Question 1:

(a)
Variable costing
Cost per unit
=Direct material + Direct Labor +Variable Manufacturing overhead
=RM 35+RM36 +RM 3
=RM74

(b)
Variable Costing Income Statement
RM RM
Sales(121 x 6,900) 834,900

Less: Variable Expense

Variable Cost of Goods Sold
Beginning inventory (74 x 400) 29,600
Variable Manufacturing Cost (74 x 6,800) 503,200
Less Ending of Inventory (74 x 300) (22,200)
Variable Cost of Goods Sold 510,600
Variable Selling and Administrative (4 x 6,900) 27,600
Total Variable Expense 538,200
Contribution Margin 296,700

Less Fixed Expense

Fixed Manufacturing Overhead 197,200
Fixed Selling and Administrative 96,600
Total Fixed Expense 293,800
Net Operating Income 2,900

(c)
RM
Variable costing net income 2,900
Add: Fixed manufacturing overhead costs deferred in inventory 8,700
(197,200/6,800) x300
Less:Beginning inventory 29,600
Absorption costing net income/(loss) (18,000)
Question 2:

The activity level must be appropriate for the business. Yummy must choose between three
activity levels:

Units of production - This would not be appropriate since Yummy produces more than one
type of product. It would not be fair to absorb the same amount of overhead into each product.

Machine hours or labour hours : It is fair to absorb production overheads into the products
based on the labour or machine hours taken to produce each unit. We must decide if the most
appropriate activity level is machine or labour hours. To do this we can look at the nature of
the process. Production appears to be more machine intensive than labour intensive because
each unit takes more machine hours to produce than it does labour hours. Therefore, the most
appropriate activity level is machine hours.

Activity level
=machine hours per unit x actual sales
=(0.01 x 500,000) + (0.04 x 150,000) +(0.02 x 250,000)
=RM5,000 + RM6,000 + RM5,000
=RM16,000

Predetermined overhead rate,POR

=Production overhead/activity level
=80,000/16,000
=RM5 per machine hour

Koko Koki Koka

Production overhead per unit 0.01 x 5 0.04 x 5 0.02 x 5
=Machine hours per unit x 5 =0.05 =0.20 =0.10

Direct labour cost per unit 0.07 0.14 0.12

Direct material cost per unit 0.17 0.19 0.16
Production overhead per unit 0.05 0.20 0.10
Full production cost per unit 0.29 0.53 0.38
Selling price per unit 0.50 0.45 0.43
Profit/Loss per unit 0.21 (0.08) 0.05

(b)
Outcome of absorption costing

Based on absorption costing, the Koko and the Koka are both profitable. However, the Koki
is loss making. Managers would need to consider the future of the Koki. They may look at the
possibility of increasing the selling price and/ or reducing costs. If this is not possible, they
may make the decision to stop selling the product.

However, this may prove to be the wrong decision because absorption costing does not
always result in an accurate calculation of the full production cost per unit. ABC can be a
more accurate method of calculating the full production cost per unit and as a result should
lead to better decisions.
B.
Cost pool POR ABC cost assigned
=Expected =POR x cost driver of each product
cost/total cost Koko Koki Koka
driver
Machining cost 5,000/16,000 0.31 x (16,000 x 0.31 x (16,000 0.31 x (16,000 x
=0.31 per 1/7) x4/7) 2/7)
machine hour =708.57 =2,834.29 =1,417.14
Component cost 15,000/(4+6+20) 500 x 4 500 x 6 500 x 20
=500 per =2,000 =3,000 =10,000
component
Set-up costs 30,000/(3+1+26) 1,000 x 3 1,000 x 1 1,000 x 26
=1,000 per set-up =3,000 =1,000 =26,000
Packing cost 30,000/ 600 x 21 600 x 4 600 x 25
(21+4+25) =12,600 =2,400 =15,000
=600 per order
Total production 18,308.57 9,234.29 52,417.14
cost

Koko Koki Koka

Production overhead per unit 18,308.57/ 9,234.29/ 52417.14/
=Total production cost/ production 500,000 150,000 250,000
unit =0.04 =0.06 =0.21

Direct labour cost per unit 0.07 0.14 0.12

Direct material cost per unit 0.17 0.19 0.16
Production overhead per unit 0.04 0.06 0.21
Full production cost per unit 0.28 0.39 0.49
Selling price per unit 0.50 0.45 0.43
Profit/Loss per unit 0.22 0.06 (0.06)

Outcome of ABC

When comparing the results of absorption costing and ABC, the Koko is slightly more
profitable. The real surprise is the results for the Koki and the Koka. The Koki is now
profitable and the Koka is now loss making. This is because the production overheads have
been absorbed in a more accurate way.

For example:

There are 20 components in a Koka, compared with only 6 in a Koki. It is therefore fair that
the Koka receives more of the component cost.
There are only 4 orders for the Koki but 25 for the Koka. It is therefore fair that the Koka
receives more of the packing costs.
ABC absorbs overheads more accurately and should therefore result in better decision
making. The managers should be concerned about the Koka and not the Koki, as was
previously thought. They will now have to decide if it is possible to control the Koka costs or
increase the selling price. If not, they may decide to stop selling the product.
Question 3:
(a)
Machining Department production cost report
Item Physical Percentage of Equivalent unit
unit: Completion
with Respect Direct Material Conversion
to Conversion cost
Beginning WIP 0
Unit started during 80,000
March
Total units to 80,000
account for
Units completed 60,000 100% 60,000 60,000
and transferred
Ending WIP 20,000 50% 20,000 10,000
Total units 80,000 80,000 70,000
accounted for
DM (RM) CC (RM) Total cost (RM)
Beginning WIP 0 0 0
Cost incurred 240,000 140,000+65,000 445,000
during March =205,000
Total cost to 240,000 205,000 445,000
account for
Equivalent units 80,000 70,000 80,000
Cost per equivalent 3 2.93 5.93
unit
Total cost
Completed cost and 60,000 x 5.93
transferred =355,800
Ending WIP:
DM 20,000 x 3=
60,000
CC 10,000 x 2.93
=29,300
Total ending WIP 89,300
Total cost 445,100
accounted for
 Finishing Department production cost report
Item Physical Equivalent unit
unit:
Transferred in Direct Material Conversion cost

Beginning WIP 0
Unit started during 60,000
March
Total units to account 60,000
for
Units completed and 50,000 50,000 50,000 50,000
transferred
Ending WIP 8,000 8,000 8,000 5,600
Normal spoilage 2,000 2,000 2,000 1,000
Total units accounted 60,000 60,000 60,000 56,600
for
Transferred DM (RM) CC (RM) Total cost (RM)
in (RM)
Beginning WIP 0 0 0 0
Cost incurred during 355,800 88,500 141,500+25,700 611,500
March =167,200
Total cost to account 355,800 88,500 167,200 611,500
for
Equivalent units 60,000 60,000 56,600 60,000
Cost per equivalent 5.93 1.48 2.95 10.36
unit
Total cost
Completed cost and 50,000 x 10.36+
transferred & Normal 2,000 x 10.36=
Spoilage 538,720
Ending WIP:
Transferred in 5.93 x 8,000=
47,440
DM 1.48 x 8,000=
11,840
CC 2.95 x 5,600=
16,520
Total ending WIP 75,800
Total cost accounted 614,520
for

(b)
Question 4:

(a)
Contribution margin method: December 31,2019
Alpha Beta Total
Total Per unit Total Per unit RM(’000)
RM(’000) RM(’000)
Sales 1,050 15 3,150 22.50 4,200
Less: Variable
expenses
Direct materials 280 4 630 4.50 910
Direct labour 140 2 420 3.00 560
Variable overhead 140 2 280 2.00 420
Contribution margin 490 1,820 2,310
Less:fixed expenses
Fixed overhead 280
Fixed selling and 1,040
administrative
expenses
Net income 990

(b)

Sales mix Alpha :Beta, 1:3

Total weighted average contribution margin per package
=(7x1)+(13x3)
=46
Bep= 1320000/46=28,696 unit
Alpha= 28696 x 1=28696unit
Beta=28696 x 3=86,088unit

(c)
Alpha Price do not change, selling unit change to (x)
Beta price change to from 22.5 to 20,additional advertising=57,000
80% sales/revenue from Beta, 20% from Alpha
Total selling unit same in these 2 years ,but each product will be different
FOC not change, VOC rate (dlh) Alpha,DM drop10%,DL up 10% Beta ,DMdrop20%, DL up
10%
Alpha Beta Total
Total Per unit Total Per unit RM(’000)
RM(’000) RM(’000)
Sales 735 15 2,940 20 4,200
Less: Variable
expenses
Direct materials 201.6 3.6 604.8 3.6 806.4
Direct labour 123.2 2.2 554.4 3.3 677.6
Variable overhead 112 2 336 2.0 448
Contribution margin 490 7.2 1,820 11.1 2,268
Less:fixed expenses
Fixed overhead 280
Fixed selling and 1,097
administrative
expenses
Net income 891
Sales mix Alpha :Beta, 1:4
Total weighted average contribution margin per package
=(7x1)+(13x3)
=46
Bep= 1320000/46=28,696 unit
Alpha= 28696 x 1=28696unit
Beta=28696 x 3=86,088unit