END-OF-SEMESTER EXAMINATION

SEMESTER 1, 2019/2020 SESSION

KULLIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES

Programme : BACC Level of Study : 2

Time : 2.30 pm – 5.30 pm Date : 9/1/2020

Duration : 3 Hr(s) 0 Min(s)

Course Code : ACC 2112 Section(s) : 1-3

Course Title : Cost Management

(This Question Paper Consists of 5 Printed Pages)

INSTRUCTION(S) TO CANDIDATES
DO NOT OPEN UNTIL YOU ARE ASKED TO DO SO
ANSWER ALL QUESTIONS

ANY FORM OF CHEATING OR ATTEMPT TO CHEAT IS A SERIOUS

OFFENCE WHICH MAY LEAD TO DISMISSAL

APPROVED BY:

1
QUESTION 1

Qaisara Company (Qaisara) is a well-known manufacturer of chemicals used by industrial and

retail customers. C-333 is a large volume product, used in the preparation of chocolate; H-99,
is used in the manufacture of household and commercial cleaning agent; while P-18, is a by-
product that can be used in the manufacture of pesticides. The by-product is inventoried at its
net realizable value, which is used to reduce the joint production costs before they are allocated
to the main products using the net realizable value method.
Data regarding Qaisara’s operation for the month of September is shown in the table
below. During this month, Qaisara incurred joint production costs of RM2,800,000 in the
manufacture of its three product.

C-333 H-99 P-18 Total

September sales in gallons 1,200,000 450,000 40,000 1,690,000
September production in gallons 1,320,000 450,000 60,000 1,830,000
Sales price per gallon at split-off RM6.50 RM8.00 RM1.40
Separable processing costs RM2,466,000 RM1,050,000
Sales price per gallon after RM11.70 RM12.5 _
separable processing

Required :
a. Determine Qaisara’s allocation of joint production costs and the total manufacturing
costs for each product for the month of September. Be sure to present appropriate
supporting calculations. (16 marks)

b. Qaisara’s management chose to process C-333 and HCC-99 beyond the split-off point,
do you think this is the correct decision? Which products, if any, do you think should
have been processed further beyond the split off point and why? (6 marks)
c. The production supervisor for Qaisara, Puan Hamisah, have found out that small
quantities of the critical chemical compound in P-18 might be present in C-333. What
should she do? (3 marks)

(Total: 25 marks)

2
QUESTION 2
Amore Coatings Company (ACC) manufactures and sells synthetic coatings that can withstand
high temperatures. Its primary customers are aviation manufacturers and maintenance
companies. The following table contains financial information pertaining to cost of quality
(COQ) in 2019 and 2020 (in thousands of Ringgit Malaysia):
2019 2020
Sales RM16,000 RM20,000
Material inspection 300 60
In-process (production) inspection 160 125
Finished product inspection 250 70
Preventive equipment maintenance 20 60
Scrap (net) 500 300
Warranty repairs 700 450
Product design engineering 150 270
Vendor certification 10 60
Direct costs of returned goods 275 80
Training of factory workers 40 140
Product testing- equipment maintenance 60 60
Product testing labour 210 90
Field repair 70 40
Rework before shipment 240 200
Product-liability settlement 360 60
Emergency repair and maintenance 200 75

Required
a. Classify the cost items in the table above into cost-of-quality (COQ) categories. Calculate
the ratio of each COQ category to revenues in each of the 2 years. (Round all answers to 2
decimal places). (10 marks)

b. Comment on the results. In conjunction with answering this question, calculate and refer to
the following results:
(i) Percentage change (to 2 decimal places) in total COQ as a percentage of sales, from
2019 to 2020. (3 marks)

(ii) Total COQ in 2020 expressed as a percentage (to 2 decimal places) of 2019 sales
Ringgit. (3 marks)

(iii) Percentage change in total prevention costs, appraisal costs, internal failure costs
and external failure costs (to 2 decimal places), 2019 to 2020. (3 marks)

c. In addition to the financial measures listed in the table, what are three (3) non-financial
measures might ACC monitor in its effort to achieve overall improvement in quality?
(3 marks)

d. Other than non-financial measures, state three (3) other factors that the management of
ACC can consider to make the cost of quality report more useful. (3 marks)

(Total: 25 marks)

3
QUESTION 3

Fancy Boat (FB) produces three models of speedboat for sale to the retail market. FB currently
operates a standard absorption costing system. Budgeting information for year 2020 is given
below:

Model of speedboat
Superior Deluxe Ultra Total
(RM ‘000) (RM ‘000) (RM ‘0000 (RM ‘000)
Sales 54,000 86,400 102,000 242,400
Direct material 17,600 27,400 40,200 85,200
Direct labour 10,700 13,400 16,600 40,700
Production overhead 69,600
Gross profit 46,900

Superior Deluxe Ultra

Production/sales (number of boats) 1,000 1,200 800
Machine hours per boat 100 200 300

The production overhead cost is absorbed using a machine hour rate.

FB is considering changing to an activity-based costing system. The main activities and their
associated cost drivers and overhead cost have been identified as follows:
Production overhead
Activity Cost driver cost (RM ‘000)
Machining Machine hours 13,920
Set up Number of set ups 23,920
Quality inspection Number of quality inspections 14,140
Stores receiving Number of component deliveries 6,840
Stores issue Number of issues from stores 10,780
69,600

The analysis also revealed the following information:

Superior Deluxe Ultra
Budgeted production (number of boats) 1,000 1,200 800
Boats per production run 5 4 2
Number of Quality inspections per 10 20 30
production run
Number or component deliveries 500 600 800
Number of issues from stores 4,000 5,000 7,000

The machines are set up for each production run of each model.

4
Required:
a. Calculate the total gross profit for each model of speedboat:
(i) Using the current absorption costing system (4 marks)
(ii) Using the proposed activity-based costing system (12 marks)

b. Explain why an activity-based costing system may produce more accurate product costs
than a traditional absorption costing system. (3 marks)

c. Explain the possible other benefits to the company of introducing an activity-based

costing system. You should use the figures calculated in part (a) to illustrate your
answer. (6 marks)

(Total: 25 marks)
QUESTION 4
Modern Kitchen Ltd Manufactures a single product, a laminated kitchen unit with a standard
cost of RM110 made up as follows:
RM
Direct materials (15sq. metres at RM3 per sq. metre 45
Direct labour (5 hours at RM10 per hour) 50
Variable overhead (5 hours at RM2 per hour) 10
Fixed overhead (5 hours at RM1 per hour) 5
110

The standard selling price of the kitchen unit is RM130. The monthly budget projects
production and sales of 1,000 units. Actual figures for the month of April are as follows:

Sales 1,200 units at RM132 per unit

Production 1,400 units
Direct materials 22,000 sq. metres at RM4 per sq. metre
Direct wages 6,800 hours at RM 11 per hour
Variable overheads RM 11,000
Fixed overheads RM 6,000

There were no opening stocks at the beginning of the period.

Required:
a) Calculate all the appropriate variances and prepare a statement to reconcile actual and
budgeted profit. (15 marks)

b) Comment on the performance of Modern Kitchen based on the reconciliation statement

that you have prepared in (a). (5 marks)

c) Describe five (5) factors that managers often consider when determining the
significance of a variance. (5 marks)

(Total: 25 marks)
(TOTAL: 100 MARKS)
END OF QUESTION PAPER