 7,200
Inspection costs 3,150
Dispatch costs 7,560
48,750
Cost drivers have been identified as follows:
Set-up costs Number of production runs
Stores receiving Number of requisitions raised
Inspection Number of production runs
Dispatch Number of orders completed

You are required to calculate:


(a) (i) The machine-hour rate currently used to absorb the production overhead.
(ii) The total cost per unit for each product if overheads are absorbed by the method in
(a)(i).
(b) The cost per unit for each product using an ABC approach.
Question 14
Jomit plc has budgeted for the following overhead costs for Period 6.

Material receipt costs Br. 31,200


Power costs 39,000
Material handling costs 27,300

The company produces 3 products, P, Q and R for which the following budgeted information is
available for Period 6.

Product P Q R
Output (units) 4,000 3,000 1,600
Material batches 20 10 32

Per Unit
Direct material (kg) 4 6 3
Direct material (Br. ) 6 5 9
Direct labour (hours) 0.2 0.5 1.0
Number of power operations 6 3 2
Direct labour rate per hour Br. 8 Br. 8 Br. 8

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Currently the overhead costs are each absorbed using a rate per direct labor hour.

However, the company is considering applying overheads using an ABC approach and has
identified drivers for the activities as follows:

Material receipt costs number of batches of material


Power costs number of power operations
Material handling costs kg of material handled
You are required to calculate:
(a) The total cost per unit for each product using the current overhead absorption method.
(b) The total cost per unit for each product using the ABC method.

Question 15
Your company currently produces a range of three products, D, E and F to which the following
details relate for Period 2.
D E F
Production (units) 1,500 2,500 14,000
Material cost per unit Br. 18 Br. 10 Br. 20
Labour hours per unit 1 3 2
Machine hours per unit 3 2 6

Labour costs are Br. 8 per hour and production overheads are currently absorbed in the
conventional system by reference to machine hours. Total production overheads for Period 2
have been analysed as follows:
Set-up costs Br. 327,250
Handling costs 187,000
Machining costs 140,250
Inspection costs 280,500
935,000

(a) Calculate the cost per unit for each product using conventional methods.
The introduction of an ABC is being considered and to that end the following volume of
activities have been identified with the current output levels.
D E F
Number of set-ups 90 138 576
Number of material issues 16 28 116

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Number of inspections 180 216 804

(b) Calculate the cost per unit for each product using the ABC approach.

PART II: Answer the following question in your group.


Question 16:
(i) Costs may be classified in a number of ways including classification by behavior, by
function, by expense type, by controllability and by relevance.
(ii) Management accounting should assist in EACH of the planning, control and decision
making processes in an organization.
Required: Discuss the ways in which relationships between statements (i) and (ii) are relevant in
the design of an effective management accounting system.
Question 17: Activity-Based Costing
The activity-based costing (ABC) approach allocate overhead costs to products by first assigning
the overhead costs to major activities done by the organization, and then using the appropriate
cost driver for each activity, the overhead costs are allocated to the product in proportion to the
amount of the cost driver consumed by the product. ABC proponents indicate that ABC captures
the economics of the production process more closely than traditional volume-based costing
systems (Cooper and Kaplan 1990). ABS also identifies the different levels of activities. The
cost hierarchy under ABS categorizes costs into different cost pools on the bases of the
difference in the cost deriver, whether it is a unit, batch, or product line.

Required: Discuss the difference between ABC and a traditional costing system. Explain the
advantages and disadvantages of the ABC system. Is it applicable to all types of organizations?
Search the internet for companies that applied this system and discuss the degree of success they
met. What are the measures of success that are used in evaluating the success of ABC?

Question 18: EVA® Case


Economic value added (EVA) is a measure of profitability for performance evaluation. The Coca
Cola Company, General Electric, and Intel are a few of the companies that use EVA to measure
their financial performance. Proponents of EVA suggest that this measure comes closer than any
other to capturing the true economic profit of an enterprise. They also indicate that EVA is the
performance measure that is most directly linked to the creation of shareholder wealth over time
(Stern Stewart & Co. website: www. sternstewart.com). On the other hand, the results of some
academic studies do not support the claims about the superiority of EVA (e.g., Biddle et al
1997).

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Required: Explain the EVA as a measure of performance. Discuss its advantages and
disadvantages. Explain why companies adopt it as a base for their compensation scheme. From
your readings, do you believe that EVA is superior to other performance measures?
Question 19: Balanced Scorecard

An article by Robert S. Kaplan and David D. Norton in 1992 sparked the interest in the concept
of the balanced scorecard. A balanced scorecard is a model of business performance evaluation
that balances measures of financial performance, internal operations, innovation and learning,
and customer satisfaction (Hilton 2002). The balanced scorecard does not focus only on financial
objectives. It also considers operational measures such as customer satisfaction, internal
innovation, and learning and growth. This allows for measuring the present performance, in
addition it captures information on how well the organization is prepared to perform in the
future.

Required: Explain the idea behind the balanced scorecard. Show how companies in different
industries are using it, and how successful it is. What types of measures are used? What are the
bases for the inclusion of a measure in a typical scorecard system?

Question 20: Non-financial Performance Measures


It is common to measure the company performance using financial measures. Financial measures can be
accounting-based such as earnings, return on assets, and return on equity, or market-based such as stock
prices. Increasingly, companies are also using nonfinancial measures such as customer satisfaction,
market share, and employees’ satisfaction, among others to evaluate the performance of its managers.
Using nonfinancial measures may increase the efficiency of the management, and may reflect information
that is not captured by financial performance measures.

Required: Discuss the importance of nonfinancial measures and their applications. Explain the reasons
for using them alongside the financial measures. What kind of information is provided by the
nonfinancial measures that is not captured by the financial measures?

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