Practice Questions: Cost Analysis

Question No 1: (Source: CIMA P2 Q Nov 2010)

Prepare calculations to show the effect on fees charged to each of these three clients of
changing to the new costing system.

Dr. Zeeshan Mahmood |Glocal Ecademy zeeshan@glocalecademy.com| www.glocalecademy.com

 Question No 2: (Source: CIMA P2 Q2 Nov 2013)
SXL is a specialist car manufacturer that produces various models of car. The organisation is
due to celebrate its 100th anniversary next year. To mark the occasion, SXL intends to
produce a sports car; the Model S. As this will be a special edition, production will be limited
to 1,000 Model S cars.
SXL is considering using a target costing approach and has conducted market research to
determine the features that consumers require in a sports car. Based on this market research
and knowledge of competitors’ products, SXL has decided to price the Model S at $19,950.
SXL requires an operating profit margin of 25% of the selling price of the car. Details for the
forthcoming year are as follows:
Forecast direct costs for a Model S car
Labour $5,000
Material $9,500

Forecast annual overhead costs $ Cost driver

Production line cost 4,630,000 See note 1
Transportation costs 1,800,000 See note 2
There are no fixed costs that are specific to the product.
Note 1
The production line that would be used for Model S has a capacity of 60,000 machine hours
per year. The production line time required for Model S is 6 machine hours per car. This
production line will also be used to make other cars and will be working at full capacity.
Note 2
Some models of cars are delivered to showrooms using car transporters. 60% of the
transportation costs are related to the number of deliveries made. 40% of the transportation
costs are related to the distance travelled.
The car transporters are forecast to make a total of 640 deliveries in the year and carry 10
cars each time. The car transporter will always carry its maximum capacity of 10 cars.
The total annual distance travelled by car transporters is expected to be 225,000km.
50,000km of this is for the delivery of Model S cars only. All 1,000 Model S cars that will be
produced will be delivered in the year using the car transporters.

Prepare calculations to show the effect on fees charged to each of these three clients of
changing to the new costing system.

Dr. Zeeshan Mahmood |Glocal Ecademy zeeshan@glocalecademy.com| www.glocalecademy.com

 Question No 3: (Source: CIMA P2 Q3 Sept 2010)
ST is a distribution company which buys a product in bulk from manufacturers, repackages the product
into smaller packs and then sells the packs to retail customers. ST’s customers vary in size and
consequently the size and frequency of their orders also varies. Some customers order large quantities
from ST each time they place an order. Other customers order only a few packs each time.
The current accounting system of ST produces very basic management information that reports only the
overall company profit. ST is therefore unaware of the costs of servicing individual customers. However,
the company has now decided to investigate the use of Direct Customer Profitability Analysis (DCPA).
ST would like to see the results from a small sample of customers before it decides whether to fully
introduce DCPA.The information for two customers, and for the whole company, for the previous period
was as follows:

(a) Prepare a Direct Customer Profitability Analysis for each of the two customers.

(b) Explain how ST could use DCPA to increase its profits.

Dr. Zeeshan Mahmood |Glocal Ecademy zeeshan@glocalecademy.com| www.glocalecademy.com

 Question No 4: (CIMA P2 Q3 March 2013)
PQ is a building supplies retailer that operates a chain of shops throughout the country. The company
has grown rapidly but profits have started to fall. The company has an excellent Inventory Procurement
and Management System, but the accounting systems are very poor. A management accountant has
recently been appointed to help improve decision making within the company. The company sells
building supplies, ranging from bags of nails and screws to pre-packed kitchen units, to a wide range of
customers including homeowners and professional builders. The company offers a free delivery service
on all orders totaling over $100. Within each shop there are specialist sections that have skilled staff
to offer help and advice to customers. Examples include: • The “Design Station” which offers free advice
on kitchen and bathroom installation and design. • The “Cutting Bay” which cuts timber to customers’
specific requirements. There is no charge for this service.
Other areas of the shop are “help yourself” where customers select their requirements from racked
displays of products and then pay at the check-out points. The recently appointed management
accountant was shocked to discover that the company’s pricing policy is to add a 100% mark-up to the
bought in cost of all products. The management accountant has suggested that the mark-up should not
be the same for all products because certain products and certain types of customer will be more costly
to sell and service respectively. The management accountant has suggested that an activity-based
costing system should be introduced to allow Direct Product Profitability and Customer Profitability
Analyses to take place

(a) Explain how the allocation and absorption of costs differs in activity-based costing
compared to traditional absorption costing.

(b) Explain how activity-based costing could help to increase the profits of PQ.

Dr. Zeeshan Mahmood |Glocal Ecademy zeeshan@glocalecademy.com| www.glocalecademy.com

 Question No 5: (CIMA P2 Q1 May 2013)

A tree farm supplies shrubs to two customers. Each shrub has a selling price of $60.
It costs $25 to grow a shrub and get it to the point of sale. Additional costs incurred
by the farm are $100 per order fulfilled and delivery costs of $500 per order
delivered.
Details of two of the farm’s customers (B and C) for the previous period are as
follows:
Customer B Customer C
Shrubs purchased 960 650
Discount allowed 15% 20%
Orders fulfilled 8 (each for 120 shrubs) 10 (each for less than 100
shrubs)
Deliveries made 8 0
Customers are given a 15% discount on orders for 100 shrubs or more.
Customer C is given a 20% discount for collecting the shrubs using its own transport.

Evaluate the two customers.

(Your answer should include customer profitability statements and appropriate measures.)

Dr. Zeeshan Mahmood |Glocal Ecademy zeeshan@glocalecademy.com| www.glocalecademy.com

 Question No 6: (Kaplan ST P2 CIMA)

A supermarket wholesaler sells over 40,000 product lines to retailers who visit the
store. It has 45,000 m3 of general storage including 100 m3 of cold storage. General
overheads are $90,000 and additional cold storage costs are $5,000. Two of the
products sold are single frozen desserts (FD) and trays of 48 cans of soft drink (SD).
Only frozen desserts are
kept in cooled storage.
The wholesaler pays $0.4 for a FD, which is 0.03 m3 and sells for $4. The trays of SD
are 0.3 m3 and are bought for $5 and sold for $30.

Calculate the net profit per FD

Calculate the net profit and per crate of SD

Dr. Zeeshan Mahmood |Glocal Ecademy zeeshan@glocalecademy.com| www.glocalecademy.com

 Question No 7: (Kaplan ST P2 CIMA)
XY provides accountancy services and has three different categories of client:
➢ limited companies
➢ self-employed individuals
➢ employed individuals requiring taxation advice.
XY currently charges its clients a fee by adding a 20% mark-up to total costs. Currently, the costs are
attributed to each client based on the hours spent on preparing accounts and providing advice. XY is
considering changing to an activity-based costing system. The annual costs and the causes of these
costs have been analyzed as follows:
Accounts preparation and advice $580,000
Requesting missing information $30,000
Issuing fee payment reminders $15,000
Holding client meetings $60,000
Travelling to clients $40,000
The following details relate to three of XY’s clients and to XY as a whole:
Client XY
A B C
Hours spent on preparing accounts and 1,000 250 340 18,000
providing advice
Requests for missing information 4 10 6 250
Payment reminders sent 2 8 10 400
Client meetings held 4 1 2 250
Miles travelled to clients 150 600 0 10000

Prepare calculations to show the effect on fees charged to each of these three clients of
changing to the new costing system.

Dr. Zeeshan Mahmood |Glocal Ecademy zeeshan@glocalecademy.com| www.glocalecademy.com

 Question No 8: (Kaplan ST P2 CIMA)

Crale & Co manufactures replacement batteries for smartphones. The battery retails for $40 and costs
$10 to make. Crale & Co currently sells 1 million batteries every year through its e-commerce website,
and 1 million batteries a year via its network of retail distributors across the country.
Overheads incurred to recruit and retain website administrators amount to $800,000 yearly, and
other employee costs amount to $310,000 for the e-commerce channel.
Via its retail distribution network, the company must also offer a $1.50 discount per unit to
distributors; also, the administrative cost of processing retail orders amounts to $620,000.

(a) Which of the two channels is more profitable for Crale & Co?

Further analysis of Crale & Co’s financial data reveals that:

• 2% of the batteries sold via the website go unpaid every year, due to payment fraud;
• Packaging and distribution costs linked to the website operation have been calculated at $0.80
per battery.
• Furthermore, 50% of the batteries ordered on the website qualify for free shipping due to web
promotional vouchers.
Batteries which qualify for this free shipping incur an additional cost of $1.20 per battery to
process the vouchers and ship to customers (not including the $0.80 packaging and distribution
costs mentioned above).
• The cost of shipping inventory in bulk to distributors is $1 per unit.
(b) In light of this further analysis, which of the two channels is now more profitable?

Dr. Zeeshan Mahmood |Glocal Ecademy zeeshan@glocalecademy.com| www.glocalecademy.com

 Question No 9: (Kaplan ST P2 CIMA)
Walken Supermarkets sells over 30,000 product lines. It wishes to introduce Direct Product
Profitability analysis and a team of management accountants have ascertained the following
information relating to the following year:
Budgeted weekly overhead $
Warehouse costs 75,000
Supermarket costs 40,000 per supermarket
Transportation costs 400 per delivery
The warehouse is expected to handle 10,000 cubic metres (m3) of goods.
Each supermarket will handle 5,000 m3 of goods each week.
Each transportation vehicle holds 40 m3 of goods.
Three products sold by Walken are Kitchen Roll (KR), Tinned Spaghetti (TS) and Toothpaste
(T):
KR TS T
Retail price per item $1.00 $0.60 $1.75
Bought-in price per item $0.60 $0.30 $1.00
Number of items per case 10 25 40
Number of cases per m3 20 30 20
Time in warehouse 1 week 2 weeks 3 weeks
Time in supermarket 2 weeks 4 weeks 2 weeks

Calculate the following figures, in $, to four decimal places:

The net profit per kitchen roll $

The net profit per tin of spaghetti $

The net profit per tube of toothpaste

Dr. Zeeshan Mahmood |Glocal Ecademy zeeshan@glocalecademy.com| www.glocalecademy.com

 Question No 10: (CIMA P2 Q7 Nov 2005)

Prepare calculations to show the cost attributed to each client group using an activity
based system of attributing costs.

Dr. Zeeshan Mahmood |Glocal Ecademy zeeshan@glocalecademy.com| www.glocalecademy.com

 Question No 11: (CIMA P1 Pilot Paper)

Calculate the annual budgeted number of:

(a) batches

(b) machine set-ups

(c) purchase orders (d) processing minutes

Calculate the budgeted overhead unit cost for Product R for inclusion in the budget
for 2004.

Dr. Zeeshan Mahmood |Glocal Ecademy zeeshan@glocalecademy.com| www.glocalecademy.com

 Question No 12: (CIMA P1 Q3 May 2005)
F plc supplies pharmaceutical drugs to drug stores. Although the company makes a satisfactory
return, the directors are concerned that some orders are profitable, and others are not. The
management has decided to investigate a new budgeting system using activity-based costing
principles to ensure that all orders they accept are making a profit. Each customer order is charged
as follows. Customers are charged the list price of the drugs ordered plus a charge for selling and
distribution costs (overheads). A profit margin is also added, but that does not form part of this
analysis.
Currently F plc uses a simple absorption rate to absorb these overheads. The rate is calculated based
on the budgeted annual selling and distribution costs and the budgeted annual total list price of the
drugs ordered.
An analysis of customers has revealed that many customers place frequent small orders with each
order requesting a variety of drugs. The management of F plc has examined more carefully the
nature of its selling and distribution costs, and the following data have been prepared for the budget
for next year:
Total list price of drugs supplied £8m
Number of customer orders 8,000
Selling and Distribution Costs £000 Cost driver
Invoice processing 280 See Note 2
Packing 220 Size of package – see Note 3
Delivery 180 Number of deliveries – see Note 4
Other overheads 200 Number of orders
Total overheads 880
Notes:
1. Each order will be shipped in one package and will result in one delivery to the customer and one
invoice (an order never results in more than one delivery).
2. Each invoice has a different line for each drug ordered. There are 28,000 invoice lines each year. It
is estimated that 25% of invoice processing costs are related to the number of invoices, and 75% are
related to the number of invoice lines.
3. Packing costs are £32 for a large package, and £25 for a small package.
4. The delivery vehicles are always filled to capacity for each journey. The delivery vehicles can carry
either 6 large packages or 12 small packages (or appropriate combinations of large and small
packages). It is estimated that there will be 1,000 delivery journeys each year, and the total delivery
mileage that is specific to particular customers is estimated at 350,000 miles each year. £40,000 of
delivery costs are related to loading the delivery vehicles, and the remainder of these costs are
related to specific delivery distance to customers.
The management has asked for two typical orders to be costed using next year’s budget data, using
the current method, and the proposed activity-based costing approach. Details of two typical orders
are shown below:
Order A Order B
Lines on invoice 2 8
Package size small large
Specific delivery distance 8 miles 40 miles
List price of drugs supplied £1,200 £900

Calculate the charge for selling and distribution overheads for Order A and Order B using:

(i) the current system; and

(ii) the activity-based costing approach.

Dr. Zeeshan Mahmood |Glocal Ecademy zeeshan@glocalecademy.com| www.glocalecademy.com

 Question No 13:

Carry out Pareto Analysis and discuss its benefits

Dr. Zeeshan Mahmood |Glocal Ecademy zeeshan@glocalecademy.com| www.glocalecademy.com

 Question No 14:

Dr. Zeeshan Mahmood |Glocal Ecademy zeeshan@glocalecademy.com| www.glocalecademy.com

 Question No 15: (CIMA P1 Nov 2013)

Dr. Zeeshan Mahmood |Glocal Ecademy zeeshan@glocalecademy.com| www.glocalecademy.com

 Question No 16: (CIMA P1 March 2011)

Each customer has a service contract for two machines on average.

(a) Calculate the annual profit per machine for each of the three sizes of machine using
activity-based costing
(b) Explain the potential benefits to the company of using activity-based costing.

Dr. Zeeshan Mahmood |Glocal Ecademy zeeshan@glocalecademy.com| www.glocalecademy.com

 Question No 17: (ACCA F5 Q1 June 2015)

Dr. Zeeshan Mahmood |Glocal Ecademy zeeshan@glocalecademy.com| www.glocalecademy.com

 Question No 18: (ACCA F5 June 2014)

Dr. Zeeshan Mahmood |Glocal Ecademy zeeshan@glocalecademy.com| www.glocalecademy.com