CHINHOYI UNVERSITY OF TECHNOLOGY

SCHOOL OF ENTREPRENEURSHIP AND BUSINESS SCIENCES

DEPARTMENT OF ACCOUNTING SCIENCES AND FINANCE
BACHELOR OF SCIENCE HONOURS DEGREE IN ACCOUNTANCY
LACTURER: J.NDHLOVU
MODULE:PERFOMANCE MANAGEMENT ACCOUNTING
MODULE CODE: CUAC 413
PRESENTATION QN 12
NAME SURNAME REG No

IGNATIOUS TERRENCE KATIVHU C20141111C

TAONA DANIEL MANJEESE C20141539X
PATRICK MATIKA C20142925K
MOLINE MUDZANI C20142579P
SIMBARASHE HENRY JENYA C20142102P
MILCAH MUNASHE CHIDEMO C20141816Y
MOLEEN HATIVAGONI C20140964K
CHIEDZA MAGAYA C20141130Y
TINOTENDA GONDO C20142125I
SIPHRAH SINGO C20142970X
DUMISANI DUBE C19138897O
MOLLINE CHIKUPO C20141633Q
a) Determine whether the assumption of an 80% learning effect is a reasonable one in this case by
using the standard formula: Y = axb (5marks)

Answer
y
Y
Y=17.10366479
=14 units x 17.10 hrs = 239.45

• In this case, the learning curve effect is reasonable.

• It assumes that time taken to produce the first unit is reduced as more units are produced .
• In the absence of the Learning curve (LC) the time taken would be 14units x 40hrs.
• However, by effecting the LC ,it takes 239.45 hrs therefore less time is consumed.
b) Calculate the number of direct labour hours likely to be
required for an expected second order of 20 units.

Y
Y
Y=13.3823739
= 401.47 hrs

Y
Y
Y=11.35308304
=567.65 hrs

567.65 hrs – 401.47 hrs = 166.18hrs

 c) Use the cost data given, to produce an estimated product cost for the initial order, examine
the problems which may be created for budgeting by the presence of the learning effect

Direct material (20*30) 600

Direct labour (5*401.47) 2007.35

Variable overheads (0.8 x 401.47) 321.18

2928.53

Fixed overheads 8000

Total cost 10928.53

problems which may be created for budgeting by the presence
of the learning effect

• Uncertain cost projections- the learning effect affects learning results often results in reducing
costs overtime due to increased efficiency. However, accurately predicting the extent of costs
reductions can be challenging. Budgeting based on historical data may not consider the full
potential of future learning, leading to inaccurate cost projections.
• Inconsistent cost behaviour- the learning effect can cause cost behaviours to change overtime.
Initially costs may be higher as individuals or organisations are still learning and refining their
processes. As experience accumulates, cots may decrease signicantly. This makes it difficult to
develop stable cost estimates for budget purposes
• Unrealistic expectations- The learning effect can create unrealistic expectations regarding cost
savings. If budgeting assumes that cost reduction will occur at a constant rate, it may
overestimate the actual savings achieved, this can lead to budget shortfalls and financial
challenges when cost reduction rate are lower than anticipated.
 (a) Calculate the transfer price proposed by the Industrial Division, and show that this transfers pricing arrangement will motivate both divisions to act
in a manner which is in the best interests of Makudo Ltd. as a whole. (7 MARKS)

Step 1
Total fixed cost /ton= fixed cost/total monthly production fixed cost
= $28 800/600
=$48/ton

Marginal cost of production

9

Total fixed cost 48

57

In this case ,the transfer price cannot motivate both divisions to act in the best interest
of Makudo ltd. The $57 would result in consumer division incurring higher costs
compared to purchasing externally at $15.
b)Discuss whether, in these circumstances, the board of directors of Makudo Ltd.
should intervene to order the divisions to make the transfer at the price calculated
in your answer to part (a). (9 marks)
• The transfer price proposed by the industrial division should not exceed the external purchase
price of $15/tone for the consumer division. Since the full cost per tone is $57 which is greater
than $15 ,it would not be acceptable for the consumer division.
• In this case ,the transfer price cannot motivate both divisions to act in the best interest of
Makudo ltd. The $57 would result in consumer division incurring higher costs compared to
purchasing externally at $15 and this may discourage the consumer division from sourcing
internally leading to inefficiencies and reduced profitability for Makudo ltd.
• Recommendation, To ensure transfer price that motivates both divisions the industrial division
should engage price negotiations with the consumer division so that they charge at a price lower
than $15/tone considering factors such as variable cost
• The board of directors also needs to consider other factors such as the overall profitability of
Makudo ltd and the impact of the transfer price on the company`s existing external customers.
• The board can agree on cost-based pricing with a compromise whereby they can agree on a
transfer price between $9.50 and $14.50 per tone which is acceptable to both divisions.
c)Assume now that the Consumer Division requires a further 50 tons per month (in addition to the 200 tons), but that the Industrial Division
has no additional spare capacity and therefore these 50 tons could only be provided to the Consumer Division if the Industrial Division were
to reduce sales to its external customers by an equivalent amount. Assume also that the marginal cost to the Industrial Division of supplying
a ton to the Consumer Division is $0, 30 lower than the cost of supplying a ton to an external customer. What is the appropriate transfer

price per tonforthese 50 tons? Explain your answer .

Marginal cost =$9-$0.3=$8.7
Units =600+200=800

Marginal cost(8.70*50) =435

Total fixed cost =28 800
Total cost =29 235

Cost =29 235/800 =$36.54

• Since marginal cost have been reduced to $8.70, therefore the total cost of the product is reduced. An
increase in production by the 200 tones have reduced the total fixed cost per tone.
Th
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