Business, Accounting and Financial Studies Cost Accounting

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SECTION A: SHORT QUESTIONS

1.
Felix Company produces and sells basketball. Information for the year is as follows:

$
Selling price (per unit) 80
Direct labour (per unit) 5
Direct material (per unit) 25
Variable production overheads (per unit) 16
Fixed production overheads 324,000
Fixed administrative overheads 158,000

Felix Company is producing at its maximum capacity, which is 15,000 units. It is considering to rent a
machine which can save direct labour cost. The annual rental expense of the machine is $160,000. The
direct labour cost will decrease by $2 per unit. The production capacity and sales volume can increase
by 5,000 units with the new machine.

Required:
Should Felix Company rent the machine? Support your answer with calculations. (4 marks)

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Chapter 4 Cost Accounting for Decision-making
Business, Accounting and Financial Studies Cost Accounting
Question Bank
2.
Kenneth Company produces and sells cup, which has a unit contribution margin of $30. Kenneth
Company has received a special order to produce 2,000 units of cup at a price of $150,000. The size of
the cup is different from the ordinary one and it incurs direct costs of $33 per unit and fixed production
overheads of $28,000.

However, Kenneth Company has a spare capacity of 1,400 units only and if it accepts the special order,
it has to give up some production.

Required:
Should Kenneth Company accept the special order? Support your answer with calculations. (5 marks)

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Chapter 4 Cost Accounting for Decision-making
Business, Accounting and Financial Studies Cost Accounting
Question Bank
3.
SilkStory Company produces and sells silk. It is considering to process the silk further into clothing.
The selling price of silk is $120 per kg and it is estimated that it requires 0.8 kg to produce a unit of
clothing. The estimated selling of clothing is $250 per unit and the additional direct labour cost
incurred in producing clothing is $18.

The estimated demand for clothing is 3,200 units per year. SilkStory Company has to acquire an
equipment to produce clothing. The cost of the equipment is $800,000 and the company policy to
deprecate the non-current assets at 8% per annum using the straight-line method. The fixed
administrative overheads will increase by $100,000.

Required:
Should SilkStory Company process the silk further? Support your answer with calculations. (4 marks)

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Chapter 4 Cost Accounting for Decision-making
Business, Accounting and Financial Studies Cost Accounting
Question Bank
4.
Kelly Company purchased a machine called ‘Model S6’ for its production five years ago. The
estimated useful life of ‘Model S6’ is 9 years with no scrap value and has a net book value of $400,000
today. Depreciation of machinery is calculated on the basis of the straight-line method.

Kelly Company is planning to trade-in the machine for a new machine: ‘Model S8’. It costs
$1,440,000 and has an estimated useful life of 12 years. The trade-in value of ‘Model S6’ is $250,000.
With the new machine, the direct labour per unit will reduce by 15 minutes and the variable production
overheads per unit will decrease by $8. The hourly wage rate of labour is $50. The unit contribution
margin after using the new machine is $28.

The annual demand for the product is 30,000 units. The maximum production capacity of ‘Model S6’
and ‘Model S8’ are 28,000 units and 32,000 units respectively. The company has to borrow $800,000
to pay for the new machine and the interest rate is 5% per annum.

Required:
(a) Calculate the cost of the machine ‘Model S6’. (2 marks)
(b) Should Kelly Company replace the machine with a new model? Support your answer with
calculations. (5 marks)

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Chapter 4 Cost Accounting for Decision-making
Business, Accounting and Financial Studies Cost Accounting
Question Bank
5.
Daniel Company produces and sells toy. Information regarding the production is as follows:

Direct labour (per unit) 10 minutes

Direct material (per unit) 0.8 kg
Variable production overheads (per unit) $12
Fixed production overheads $324,000
Fixed administrative overheads $158,000

The hourly wages and the price of material are $36 and $28 per kg. The monthly demand for Daniel
Company is 6,000 units of toy. If the total direct labour hour exceeds 700 hours, the hourly rate for the
extra direct labour hour would be 20% higher than the ordinary hourly wages.

The company can also buy the toys from Andy Company at $35 per unit. However, the company has
to pay a transportation cost of $1.5 per unit and fixed administrative overheads of $17,400 if it decides
to purchase from Andy Company.

Required:
Should Daniel Company purchase the toys from Andy Company or make the toys itself? Support your
answer with calculations. (5 marks)

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Chapter 4 Cost Accounting for Decision-making
Business, Accounting and Financial Studies Cost Accounting
Question Bank

SECTION B: APPLICATION PROBLEMS

1.
Sammy Ho operates frozen food trading business. The business has three different segments: Chicken,
Duck and Pork Chop.

Chicken Duck Pork Chop

$’000 $’000 $’000
Sales 12,000 15,000 6,000
Variable cost 1,800 3,250 1,400

Fixed costs totaling $3,300,000 are unavoidable costs. Sammy decides to allocate fixed costs in
accordance with the sales of the products.

Required:
(a) Compute the contribution and net profit / net loss for each segment. (4 marks)
(b) Sammy suggests to eliminate pork chop segment. Comment her suggestion with calculations.
(2 marks)
(c) Suggest two other non-financial factors that Sammy should be taken into consideration
(4 marks)

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Chapter 4 Cost Accounting for Decision-making
Business, Accounting and Financial Studies Cost Accounting
Question Bank

2.
Woody Company produces wood furniture. During the year ended 31 December 20X6, the selling
price of wood furniture is $32 each. The annual production is 40,000 units and shares 50% of the
capacity. Direct material cost and direct labour cost are $10 and $15 per unit respectively. The fixed
production overheads are $250,000.

Required:
(a) Prepare the income statement for the year ended 31 December 20X6 using the marginal costing
system. (3 marks)

A customer offers an order for 20,000 units of wood furniture for of $25 each. If the order is accepted,
fixed production overheads would increase to $300,000. Extra direct labour would be required at an
overtime premium of 20%. 5% discount would be obtained for all direct materials.

Required:
(b) Should Woody Company accept the order? Support your answer with calculations. (5 marks)
(c) Explain two other non-financial factors that Woody Company should consider. (4 marks)

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Chapter 4 Cost Accounting for Decision-making
Business, Accounting and Financial Studies Cost Accounting
Question Bank
3.
Mr Kwok sells two types of Dim Sum: Deluxe and Regular. The expected sales volumes of two
products in the month of December 20X6 are 5,000 and 10,000 units respectively. The relevant
information about selling price, variable production cost and fixed production overheads is given
below:

Deluxe Regular
$/per unit $/per unit
Selling price 100 50
Variable production cost 40 30

The total monthly fixed production overheads of the company are $270,000.

Required:
(a) Compute the breakeven sales volume for each product. (3 marks)

Mr Kwok is considering to introduce a new machine of $240,000 with the estimated useful life of 5
years, which can reduce the variable production cost by 20% for both Deluxe and Regular.

Required:
(b) Compute the breakeven sales volume for each product and state the changes in the breakeven
sales volume. (5 marks)
(c) Should Mr Kwok introduce the new machine? Support your answer with calculations.
(3 marks)

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Chapter 4 Cost Accounting for Decision-making
Business, Accounting and Financial Studies Cost Accounting
Question Bank
SECTION C: CASE/THEORY QUESTIONS

1.
James operates a factory making light bulbs. The selling price of a light bulb is $3.95 and the cost
information is as follows:

$/unit
Direct materials 1.35
Direct labour 0.15
Production overheads 0.8
Production cost 2.3

The variable production overhead of the light bulb is $0.05 per unit.

Required:
(a) Prepare a statement calculating the unit contribution of the light bulb. (2 marks)
(b) Give one example of variable production overhead and fixed production overhead in light bulb
manufacturing industry. (2 marks)

James has just received a request from a customer for 800 light bulbs to be used in a special event for
major donors. The light bulbs will be imprinted with the customer company’s logo. James would have
to order a special light bulb mold in which the customer company’s logo is inscribed, which costing
$800. In addition, the customer wants a special wick containing gold-like thread that would add $0.2
to the cost of each light bulb. Because of the large size of the order and the charitable nature of the
work, the customer can only pay $2.95 each for this light bulb. The fixed production overheads would
not be affected by this special order.

The special order will have no effect on the company’s normal sales to retail outlets.

Required:

(c) Should James accept the special order? Support your answer with calculations. (4 marks)
The customer bankrupt suddenly and he is no longer able to pay for the order. As there is a company
logo in the special light bulb, James cannot sell it as normal product. There are three options:

Option 1: Sell it at a price at $2 each. It is expected that 500 special light bulbs could be sold.
Fixed selling expenses of $1,200 are involved.
Option 2: Pay $500 for a worker to eliminate the company logo. The light bulb can be sold at $4.5
as there is a special wick containing gold-like thread. It is expected that 200 special light

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Chapter 4 Cost Accounting for Decision-making
Business, Accounting and Financial Studies Cost Accounting
Question Bank

bulbs could be sold. Fixed selling expenses of $1,200 are involved.

Option 3: Throw all special light bulbs away.

Required:
(d) Based on financial analysis, suggest which option should James pick. (5 marks)
(e) Explain one adverse effect for the option picked in (d). (2 marks)

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Chapter 4 Cost Accounting for Decision-making
Business, Accounting and Financial Studies Cost Accounting
Question Bank
2.
Miss Tsang operates a factory. The production of one unit of Product X involves direct material of $1,
direct labour of $4 and variable production overhead of $2. Also, fixed production overheads of
$80,000 are involved in production, in which $20,000 is avoidable. The selling price of Product X is
$15 per unit. The expected production and sales volume are 20,000 and 18,000 units respectively.

Required:
(a) Calculate the amount of total contribution and the net profit under marginal costing system.
(3 marks)
(b) What is the difference in net profit if adopting the absorption costing system? (2 marks)

Another manufacturer offers to make Product X and sell it to Miss Tsang at a price of $10 for 15,000
units. If Miss Tsang accepts the offer, the spare capacity could be used to produce Product Y. The
selling price of Product Y is $10 per unit, which has unit contribution of $3 with no fixed production
overheads. The expected sales units of Product X and Product Y are 12,000 and 8,000 units
respectively after the introduction of Product Y.

Required:
(c) Based on financial analysis, should Miss Tsang accept the offer? (4 marks)
(d) Explain two non-financial factors that Miss Tsang should consider before accept the offer.
(4 marks)

Finally, Miss Tsang accepts the offer. The actual sales mix ratio of Product X and Product Y is the
same as expected one.

Required:
(e) Compute the breakeven sales quantity for Product X and Product Y. (3 marks)
(f) Compute the margin of safety (as a percentage). (2 marks)

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Chapter 4 Cost Accounting for Decision-making
Business, Accounting and Financial Studies Cost Accounting
Question Bank

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Chapter 4 Cost Accounting for Decision-making