MIDLAND STATE UNIVERSITY

FACULTY OF BUSINESS SCIENCES

DEPARTMENT OF ACCOUNTING SCIENCES
ACC408 INCLASS TEST 1.
Attempt both questions.
1.The 2022 budget for Giraffe ltd is based amongst other issues on the following:
Average total investment in the firm $100 000
Expected return on the investment (before tax) 25%
Expected annual sales 25 000 units
Unit variable costs $4,50
Fixed overheads for the year $30 000

Required:
a) Calculate the unit selling price if the company expects to earn the expected return before tax
on the total investment. (3 marks)
b) Assuming that the unit selling price is $8:
i)Calculate the breakeven value (3 marks)
ii)Calculate the margin of safety ratio (2 marks)
iii)Calculate the units which must be sold if the firm wants to earn the expected return on its total
investment (before tax) (3 marks)
iv)Calculate the income after tax if the tax rate is 50% (6 marks)
v)Calculate the sales value if the firm is to realize a profit of $30 000 after tax and if an
additional $19 375 is spent on advertising. Assume a tax rate of 50%. (4 marks)
c)’The marketing manager is of the view that a product with a steep cost slope is better to stock
whilst the production manager is of the view that one with a gentle slope would be better to
stock’
As the management accountant, advise which of the two views is correct in an environment of
stiff competition. (4 marks)
2.Progress ltd manufactures and sells a step counter called a pedometer. Its year end is 31
August.
The following information about fixed manufacturing overheads (FMO) is available for the year
ended 31 August 2021 with the FMO allocated based on units produced.

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Total budgeted FMO 2 450 000
Total applied FMO absorbed by 165 000 units produced 2 640 000
Over-applied FMO 120 000

Some of the actual information for the year ended 31 August 2021 is as follows:
 Inventory
Details Units $ Direct costing
Initial stock (1 September 2020) 5 000 42 500
Final stock(31 August 2021) 30 000 ?

 Unit variable costs

Details Notes $
Direct materials 3 ?
Direct labour (@$30 per direct labour hour) 15
Variable manufacturing Overhead (VMO) 4 ?
Variable selling costs 3

 Fixed administration costs amounted to $300 000 for the year.

 Unit selling price is $150.
Notes:
1.The company uses the FIFO method of inventory valuation
2.No inventory of direct materials or work in process is held.
3.Each pedometer requires the following direct material inputs:
-one mechanical switch @ $20 per switch
-ten centimeters of wire @$1,30 per centimeter.
-other direct materials of which the total cost amount to $22 per meter.
4.VMO varies with direct labour hours worked and a VMO rate of $40 per direct labour hour
applies.
Required
a) Calculate for the year ended 31 August 2021 assuming the company uses the full costing
system:
i)the predetermined FMO absorption rate per pedometer. (2 marks)

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ii)budgeted production units (2 marks)
iii)actual FMO (2 marks)
b) Prepare the actual Statement of profit and loss for the year ended 31 August 2021 using the
direct costing principles. (14 marks)
c)Draft a journal entry to show how the over-applied FMO would normally be dealt with under
full costing. (2 marks)
d)Which costing approach would be most suitable as a basis for drafting the sales policy in an
environment that has pressure on quality and prices. Motivate your response. (3 marks)

END OF TEST