‘I remember being told about the useful decision-making technique of limiting fac- Question IM 9.1
tor analysis (also known as “contribution per unit of the key factor”). If an organisa- Advanced
tion is prepared to believe that, in the short run, all costs other than direct materials
are fixed costs, is this not the same thing that throughput accounting is talking
about? Why rename limiting factor analysis as throughput accounting?’
Requirements:
(a) Explain what a limiting (or ‘key’) factor is and what sort of things can become
limiting factors in a business situation. Which of the factors in the scenario
could become a limiting factor? (8 marks)
(b) Explain the techniques that have been developed to assist in business decision-
making when single or multiple limiting factors are encountered. (7 marks)
(c) Explain the management idea known as throughput accounting. State and
justify your opinion on whether or not throughput accounting and limiting
factor analysis are the same thing. Briefly comment on whether throughput
accounting is likely to be of relevance to SEL. (10 marks)
(Total 25 marks)
CIMA Stage 3 Management Accounting Applications
Company A expects to have 2000 direct labour hours of manufacturing capacity (in Question IM 9.2
normal time) available over the next two months after completion of current regu- Intermediate:
lar orders. It is considering two options in order to utilize the spare capacity. If the Determining
available hours are not utilized direct labour costs would not be incurred. minimum short-
The first option involves the early manufacture of a firm future order which would term acceptable
as a result reduce the currently anticipated need for overtime working in a few selling price
months time. The premium for overtime working is 30% of the basic rate of £4.00 per
hour, and is charged to production as a direct labour cost. Overheads are charged at
£6.00 per direct labour hour. 40% of overhead costs are variable with hours worked.
Alternatively, Company A has just been asked to quote for a one-off job to be com-
pleted over the next two months and which would require the following resources:
1. Raw materials:
(i) 960 kg of Material X which has a current weighted average cost in stock of
£3.02 per kg and a replacement cost of £3.10 per kg. Material X is used con-
tinuously by Company A.
(ii) 570 kg of Material Y which is in stock at £5.26 per kg. It has a current
replacement cost of £5.85 per kg. If used, Material Y would not be replaced.
It has no other anticipated use, other than disposal for £2.30 per kg.
(iii) Other materials costing £3360.
2. Direct labour: 2200 hours.
Required:
(a) Establish the minimum quote that could be tendered for the one-off job
such that it would increase Company A’s profit, compared with the
alternative use of spare capacity. (Ignore the interest cost/benefit associated
with the different timing of cash flows from the different options.)
(12 marks)
Question IM 9.3 JB Limited is a small specialist manufacturer of electronic components and much of
Intermediate: its output is used by the makers of aircraft for both civil and military purposes. One
Acceptance of a of the few aircraft manufacturers has offered a contract to JB Limited for the sup-
contract ply, over the next twelve months, of 400 identical components.
The data relating to the production of each component is as follows:
(i) Material requirements:
3 kg material M1 – see note 1 below
2 kg material P2 – see note 2 below
1 Part No. 678 – see note 3 below
Note 1. Material M1 is in continuous use by the company. 1000 kg are currently
held in stock at a book value of £4.70 per kg but it is known that future
purchases will cost £5.50 per kg.
Note 2. 1200 kg of material P2 are held in stock. The original cost of this material
was £4.30 per kg but as the material has not been required for the last two years
it has been written down to £1.50 per kg scrap value. The only foreseeable
alternative use is as a substitute for material P4 (in current use) but this would
involve further processing costs of £1.60 per kg. The current cost of material P4
is £3.60 per kg.
Note 3. It is estimated that the Part No. 678 could be bought for £50 each.
(ii) Labour requirements: Each component would require five hours of skilled
labour and five hours of semi-skilled. An employee possessing the necessary
skills is available and is currently paid £5 per hour. A replacement would,
however, have to be obtained at a rate of £4 per hour for the work which
would otherwise be done by the skilled employee. The current rate for semi-
skilled work is £3 per hour and an additional employee could be appointed for
this work.
(iii) Overhead: JB Limited absorbs overhead by a machine hour rate, currently £20
per hour of which £7 is for variable overhead and £13 for fixed overhead. If this
contract is undertaken it is estimated that fixed costs will increase for the
duration of the contract by £3200. Spare machine capacity is available and each
component would require four machine hours.
A price of £145 per component has been suggested by the large company
which makes aircraft.
You are required to:
(a) State whether or not the contract should be accepted and support your
conclusion with appropriate figures for presentation to management;
(16 marks)
(b) comment briefly on three factors which management ought to consider and
which may influence their decision. (9 marks)
(Total 25 marks)
CIMA Cost Accounting Stage 2
You are aware that considerable publicity could be obtained for the company if you
are able to win this order and the price quoted must be very competitive.
The following are relevant to the cost estimate above:
1. The paper to be used is currently in stock at a value of £5000. It is of an unusual
colour which has not been used for some time. The replacement price of the
paper is £8000, while the scrap value of that in stock is £2500. The production
manager does not foresee any alternative use for the paper if it is not used for
the village fair programmes.
2. The inks required are not held in stock. They would have to be purchased in
bulk at a cost of £3000. 80% of the ink purchased would be used in printing the
programme. No other use is foreseen for the remainder.
3. Skilled direct labour is in short supply, and to accommodate the printing of the
programmes, 50% of the time required would be worked at weekends, for
which a premium of 25% above the normal hourly rate is paid. The normal
hourly rate is £4.00 per hour.
4. Unskilled labour is presently under-utilized, and at present 200 hours per week
are recorded as idle time. If the printing work is carried out at a weekend, 25
unskilled hours would have to occur at this time, but the employees concerned
would be given two hours’ time off (for which they would be paid) in lieu of
each hour worked.
5. Variable overhead represents the cost of operating the printing press and
binding machines.
6. When not being used by the company, the printing press is hired to outside
companies for £6.00 per hour. This earns a contribution of £3.00 per hour.
There is unlimited demand for this facility
7. Fixed production costs are those incurred by and absorbed into production,
using an hourly rate based on budgeted activity.
8. The cost of the estimating department represents time spent in discussion with
the village fair committee concerning the printing of its programme.
Required:
(a) Prepare a revised cost estimate using the opportunity cost approach, showing
clearly the minimum price that the company should accept for the order. Give
reasons for each resource valuation in your cost estimate. (16 marks)
(b) Explain why contribution theory is used as a basis for providing information
relevant to decision-making. (4 marks)
(c) Explain the relevance of opportunity costs in decision-making. (5 marks)
(Total 25 marks)
CIMA Stage 2 Operational Costs Accounting
MEASURING RELEVANT COSTS AND REVENUES FOR DECISION-MAKING 55
Question IM 9.5 A company is currently manufacturing at only 60% of full practical capacity, in
Intermediate: each of its two production departments, due to a reduction in market share. The
Decision on company is seeking to launch a new product which it is hoped will recover some
whether to launch lost sales.
a new product The estimated direct costs of the new product, Product X, are to be established
from the following information:
Direct materials:
Every 100 units of the product will require 30 kilos net of Material A. Losses of 10%
of materials input are to be expected. Material A costs £5.40 per kilo before dis-
count. A quantity discount of 5% is given on all purchases if the monthly purchase
quantity exceeds 25 000 kilos. Other materials are expected to cost £1.34 per unit of
Product X.
Direct labour (per hundred units):
Department 1: 40 hours at £4.00 per hour.
Department 2: 15 hours at £4.50 per hour.
Separate overhead absorption rates are established for each production depart-
ment. Department 1 overheads are absorbed at 130% of direct wages, which is
based upon the expected overhead costs and usage of capacity if Product X is
launched. The rate in Department 2 is to be established as a rate per direct labour
hour also based on expected usage of capacity. The following annual figures for
Department 2 are based on full practical capacity:
Overhead, £5 424 000:
Direct labour hours, 2 200 000.
Variable overheads in Department 1 are assessed at 40% of direct wages and in
Department 2 are £1 980 000 (at full practical capacity).
Non-production overheads are estimated as follows (per unit of Product X):
Variable, £0.70
Fixed, £1.95
The selling price for Product X is expected to be £9.95 per unit, with annual sales of
2 400 000 units.
Required:
(a) Determine the estimated cost per unit of Product X. (13 marks)
(b) Comment on the viability of Product X.
(7 marks)
(c) Market research indicates that an alternative selling price for Product X could
be £9.45 per unit, at which price annual sales would be expected to be 2 900 000
units. Determine, and comment briefly upon, the optimum selling price.
(5 marks)
(Total 25 marks)
ACCA Cost and Management Accounting 1
Selling price 28 30 45 42
Direct material 5 6 8 6
Direct labour 4 4 8 8
Variable overhead 3 3 6 6
Fixed overhead* 8 8 16 16
Profit 8 9 7 6
Labour hours 1 1 2 2
Machine hours 4 3 4 5
Units Units Units Units
Maximum demand per week 200 180 250 100
*Absorbed based on budgeted labour hours of 1000 per week.
Notes
1. The labour hour rate is £5 per hour.
2. Overhead absorption rates per machine hour are as follows:
Variable Fixed
£ £
B Ltd manufactures a range of products which are sold to a limited number of Question IM 9.8
wholesale outlets. Four of these products are manufactured in a particular depart- Intermediate:
ment on common equipment. No other facilities are available for the manufacture Limiting/key
of these products. factors and a
Owing to greater than expected increases in demand, normal single shift work- decision whether
ing is rapidly becoming insufficient to meet sales requirements. Overtime and, in it is profitable to
the longer term, expansion of facilities are being considered. expand output by
Selling prices and product costs, based on single shift working utilizing practical overtime
capacity to the full, are as follows:
Product (£/unit)
W X Y Z
Fixed manufacturing overheads are absorbed on the basis of machine hours which,
at practical capacity, are 2250 per period. Total fixed manufacturing overhead per
period is £427 500. Fixed selling and administration overhead, which totals £190 000
per period, is shared amongst products at a rate of 10% of sales.
The sales forecast for the following period (in thousands of units) is:
Product W 190
Product X 125
Product Y 144
Product Z 142
Overtime could be worked to make up any production shortfall in normal time.
Direct labour would be paid at a premium of 50% above basic rate. Other variable
costs would be expected to remain unchanged per unit of output. Fixed costs
would increase by £24 570 per period.
Required:
(a) If overtime is not worked in the following period, recommend the quantity of
each product that should be manufactured in order to maximize profit.
(12 marks)
(b) Calculate the expected profit in the following period if overtime is worked as
necessary to meet sales requirements. (7 marks)
(c) Consider the factors which should influence the decision whether or not to
work overtime in such a situation. (6 marks)
(Total 25 marks)
ACCA Cost and Management Accounting 1
10” 6 12
18” 18 12
Machine A Machine B
(£) (£)
A subcontractor has offered to lay any quantity of the 10” pipe at £18 per metre and
of the 18” pipe at £12 per metre.
You are required to:
(a) calculate the most economical way of undertaking the contract; (15 marks)
(b) state the weekly cost involved in your solution to (a) above; (5 marks)
(c) comment on the factors that management should consider in reaching a
decision whether to adopt the minimum cost solution. (10 marks)
CIMA P3 Management Accounting
Annual yield
(boxes per hectare) 350 100 70 180
(Pesos) (Pesos) (Pesos) (Pesos)
Costs
Direct:
Materials per hectare 476 216 192 312
Labour:
Growing, per hectare 896 608 372 528
Harvesting and packing, per box 3.60 3.28 4.40 5.20
Transport, per box 5.20 5.20 4.00 9.60
Market price, per box 15.38 15.87 18.38 22.27
It is possible to make the entire farm viable for all four vegetables if certain
drainage work is undertaken. This would involve capital investment and it would
have the following effects on direct harvesting costs of some of the vegetables:
The farmer is willing to undertake such investment only if he can obtain a return of
15% DCF for a four-year period.
You are required to
(a) advise the farmer, within the given constraints,
(i) the area to be cultivated with each crop if he is to achieve the largest total
profit, (13 marks)
(ii) the amount of this total profit, (3 marks)
(iii) the number of hectares it is worth draining and the use to which they
would be put; (10 marks)
Notes: Show all relevant calculations in arriving at your answer. Ignore tax and
inflation. (Total 30 marks)
CIMA Stage 4 Management Accounting–Decision Making
Question IM 9.11 Johnson trades as a chandler at the Savoy Marina. His profit in this business during
Advanced: the year to 30 June was £12 000. Johnson also undertakes occasional contracts to
Relevant costs for build pleasure cruisers, and is considering the price at which to bid for the contract
a pricing decision to build the Blue Blood for Mr B.W. Dunn, delivery to be in one year’s time. He has
no other contract in hand, or under consideration, for at least the next few months.
Johnson expects that if he undertakes the contract he would devote one-quarter
of his time to it. To facilitate this he would employ G. Harrison, an unqualified prac-
titioner, to undertake his book-keeping and other paperwork, at a cost of £2000.
He would also have to employ on the contract one supervisor at a cost of £11 000
and two craftsmen at a cost of £8800 each; these costs include Johnson’s normal
apportionment of the fixed overheads of his business at the rate of 10% of labour cost.
During spells of bad weather one of the craftsmen could be employed for the
equivalent of up to three months full-time during the winter in maintenance and
painting work in the chandler’s business. He would use materials costing £1000.
Johnson already has two inclusive quotations from jobbing builders for this main-
tenance and painting work, one for £2500 and the other for £3500, the work to start
immediately.
The equipment which would be used on the Blue Blood contract was bought nine
years ago for £21 000. Depreciation has been written off on a straight-line basis,
assuming a ten-year life and a scrap value of £1000. The current replacement cost of
similar new equipment is £60 000, and is expected to be £66 000 in one year’s time.
Johnson has recently been offered £6000 for the equipment, and considers that in a
year’s time he would have little difficulty in obtaining £3000 for it. The plant is use-
ful to Johnson only for contract work.
In order to build the Blue Blood Johnson will need six types of material, as follows:
Materials B and E are sold regularly in the chandler’s business. Material A could be
sold to a local sculptor, if not used for the contract. Materials A and E can be used
for other purposes, such as property maintenance. Johnson has no other use for
materials D and F, the stocks of which are obsolete.
The Blue Blood would be built in a yard held on a lease with four years remaining
at a fixed annual rental of £5000. It would occupy half of this yard, which is useful
to Johnson only for contract work.
Johnson anticipates that the direct expenses of the contract, other than those
noted above, would be £6500.
Johnson has recently been offered a one-year appointment at a fee of £15 000 to
manage a boat-building firm on the Isle of Wight. If he accepted the offer he would
Shortflower Ltd currently publish, print and distribute a range of catalogues and Question IM 9.12
instruction manuals. The management have now decided to discontinue printing Advanced:
and distribution and concentrate solely on publishing. Longplant Ltd will print Decision on
and distribute the range of catalogues and instruction manuals on behalf of whether a
Shortflower Ltd commencing either at 30 June or 30 November. Longplant Ltd will department
receive £65 000 per month for a contract which will commence either at 30 June or should be closed
30 November.
The results of Shortflower Ltd for a typical month are as follows:
Other information has been gathered relating to the possible closure proposals:
(i) Two specialist staff from printing will be retained at their present salary of
£1500 each per month in order to fulfil a link function with Longplant Ltd.
One further staff member will be transferred to publishing to fill a staff
vacancy through staff turnover, anticipated in July. This staff member will be
paid at his present salary of £1400 per month which is £100 more than that of
the staff member who is expected to leave. On closure all other printing and
distribution staff will be made redundant and paid an average of two months
redundancy pay.
(ii) The printing department has a supply of materials (already paid for) which cost
£18 000 and which will be sold to Longplant Ltd for £10 000 if closure takes place
on 30 June. Otherwise the material will be used as part of the July printing
requirements. The distribution department has a contract to purchase pallets at
a cost of £500 per month for July and August. A cancellation clause allows for
non-delivery of the pallets for July and August for a one-off payment of £300.
Non-delivery for August only will require a payment of £100. If the pallets are
taken from the supplier Longplant Ltd has agreed to purchase them at a price of
£380 for each month’s supply which is available. Pallet costs are included in the
distribution material and supplies cost stated for a typical month.
(iii) Company expenditure on apportioned occupancy costs to printing and distri-
bution will be reduced by 15% per month if printing and distribution depart-
ments are closed. At present, 30% of printing and 25% of distribution
occupancy costs are directly attributable costs which are avoidable on closure,
whilst the remainder are apportioned costs.
(iv) Closure of the printing and distribution departments will make it possible to
sub-let part of the building for a monthly fee of £2500 when space is available.