MA4023 Management Accounting Techniques

CHAPTER 1 BUDGETING
EXERCISES
BUDGETING

Question 1
Flosun Bhd makes and sells a range of products. Management has carried out an analysis of
the total cost of production. The information in Appendix 1 reflects this analysis of budgeted
costs for the six-month period to 30 June 2017. The analysis has identified that the factory is
organized in order to permit the operation of three production lines X, Y and Z. Each production
line facilitates the production of two or more products. Production line X is only used for the
production of products A and B. The products are manufactured in batches on a just-in-time
basis in order to fulfil orders from customers. Only one product can be manufactured on the
production line at any one time. Materials are purchased and received on a just-in-time basis.

Additional information is available for production line X as follows:

(i) Production line machine costs including labour, power, etc., vary in proportion to
machine hours.
(ii) Costs incurred for production scheduling, WIP movement, purchasing and receipt of
materials are assumed to be incurred in proportion to the number of batches of product
which are manufactured. Machine set-up costs vary in proportion to the number of set-
ups required and are linked to a batch throughput system.
(iii) Costs for material scheduling systems and design/testing routines are assumed to be
incurred by each product in proportion to the total quantity of components purchased and
the total number of types of component used respectively. The number of different
components designed/tested for product A and B are 12 and 8 respectively.
(iv) Product line development costs is identified with changes in product design and
production method. At present such costs for production line X are apportioned 80 per
cent; 20 per cent to Products A and B respectively. Production line maintenance costs are
assumed to very in proportion to the maintenance hours required for each product.
(v) General factory costs are apportioned to each of production lines X, Y and Z in the ration
25 per cent; 30 per cent; 45 per cent respectively. Such costs are absorbed by products
units at an average rate per unit through each production line.

Required:
Prepare an activity based budget for production line X for the six month period to 30 June 2017
analysed into sub-sets for activities which are product unit based, batch based, product
sustaining, production line sustaining and factory sustaining.

The budget should show:

(a) Total cost for each activity sub-set grouped to reflect the differing operational levels at
which each sub-set is incurred/controlled.
(b) Average cost per unit for each products A and B analyzed by activity sub-set.

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Appendix 1
Flosun Bhd – Budget data six months to 30 June 2017

Product A Product B
Material cost per product unit RM60 RM45
Production line X
0.8 0.5
– machine hours per unit
Production batch size (units) 100 200
Total production (units) 9,000 15,000
Components per product unit (quantity) 20 12
Number of customers 5 10
Number of production line set-ups 15 25
Production line X
300 150
– maintenance hours

Cost Category Production line X Factory total (RM)

(RM)
Labour, power, etc. 294,000
Set-up of machines 40,000
Production scheduling 29,600
WIP movement 36,400
Purchasing and receipts of material 49,500
Material scheduling system 18,000
Design/testing routine 16,000
Production line development 25,000
Production line maintenance 9,000
General factory administration 500,000
General factory occupancy 268,000

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Question 2
Suppose you are the controller of Minnesota State University. The university president, Lisa
Larsson, is preparing for her annual fund-raising campaign for 2007-2008. To set an
appropriate target, she has asked you to prepare a budget for the academic year. You have
collected the following data for the current year (2006-2007):

Undergraduate Graduate
Division Division
Average salary of faculty member RM58,000 RM58,000
Average faculty teaching load in semester credit-hours per 24 18
year (eight undergraduate or six graduate courses)
Average number of student per class 30 20
Total enrolment (full-tem and part-time students) 3,600 1,800
Average number of semester credit-hours carried each year 25 20
Full-time load, semester hours per year 30 24

• For 2007-2008, all faculty and staff will receive a 6% salary increase. Undergraduate
enrolment is expected to decline by 2%, but graduate enrolment is expected to increase by
5%.

• The 2006-2007 budget for operation and maintenance of facilities was RM500,000, which
includes RM240,000 for salaries and wages. Experience so far this year indicated that the
budget is accurate. Salaries and wages will increase by 6% and other operating costs will
increase by RM12,000 in 2007-2008.

• The 2007-2008 budgets for the remaining expenditure are:

RM
General administrative 525,000
Library
Acquisitions 155,000
Operations 200,000
Health services 50,000
Intramural athletics 60,000
Intercollegiate athletics 245,000
Insurance and retirement 560,000
Interest 75,000

• Tuition fees is RM92 per credit hor. In addition, the state legislature provides RM780 per
full-time equivalent student. (A full-time equivalent is 30 undergraduate hours or 24
graduate hours). Full-tuition scholarships are given to 30 full-time undergraduate and 50
full-time graduate students.

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• Revenues other than tuition and the legislative apportionment are:

RM
Endowment income 210,000
Net income from auxiliary services 335,000
Intercollegiate athletic receipts 300,000

• The chemistry/physics classroom building needs remodelling during the 2007-2008 period.
Projected cost is RM575,000.

Required:
(a) Prepare a schedule for 2007-2008 that shows, by division:
(i) Expected enrolment
(ii) Total credit hours
(iii) Full-time equivalent enrolment
(iv) Number of faculty members needed

(b) Calculate the budget for faculty salaries for 2007-2008 by division.

(c) Calculate the budget for tuition revenue and legislative apportionment for 2007-2008 by
division.

(d) Prepare a schedule for President Larsson showing the amount that must be raised by the
annual fund-raising campaign.

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 MA4023 Management Accounting Techniques

LEARNING CURVE

Question 1
PT has discovered that when it employs a new test engineer there is a learning curve with a 75
percent of learning that exists for the first 12 customer assignments. A new test engineer
completed her first customer assignment in six hours.

Calculate the time that she should take for her 7th assignment to the nearest 0.1 hours.
Note: The index for a 75 per cent learning curve is -0.415.

Question 2
Present a table of production times showing the following columns for E. The company, which
produces up to 16 units while experiencing a 90 per cent learning curve, the first unit requiring
1,000 hours of production time:
(a) Units produced
(b) Cumulative average production time per unit (hours)
(c) Total production time (hours)
(d) Average incremental production time per unit in each successive lot (hours)

Question 3
A company is considering the price that it should charge for a repeat order. Fifteen units of the
product have already been made and supplied to the customer and the company has experienced
an 80% learning curve so far. The first unit required 54 hours of labour to complete the
manufacture, assembly and testing processes.

Required:
Assuming that the 80% learning curve continues, calculate the expected time to be taken for
the 16th unit. (Round your answer to the nearest two decimal points)

Question 4
A manufacturing company develops a new product. The time taken to manufacture the first
unit is 24 minutes. It is expected that an 70% learning curve will apply for the first three months
of production and that by the end of the period, the total number of units produced will be
1,024. It is then expected that the time taken for each subsequent unit will be the same as the
time taken for the 1,024th unit.

Required:
(a) Calculate the expected time taken for the 1,024th unit. (Round your answer to the nearest
two decimal points)
(b) Explain two reasons why the time taken for the 1025th unit may be more than expected.

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Question 5
A company recently launched a new product. The average time taken for the first four units is
24 minutes per unit and the average time taken for the first 32 units is 9.34 minutes per unit.

Required:
Calculate the rate of learning that occurred. (Round your answer to the nearest two decimal
points)

Question 6
FH is an electronics company that has developed a new product for the video conferencing
market. The product has successfully completed its testing phase and FH has now produced
the first four production units. The first unit took three hours of labour time and the total time
for the first four units was 8.3677 hours.

Calculate the learning curve improvement rate (rate of learning) to the nearest 0.1 per cent.

Question 7
Velo Racers has designed a radically new concept in racing bikes with the intention of selling
them to professional racing teams. The estimated cost and selling price of the first bike to be
manufactured and assembled is as follows:
RM
Materials 1,000
Assembly labour (50 hours at RM10 per hour) 500
Fixed Overheads (200 percent of Assembly labour) 1,000
Profit (20 per cent of total cost) 500
Selling Price 3,000

Velo Racers plans to sell all bikes at total cost plus 20 per cent and the material cost per bike
will remain constant irrespective of the number sold.
Velo Racers’ management expects the assembly time to gradually improve with experience
and has estimated an 80 per cent learning curve.

A racing team has approached the company and asked for the following quotations:
1. If we were to purchase the first bike assembled, and immediately put in order for the second,
what would be the price of the second bike?
2. If we waited until you had sold two bikes to another team, and then ordered the third and
fourth bikes to be assembled, what would be the average price of the third and fourth bikes?
3. If we decided to immediately equip our entire team with the new bike, what would be the
price per bike if we placed an order for the first eight to be assembled?

Required:
(a) Explain Learning Curve Theory and in particular the concept of cumulative average time.
(b) Provide detailed price quotations for each of the three enquiries outlined above.
(c) Identify the major areas within management accounting where learning curve theory is
likely to have consequences and suggest potential limitation of this theory.

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Question 8
Maxmarine Bhd builds boat. Earlier this year, the company accepted an order for 15 specialized
‘Crest’ boats at a fixed price of RM100,000 each. The contract allows four months for building
and delivery of all the boats and stipulates a penalty of RM10,000 for each boat delivery late.

The boats are built using purchased components and internally manufactured parts, all of which
are readily available. However, there is only a small team of specialized technicians and
boatyard space is limited, so that only one boat can be built at a time. Four boats have now been
completed and as the company has no previous experience of this particular boat, the building
times have been carefully monitored as follows:

Boat number Completion time (days)

1 10.0
2 8.1
3 7.4
4 7.1

The company has 23 normal working days in every month and the first four boats were
completed with normal working day.

Management is now concerned about completing the contract on time.

The management accountant’s estimate of direct costs per boat, excluding labour costs, is as
follows:

RM’000
Purchased components 40
Manufactured parts 15
Other direct expenses 5
60

Direct labour costs are RM2,500 per day for the normal 23 working days per month. Additional
weekend working days at double the normal rate can be arranged up to a maximum of seven
days per month (making 30 possible working days per month in total).

Overheads will be allocated to the contract at a rate of RM3,000 per normal working day and
no overheads will be allocated for overtime working.

Required:
(a) Using the completion time information provided, calculate the learning rate showing full
workings.
(b) Discuss the limitation of the learning curve in this type of application.
(c) Calculate whether it would be preferable for the company to continue normal working or to
avoid penalties by working weekends. Support your calculation with any reservations or
explanations you consider appropriate.