MBEYA UNIVERSITY OF SCIENCE AND TECHNOLOGY

DEPARTMENT OF MECHANICAL AND INDUSTRIAL ENGINEERING

COURSE: BACHEROL OF MECHANICAL ENGINEERING
MODULE NAME: QUALITY CONTROL AND COST MANAGEMENT
MODULE CODE: 8316
FACILITATOR: MR FHAKI
TASK: GROUP ASSSIGNIMENT
ACADEMIC YEAR: 2024/2025
YEAR OF STUDY: THIRD YEAR
SEMESTER: II
GROUP NUMBER: 02
GROUP 02 MEMBERS
S/N NAME REG NUMBER
1. ERICK MALULU 22100123010012
2. EVANCE MAGESA 22100123010014
3. HEAVYLUCK MLELWA 22100123010021
4. IQRAM ABDUL 22100123010085
5. ELVIS NESTORY 22100123010029
6. HENERICO SAYE 22100123010009
7. EL-MBOTO MBOGO 22100123010067
8. IDRISA ABDUL 22100123010053
 QUESTIONS
QUESTION ONE:
Part-I:
Discuss various cost accounting techniques and costing methods used in manufacturing and
service industries. Explain how marginal costing, absorption costing, and standard costing differ
from one another. Provide examples where each method is most suitable.
Part-II:
Explain the role of cost-volume-profit (CVP) analysis and other decision-making techniques in
managerial accounting. How do relevant costs, risk, and uncertainty affect business decisions?
Illustrate with examples.
Part-III:
How does quality control influence the determination of selling price in cost management?
Describe the relationship between quality-related costs and pricing decisions. Provide a detailed
example showing how to determine a selling price incorporating quality costs.
QUESTION TWO
A manufacturing company produces consumer electronics and wants to improve cost control and
product pricing. Explain how cost accounting techniques-such as absorption, marginal, and
standard costing-can be applied to different types of costing environments (products, services,
processes, and projects). In your answer, include the importance of proper cost classification
(materials, labor, and overheads), and describe how these costs are assigned and managed.
Highlight how cost volume profit analysis and the identification of relevant costs help in short-
term decision-making under uncertainty and risk. Provide examples to support your answer.
QUESTION THREE:
Explain the various factors that influence pricing decisions for a product or service. Describe
how pricing policies, objectives, and strategies align with business goals. Provide an overview of
cost-plus pricing methods and show how to calculate the selling price using both full cost and
marginal cost-based approaches. Lastly, define price elasticity of demand and demonstrate how
to formulate a linear demand function. Use a practical example to illustrate how changes in price
affect demand and decision-making.

QUESTION FOUR:
A company is assessing whether to discontinue one of its three product lines due to declining
profitability. Describe the role of relevant costing and cost-volume-profit (CVP) analysis in this
decision. Explain how fixed and variable costs, contribution margin, and opportunity costs
should be evaluated. Under uncertain market conditions, what decision-making tools can the
company use to manage risk and uncertainty? Include how price elasticity and demand
forecasting influence such strategic choices. Provide calculations and rationale to support a
discontinuation or continuation decision
QUESTION ONE
PART I: Cost Accounting Techniques and Costing Methods

Cost accounting is a way for businesses to figure out how much it costs to make products or
provide services. Whether it's a factory making physical products or a service company like a
hotel, cost accounting helps businesses track and understand their costs. There are different
methods or techniques that businesses use to calculate costs, such as marginal costing,
absorption costing, and standard costing.

1. Marginal Costing:
This method looks at the variable costs of making one additional unit of a product. Variable
costs are the costs that change depending on how much you produce, like raw materials or
direct labor. Fixed costs, like rent or the salary of a manager, are not included in this
calculation. This method is useful when a company wants to decide whether it should accept
a special order or not. For example, if a factory that makes school desks gets a special order,
it may choose to accept the order if the price covers only the variable costs, like the cost of
materials and labor needed for that specific order.
2. Absorption Costing:
Unlike marginal costing, absorption costing includes both variable and fixed costs in the
cost of a product. This means that every unit of product produced carries a share of the fixed
costs, like rent or utilities. This method is commonly used for external reporting and is
required by accounting standards to provide a full picture of a product’s cost. For example, a
company that produces cement will use absorption costing to calculate the full cost of
producing cement and report that to tax authorities.
3. Standard Costing:
Standard costing involves setting an expected or standard cost for different expenses like
materials, labor, and overhead. After that, businesses compare the actual costs to the
standard costs. If the actual cost is higher or lower than the expected cost, the difference is
called a variance. This helps businesses track where they are overspending and find areas
where they can improve. For example, in a food processing plant, if the actual labor costs are
higher than expected, the managers can investigate why this happened and see if there’s any
waste or inefficiency that needs to be addressed.
PART II: Role of CVP Analysis and Decision-Making Techniques
Cost-Volume-Profit (CVP) analysis is a useful tool in managerial accounting that helps managers
understand how profits change when costs, sales volume, or prices change. Think of it as a way
to answer important business questions like: “How many items do we need to sell to cover all
our expenses?” or “What happens to our profit if the cost of materials goes up?”

A key concept in CVP is the break-even point—this is the number of units a company needs to
sell to cover all its costs (both fixed and variable). Once that point is passed, every additional
sale adds directly to profit. This is especially helpful for startups or when launching a new
product, as it shows the minimum performance needed to avoid losing money.

Another important method is relevant cost analysis. This involves looking only at the costs that
will change because of a decision. For example, imagine a bakery considering whether to bake
cakes overnight. The rent won’t change whether they bake at night or not, so it’s not a relevant
cost. But extra electricity or wages for night staff are relevant because they only happen if the
decision is made.

Risk and uncertainty also play a big role in business decisions. Risk means there’s some
information available—for example, there might be a 50% chance that fuel prices go up.
Uncertainty means the future is unknown—we don’t have enough data to predict what might
happen. In these situations, managers use tools like sensitivity analysis to prepare for different
outcomes. For instance, they might ask: “What if our sales drop by 10%, 20%, or more? How
would that affect our profits?” This helps them plan for the worst-case scenarios.

Take the example of a transport company thinking about buying a new bus. They need to look
at the relevant costs, such as the bus's price, fuel, and maintenance. But they also need to
consider uncertainty, like future fuel prices or changes in passenger numbers. CVP analysis can
help them figure out if the investment still makes sense even if some conditions change.

In conclusion, tools like CVP analysis, relevant cost analysis, and sensitivity analysis help
managers make smarter, more informed decisions. They don’t eliminate risk, but they make it
easier to plan ahead and avoid costly mistakes.
PART III: Quality Control and Selling Price in Cost Management

Quality control plays a big role in setting the selling price of a product. If a company produces
high-quality goods, they can charge a higher price because customers trust the product. But good
quality also comes with quality-related costs, such as inspection, testing, and training workers.

 Prevention Costs:
These are the costs that a company incurs to prevent problems from happening in the first place.
It’s like taking steps to make sure things run smoothly and avoid defects. For example, if you
train your workers to do their jobs better, or if you maintain your machines regularly to keep
them from breaking down, those are prevention costs. The idea is to avoid problems before they
even start.

 Appraisal Costs:
These are the costs involved in checking and inspecting products to make sure they meet the
required quality standards. It’s like when you inspect a car before you buy it, to make sure it
doesn’t have any issues. In a business, this could be things like having quality control inspectors
check products, or testing materials to make sure they are up to standard. These costs help catch
problems early.

 Internal Failure Costs:

These are the costs that come from fixing problems within the company before the product
reaches the customer. Think of it like catching a mistake before it's too late. If a product is found
to be defective during production, the company needs to fix it or rework it before it is sent out.
This can include costs like labor for repairs or scrapping parts of the product that can’t be fixed.
It's cheaper to fix issues internally than to send a defective product out to customers.

 External Failure Costs:

These are the costs that occur when a defective product reaches the customer, and the company
has to handle the aftermath. It includes things like refunds, repairs, or replacing the product. For
example, if a customer buys a broken phone, the company might need to give them a new one or
refund their money. This can hurt the company's reputation and cost more in terms of customer
service or lost business, so it’s the most expensive type of quality cost.When setting a price, a
business must include all these costs. For example, if a factory producing water bottles spends
Tsh 500 on materials, Tsh 200 on labour, and an extra Tsh 100 on quality checks and training,
then total cost is Tsh 800. To make profit, they may add 25%, making the selling price Tsh
1000.Let’s look at a real example: A company making electrical wires wants to maintain good
quality. They invest in better raw materials and testing equipment, which increases their cost per
unit from Tsh 1500 to Tsh 1700. However, because customers are happy with the quality, they
agree to buy the product at Tsh 2200 instead of Tsh 2000. This shows how quality adds value
and allows for higher prices.Good quality reduces complaints and returns, saving money in the
long run. So, even if quality control adds cost at first, it helps a business grow and build a good
reputation.
QUESTION TWO
Introduction
Cost control and accurate product pricing are crucial for any manufacturing company, especially
in the competitive consumer electronics industry. Effective cost accounting provides the
foundation for these objectives by offering tools and techniques to measure, assign, and manage
costs. This answer explores how absorption, marginal, and standard costing can be used across
different costing environments. It also discusses the importance of cost classification, methods of
cost allocation, and the role of cost-volume-profit (CVP) analysis and relevant cost identification
in decision-making.
Cost Accounting Techniques
1. Absorption Costing
Absorption costing, also known as full costing, involves assigning all manufacturing costs-direct
materials, direct labor, and both variable and fixed manufacturing overheads-to the product. This
method is required for external financial reporting under most accounting standards.
 Application: In a consumer electronics company, absorption costing is useful for valuing
inventory and determining the total cost per unit. For example, when producing
smartphones, all costs (including factory rent and supervisor salaries) are absorbed into
the cost of each device.
 Environment: This technique is suitable for products and processes where inventory
valuation is important, such as mass production of electronic gadgets.
2. Marginal Costing
Marginal costing (or variable costing) only assigns variable costs (direct materials, direct labor,
variable overhead) to products, treating fixed overheads as period costs that are expensed in the
period incurred.
 Application: Marginal costing is valuable for internal decision-making, such as pricing,
product mix, or discontinuing a product line. For instance, if the company is considering
a special order for headphones at a lower price, marginal costing helps determine if the
order covers variable costs and contributes to fixed costs.
 Environment: Best used in scenarios where management needs to make short-term
decisions, such as services or special projects.

3. Standard Costing
Standard costing involves assigning predetermined costs (standards) for materials, labor, and
overheads to products. Actual costs are then compared to these standards to identify variances.
 Application: In electronics manufacturing, standard costing helps set benchmarks for
material usage and labor efficiency. If actual costs deviate from standards, management
investigates the reasons (e.g., wastage or overtime).
 Environment: Useful in both product and process costing environments, especially
where repetitive production occurs, such as assembly lines for TVs or laptops.
Costing Environments
 Product Costing: Assigns costs to individual products. Essential for companies with
multiple product lines, like smartphones, tablets, and wearables.
 Service Costing: Applies to after-sales services or warranty repairs. Here, labor and
overheads are more significant than materials.
 Process Costing: Used for continuous production processes, such as circuit board
manufacturing, where costs are averaged over units produced.
 Project Costing: Relevant for unique, one-off projects, such as designing a custom
electronic device for a client.
Importance of Proper Cost Classification
Accurate cost classification ensures that costs are assigned correctly and managed effectively.
The main categories include:
 Materials: Raw materials used in production (e.g., microchips, screens).
 Labor: Wages and salaries of employees directly involved in manufacturing.
 Overheads: Indirect costs such as utilities, depreciation, and quality control.
Proper classification helps in:
 Identifying cost drivers and areas for cost reduction.
 Ensuring accurate product costing and profitability analysis.
 Facilitating budgeting and variance analysis.
Cost Assignment and Management
Costs are assigned to products or services through various allocation methods:
 Direct Costs: Easily traced to a product (e.g., materials for a smartphone).
  Indirect Costs (Overheads): Allocated using bases such as machine hours or labor
hours. For example, factory rent might be allocated based on the floor space used by each
product line.
Cost-Volume-Profit (CVP) Analysis
CVP analysis examines the relationship between costs, sales volume, and profit. It helps
managers understand how changes in production levels, selling prices, or costs impact
profitability.
 Break-even Analysis: Determines the sales volume at which total revenue equals total
costs, resulting in zero profit.
 Decision-making: For example, if the company plans to launch a new tablet, CVP
analysis helps estimate how many units must be sold to cover costs and achieve target
profits.
Relevant Costs in Short-term Decision Making
Relevant costs are those that will be affected by a specific decision. In short-term scenarios, such
as accepting a special order or discontinuing a product, only costs that change as a result of the
decision are considered.
 Example: If a customer requests a large order of headphones at a discounted price, only
additional material and labor costs are relevant. Fixed costs, which remain unchanged,
are not considered.
Managing Uncertainty and Risk
Uncertainty and risk are inherent in business decisions. Cost accounting techniques help mitigate
these by:
 Using sensitivity analysis to assess how changes in costs or sales affect profit.
 Identifying risk areas, such as volatile material prices, and planning accordingly.
 Providing timely and accurate cost information for informed decision-making.
Example
Suppose the company is considering whether to produce a new line of smartwatches. By using
standard costing, they set benchmarks for material and labor costs. Absorption costing helps
determine the total cost per unit for inventory valuation. Marginal costing assists in pricing
decisions for special promotional offers. CVP analysis estimates the break-even point, while
relevant cost analysis ensures only incremental costs are considered in the decision.
QUESTION THREE

Pricing Decisions and Cost-Related Approaches in Business

1. Factors That Influence Product Pricing

Setting the right price is very important for any business because it affects profits, how many
customers buy, and whether the business survives or not. Different things influence the price of a
product or service:

 Production Cost: If it costs more to produce, the selling price also increases. This
includes raw materials, labour, rent, and electricity.
 Customer Demand: When people want something a lot, the price can go up. But when
demand is low, businesses might reduce prices to attract buyers.
 Competitors’ Prices: If other companies sell similar items for less money, you might
also lower your price to compete.
 Business Goals: If a company wants to enter the market and attract customers fast, it
may use low prices (penetration pricing). If it wants to make big profits quickly, it may
use high prices (skimming pricing).
 Perception and Value: People are willing to pay more for brands they trust or think are
high quality.
 Government Laws: There are rules to protect consumers from unfair pricing. For
example, in Tanzania, price controls apply to fuel and some food products.
 Economic Conditions: If inflation is high or people have less money, prices may have to
be adjusted to keep customers.
2. Pricing Policies, Objectives, and Strategies in Business

Every business needs a plan for how it sets its prices. This plan must match its goals.

 Pricing Policies are rules like offering discounts, charging different prices for different
markets, or keeping prices stable.
 Pricing Objectives include earning more profit, growing the business, beating
competitors, or surviving tough times.
 Pricing Strategies are how the company reaches these goals. For example:
  Cost-based pricing: Price is based on how much it costs to make.
 Competition-based pricing: Price depends on what other sellers are charging.
 Value-based pricing: Price depends on how useful the product is to the customer.

Example: If a company in Mbeya starts selling eco-friendly cooking stoves, it may use
penetration pricing (lower price) to attract rural customers. But if the product is unique, it can
use value-based pricing to charge more.
3. Understanding Cost-Plus Pricing (Full and Marginal Cost Methods)

Cost-plus pricing is simple. The company adds a profit margin (markup) on top of its costs.
(a) Full Cost Pricing (Absorption Method)

This method includes all costs – fixed and variable.

Example:
A Tanzanian factory produces rechargeable torches.

 Direct material: TZS 15,000

 Direct labour: TZS 10,000
 Fixed overhead: TZS 5,000
 Total cost = TZS 30,000
 Markup (30%) = 30,000 × 0.30 = TZS 9,000
 Selling price = TZS 39,000
(b) Marginal Cost Pricing

Here, only variable costs are considered.

 Material + Labour = TZS 25,000

 Markup (30%) = 25,000 × 0.30 = TZS 7,500
 Selling price = TZS 32,500

This is useful when entering a competitive market or during low seasons.

4. Price Elasticity of Demand (PED)
Price elasticity of demand shows how much demand changes when price changes.
 If demand changes a lot when price changes → Elastic
 If demand hardly changes → Inelastic
Formula:
PED = % Change in Quantity ÷ % Change in Price
Businesses use PED to know how customers will react if they increase or reduce prices.
5. Linear Demand Function and Real-Life Example
A linear demand function is a formula showing how demand depends on price. It looks like
this:
Q = a - bP
Where:
 Q = Quantity demanded
 P = Price
 a = Maximum demand when price is zero
 b = Change in demand when price increases
Example: Solar Lamp Business in Tanzania
Suppose a small business has the demand function:
Q = 1,000 - 10P
Scenario 1:
 Price = TZS 40
 Q = 1,000 - (10 × 40) = 600 units
 Revenue = 40 × 600 = TZS 24,000
Scenario 2:
 Price = TZS 50
 Q = 1,000 - (10 × 50) = 500 units
 Revenue = 50 × 500 = TZS 25,000
This shows that increasing price reduces demand, but might increase revenue depending on
elasticity.
QUESTION FOUR

Evaluating the Discontinuation of a Product Line: Cost Analysis and Strategic Tools

When a company considers stopping a product line due to reduced profits, it must look beyond
the surface. It is essential to evaluate both financial and strategic impacts using tools like
relevant costing, cost-volume-profit (CVP) analysis, and cost behavior knowledge. Here's a
simplified explanation of how each of these helps make a wise decision.

1. Relevant Costing and Its Role in Discontinuation Decisions

Relevant costing helps a company focus on future costs and revenues that will change directly if
it chooses to stop or continue a product.

 Relevant Costs are only those that will be affected by the decision. For example, variable
costs such as materials and direct labor usually stop if the product is discontinued—so
they’re relevant.
 Avoidable Fixed Costs (e.g., salaries of staff tied only to that product) are also relevant
since they can be saved.
 Unavoidable Fixed Costs (like head office rent) stay regardless of the decision—so
they’re not relevant here.
 The contribution margin—which is the income left after paying variable costs—shows
what the company loses if the product is dropped.
 Opportunity Costs come into play if discontinuing the product frees up machines, labor,
or space for other, more profitable activities.
2. Using CVP Analysis for Better Understanding

Cost-Volume-Profit (CVP) analysis is a tool used to understand how profits change when costs
or sales volumes shift. For a discontinuation decision:
 It checks if the product line earns enough to cover its own costs.
 The break-even point shows the sales needed to avoid loss.
 CVP analysis allows managers to simulate various sales levels to see how profits are
affected.
 If the product isn't breaking even or close to it, discontinuation might make sense.
3. Fixed vs. Variable Costs, Contribution Margin & Opportunity Cost

Understanding cost behavior is crucial:

Fixed Costs

 Do not change with production volume.

 Only avoidable fixed costs matter in the discontinuation decision.
 Unavoidable fixed costs continue even if the product is stopped.
Variable Costs

 Change with production—these are always relevant.

 If the product is dropped, these costs disappear too.
Contribution Margin

 This is calculated by subtracting variable costs from sales.

 If it’s positive, stopping the product might hurt overall profit unless savings from fixed
costs or new profits from other uses cover the loss.
Opportunity Cost

 Dropping a product might open up resources for something better.

 Managers should consider whether those freed resources can earn more elsewhere.
4. Making Decisions Under Uncertainty

Business conditions are rarely predictable. To handle this uncertainty, several techniques can
help:
Sensitivity Analysis

 Shows how profits change if costs or sales change.

 Helps test different “what if” situations.
Scenario Analysis

 Looks at best-case, worst-case, and expected-case outcomes.

 Useful in preparing for surprises.
Break-even and Margin of Safety
  Tells how much sales can fall before losses occur.
 Helps businesses gauge risk levels.
Price Elasticity and Demand Study

 If demand doesn't change much with price, the company might try raising prices to
improve profits instead of stopping the product.
5. Example: Should the Company Stop the Product?

Let’s say one product line brings:

 Sales = TZS 100 million

 Variable Costs = TZS 60 million
 Fixed Costs = TZS 30 million (out of which TZS 10 million are avoidable)
Contribution margin = TZS 100 million – TZS 60 million = TZS 40 million
If the product is stopped:
 TZS 40 million contribution is lost
 TZS 10 million in fixed costs are saved

Net Impact:
Loss = 40 million – 10 million = TZS 30 million profit reduction

The company should keep the product unless the freed resources can earn more than TZS 30
million elsewhere.
GENERAL CONCLUSION

In conclusion, this discussion has shown that effective cost and quality management play a
critical role in helping businesses make informed decisions. The use of different costing
techniques like marginal, absorption, and standard costing enables companies to understand their
production costs clearly. Marginal costing helps in short-term decisions like special orders, while
absorption costing is important for accurate product pricing and reporting. Standard costing helps
in setting cost benchmarks and in controlling any unexpected increases in costs.

Cost-Volume-Profit (CVP) analysis and decision-making tools like relevant costing and risk
analysis are also essential for businesses. These tools guide managers in understanding how
costs, volume, and profit interact. They help determine break-even points, assess profitability,
and make decisions under uncertainty. For example, when launching a new product or evaluating
whether to continue a product line, these tools give insights into financial impact and possible
outcomes.

Moreover, quality control directly impacts the final selling price and reputation of the business.
When a company invests in prevention, inspection, and employee training, it may face higher
initial costs, but in the long run, this builds trust and allows for premium pricing. The
understanding of quality costs—such as prevention, appraisal, and failure costs—is important in
setting a competitive and fair price that also covers all hidden expenses.
In pricing decisions, businesses must balance between internal cost structures and external
market forces like demand, competition, and government regulations. Strategies such as cost-
based, value-based, or competition-based pricing help firms set prices that match their goals,
whether they aim for market entry, survival, or profit maximization. Price elasticity of demand
and demand functions further assist in predicting customer responses to price changes.

Finally, when considering discontinuing a product, tools like relevant costing, CVP analysis,
contribution margin, and opportunity cost evaluation help to avoid decisions that may seem right
on the surface but hurt the company in the long run. Even under uncertain conditions, methods
such as scenario and sensitivity analysis help managers to plan and reduce risk.
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