nAmiBIA UniVERSITY

OF SCIEnCE AnD TECHnOLOGY

FACULTY OF MANAGEMENT SCIENCES

DEPARTMENT OF ACCOUNTING, ECONOMICS AND FINANCE

QUALIFICATION : BACHELOR OF ACCOUNTING

QUALIFICATION CODE: 07BAC LEVEL: 7

COURSE NAME: COST AND MANAGEMENT

SESSION: NOVEMBER 2016 PAPER: THEORY AND CALCULATIONS

DURATION: 3 HOURS MARKS: 100

FIRST OPPORTUNITY EXAMINATION QUESTION PAPER

MODERATOR: K. Boamah

INSTRUCTIONS
1. Answer ALL the questions.
2. Write clearly and neatly.
3. Number the answers clearly.

PERMISSIBLE MATERIALS

1. Scientific calculators
2.
3.

THIS QUESTION PAPER CONSISTS OF _5_ PAGES (Excluding this front page)
Question 1 (20 marks}

Namilk Ltd developed a new revolutionary product, by packaging strawberry and chocolate
milkshakes in SOOml plastic bottles, and then selling it for N$10 a bottle. Recently, however,
there had been several strikes by milk farmers, which gave rise to a giant shortage in milk
supply. The milk regulator indicated to Namilk that they are only allowed to purchase four
shipments of milk per month. A shipment carries 20 000 litres of milk and costs N$100 000.
Each bottle manufactured requires SOOml of milk.

The flavouring that is used to give the milkshakes 'that distinctive taste' contains a
controlled substance that, according to the law, can only be acquired in limited quantities.
Namilk has a permit to purchase nine tons of the flavouring per month. The current
purchase price of the flavouring is N$40/kg. The chocolate and strawberry respectively
require SOg and 90g ofthe flavouring per bottle.

The milk and flavouring is mixed and bottled in a specialised machine that is operated at a
cost of N$1 500 per hour. The machine has capacity to produce 1 000 bottles per hour. The
milkshakes are packaged in plastic bottles that are purchased in crates of 50 bottles, at a
cost of N$25 per crate.

The company is running a promotion on chocolate milkshakes this month, and a non-
cancellable order for 40 000 bottles of chocolate milkshakes has already been placed.

The financial manager, Mrs K, wants to ensure that the company generates the maximum
profit from the sale of milkshakes, in spite of the uncertainties in the milk industry. She,
however, finished his studies a long while ago, and approached you for assistance.

Required:
Use the graphical method and determine the combination of chocolate and strawberry
milkshakes to be made and sold in order to make optimum profits, by determining the profit
at each extreme point in the feasible region. {20 marks)

Round bottles down to the lower unit. E.g. 5.7 becomes 5.

Page 1 of 5
Question 2 (25 marks)

M is the holding company of a number of companies, within the engineering sector. One of
these subsidiaries is PQR which specializes in building machines for manufacturing
companies. PQR uses absorption costing as the basis for its routine accounting system for
profit reporting.

PQR is currently operating at 90% of its available capacity and has been invited by an
external manufacturing company to tender for the manufacture of a bespoke machine. If
PQR's tender is accepted by the manufacturing company, then it is likely that another
company within the M group will be able to obtain work in the future servicing the machine.
As a result, the Board of Directors of M are keen to win the tender for the machine and are
prepared to accept a price from the manufacturing company that is based on the relevant
cost of building the machine.

An engineer from PQR has already met with the manufacturing company to determine the
specification of the machine and he has worked with a non-qualified accountant from PQR
to determine the following cost estimates for the machine.

Notes N$
Engineering specification 1 1500
Direct Material A 2 61000
Direct Material B 3 2 500
Components 4 6 000
Direct Labour 5 12 500
Supervision 6 350
Machine hire 7 2 500
Overhead costs 8 5 500
Total 91850
Notes

1. The engineer that would be in charge of the project to build the machine has already
met with the manufacturing company and subsequently prepared the specification
for the machine. This has taken three days of his time and his salary and related
costs are N$500 per day. The meeting with the manufacturing company only took
place because of this potential work. No other matters were discussed at the
meeting.
2. The machine would require 10 000 square meters of Material A. The material is
regularly used by PQR. There is currently 15 000 square meters in inventory, 10 000
square meters were bought for N$6 per square meter and the reminder was bought
for N$6.30 per square meter. PQR uses the weighted average basis to value its
inventory. The current market price of Material A is N$7 per square meter and the
inventory could be sold for N$6.5 per square meter.

Page 2 of 5
3. The machine would also require 250 meters' length of Material B. This is not a
material that is regularly used by PQR and it would be purchased specifically for this
work. The current market price is N$10 per meter length, but the sole supplier of this
material has a minimum order size of 300 meter lengths. PQR does not foresee any
future use of unused lengths of Material B and expects that the net revenue from its
sale would be negligible.
4. The machine would require 500 components. The components could be produced by
HK, another company within the M group. The direct costs to HK of producing each
component is N$8 and normal transfer pricing policy within the M group is to add a
50% mark-up to the direct costs to determine the transfer price. HK has unused
capacity which would allow them to produce 350 components, but thereafter any
more components could only be produced by reducing the volume of other
components that are currently sold to the external market. These other
components, although different, require the same machine time per unit as those
required by PQR, have a direct cost of N$6 per component and currently are sold for
N$9 each. Alternatively, PQR can buy the components from the external market for
N$14 each.
5. The machine will require 1 000 hours of skilled labour. The current market rate for
engineers with the appropriate skills is N$15 per hour. PQR currently employs
engineers that have the necessary skills at a cost of N$12.50 per hour, but they don't
have any spare capacity. They could be transferred from their existing duties if
temporary replacements were to be engaged at a cost of N$14 per hour.
6. The project would be supervised by a senior engineer who currently works 150
hours per month and is paid an annual salary of N$4 200. The project is expected to
take a total of one month to complete and if it goes ahead is likely to take up 10% of
the supervisor's time during that month. If necessary, the supervisor will work
overtime which is unpaid.
7. It will be necessary to hire a specialist machine for part of the project. In total the
project will require the machine for 5 days but it is difficult to predict exactly for
which five days the machine will be required within the overall project time of one
month. One option is to hire the machine for the entire month at a cost of N$5 000
and then sub-hire the machine for N$150 per day when it is not required by PQR.
PQR expects that it would be able to sub-hire the machine for 20 days. Alternatively,
PQR could hire the machine on the days it requires and its availability would be
guaranteed at a cost of N$500 per day.
8. PQR's fixed production overhead cost budget for the year totals N$200 000 and is
absorbed into its project costs using a skilled labour hour absorption rate. Based on
normal operating capacity of 80%, PQR's capacity budget for the year is a total of 50
000 skilled direct labour hours. PQR's latest annual forecast is for overhead costs to
total N$220 000 and for the capacity to be as originally planned.

Page 3 of 5
Required:

You are employed as assistant Management Accountant of the M group. For each of the
resource items identified, you are to:

a) Discuss the basis of valuation provided for each item

Question 3 (39 marks)

Kwekwe Organs manufactures music organs and operates a variable costing system. The

budgeted and .actual results for the year to 30 June 2016 were:

Budget Actual

Units produced and sold 1000 1300

N$ N$
Sales revenue 5 500 000 7 410 000

Cost of Wood (Standard is 2.5 metres per organ) 1000 000 1495 000

Components cost (Standard is one set per organ) 2 000 000 2 431000

Semi-skilled labour (Standard is 4 hours per organ) 500 000 716 300

Skilled labour (Standard is 2 hours per organ) 300 000 414 700

Factory overheads (See notes below) 600 000 695 000

Administration and selling costs (See notes below) 300 000 330 000

There was no opening or closing inventory of wood, components, work-in-progress or

finished goods. Actual wood purchases and usage was 2 990 metres for the year and the

actual cost per set of components was N$1 700. Some components were damaged by

negligent workers making those sets unusable.

Semi-skilled workers actually worked for 4 940 hours and skilled workers worked for 2 860

hours during the year.

The accountant determined that budgeted factory overheads would have been N$680 000 if

1 200 organs were to be produced per annum. Variable factory overheads are absorbed on

Page 4 of 5
the basis of semi-skilled labour hours. Actual variable factory overheads were N$105 per

semi-skilled labour hour. Fixed administration and selling costs were budgeted at 60% of

total budgeted costs, while actual variable administration and selling costs were 39.394% of

actual total costs. Administration and selling expenses vary in line with organs sold.

You are required to:

a} Determine the 2016 fixed budgeted factory overheads above. (5 marks}

b) Calculate the 2016 budgeted contribution per organ. (Note: Treat labour costs as

variable}. (4 marks}

c) Calculate all possible standard cost variances for 2016 and reconcile the budgeted and

actual profits for 2016. (32 marks}

Question 4 (16 marks)

Taku-Tau Ltd limited traditionally designs and manufacturers lightweight aircrafts. Orders
for these aircrafts have decreased over the past two years; so to enable the company to
survive, it has been decided by Taku-Tau's board of directors to start manufacturing bigger
aircrafts.

The production manager expects the first plane to take 330 000 engineering minutes to
build, and from past experience believes a 90% learning curve effect could be achieved. The
relevant costs are as follows:

Direct material N$50 000 per aircraft

Profit mark-up is usually 10% per aircraft.

Required:
a} A local Airline (Oros Ltd} has offered to purchase four aircrafts. Estimate the price
that Taku-Tau Limited should quote for these four aircrafts. (5 marks}
b) Oros Ltd was so impressed by the aircraft they had purchased in (a} above, that they
immediately placed a second order for a further five aircrafts. What price should
Taku-Tau Limited quote for this next order? (5 marks}
c) Identify the major areas within management accounting where learning curve theory
is likely to have consequences and suggest potential limitations of this theory.
(6 marks}
END OF EXAMINATION QUESTION PAPER

Page 5 of 5