Answer MAF551 DEC 2019 PDF

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AC/DEC 2019/MAF551

SUGGESTED ANSWER QUESTION 1 a) 5 benefits of ZBB are:  ZBB assumes that the previous period’s activities are not relevant to the current period. So is its allocation of resources. Therefore all activities plan for the future are to be evaluated as it is never being held or conducted. It is evaluated from a zero base.  By its nature, it encourages a bottom-up approach to budgeting in order for ZBB to be used in practice. This should encourage motivation of employees.  It challenges the status quo and encourages a questioning attitude among managers.  It responds to changes in the business environment from one year to the next.  Overall, it should result in a more efficient allocation of resources.

b) Topspot Corporation Manufacturing Overhead Flexible Budget Report For the Month of November 2019

Production in units Indirect materials Indirect labor Utilities Maintenance Depreciation Taxes and Insurance Other costs Total costs

Budget 118,500 RM

Actual 118,500

5,925 20,775 11,850 8,275

16,800 4,200 2,300 RM 70,125

Maintenance costs: VC= 8225 – 2350 = 5875 VC per unit =5875/117500 = RM0.05 Revised costs = (0.05*118500) + 2350 = 8275 Indirect Labour: VC= 20625 – 3000 = 17625 VC per unit =17625/117500=RM0.15 Revised costs = (0.15*118500) + 3000 = 20775 1

RM

Variance

5,910 20,000 11,880 8,300

RM 15 F 775 F 30 UF 25 UF

16,800 4,200 2,000 RM 69,090

0 0 300F RM 1,035 F

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Other costs: Fixed costs =1500 Units increased = 118500-117500=1000 1000/250= 4 step costs = 4 *RM200= 800 Revised costs = 1500+800=2300 c) “Employees are more likely to be motivated by a top-down approach to budgeting than by a participative approach”. Discuss the above statement. Under Top-down approach, budgets are set by senior managers and given to operational managers as targets. This approach is likely to be quicker and it is more likely to produce a budget in line with organizational goals. Participative budget, also known as bottom-up budget setting approach allows junior managers involvement in setting budget. This approach is likely to produce budgets which reflect local knowledge and expertise and are therefore more likely to be accurate. Employee’s involvement in setting budget targets is also likely to lead to greater ownership and therefore will be more motivating. Therefore employees are more likely to be motivated by participative approach rather than topdown approach to budgeting.

QUESTION 2 a) Three (3) criticisms of traditional standard costing system in relation to current economic situations are: a) Standards set for raw materials, labour, overhead are fixed. Hence, there is a need for incurring extra expenses for revising the costs which requires experience and skills employees. b) Future is uncertainty and the business environment is fast changing. Hence, standards needs frequent revision which is tedious to ensure meaningful variance reported. c) Standard costs are suitable for homogeneous products only. It is unsuitable for non-standardized product d) The process of setting up standards is a difficult task as it requires technical skill. The time and motion study are required to fix the standard. These studies require a lot of time and money. e) The causes for variances may be due to controllable and uncontrollable factors. Determinations of controllability of the costs is bias f) With the Industrial Revolution 4.0, it offers opportunity for manufacturers to optimize and predict its operations.

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b) Calculations of variances: i)

Material mix variances = (AM.AQ ~ SM.AQ) x Standard price X = [44,625kgs ~ (10/15 x 82,875 kgs )] x RM15 = RM159,375 F

ii)

Labour yield variance = (Actual yield ~ Standard Yield ) x Standard Cost = [4,550 units ~ 18,000 / 5] x RM42 = [4,550 units ~ 3,600 units] x RM42 = RM39,900 F

iii)

Fixed overhead expenditure variance = Actual FOH ~ Budgeted FOH = RM93,500 ~ [RM20 x 5,000 units) = RM93,500 ~ RM100,000 = RM6,500 F

iv)

Labour rate Operating variance (Skilled): = [AR ~ RSR] X ACTUAL HOURS = [RM10.50 ~ RM10.80] X 10,000 hours = RM3,000 F

v)

Labour efficiency Planning variance (unSkilled): = [SH of ACTUAL QTY ~ RSH of ACTUAL QTY ] OSR = [2 hours *4,550 – 2.15 hours*4,550] X 6 = 4,095 A

SOLUTION 3 – Luffy Sdn Bhd a) The criteria for a cost to be considered relevant to any decision are:  It must occur in the future, not the past. For example additional labour costs incurred if accepting special order. Sunk costs are never relevant. For example carrying value of machinery.  The total amount of the costs or benefit must change depending on which alternative is selected. For example if accept special order the company must buy additional materials.  Involve movement of cash. Non-cash item such as depreciation is irrelevant.

b) Using incremental approach, comment on the impact of accepting the special order. The profit analysis of accepting the special order of 15,000 units of Rasengan and 20,000 units of Chidori is presented below: Per unit RM/unit 70.00

Revenue –Rasengan (15,000) 3

RM 1,050,000

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Revenue – Chidori (20,000) Incremental costs: Direct materials (30x15000) + (40x20000) Direct labour (30x15000) + (30x20000)

95.00

1,900,000 (1,250,000) (1,050,000)

*Variable mfg ohd (300,000) CONTRIBUTION (350,000) Additional Fixed costs supervisory and clerical (6,000) **Opportunity cost (5000 √units x RM90) (450,000) Rental of special machine 6,000 x 1 month (4,000) Freight expenses - irrelevant 0/ NIL LOSS (RM110,000) Decision: The company suffer losses of (RM110,000) OF if accepting the special order. Therefore the order must be rejected. *Variable overhead : Variable manufacturing support 2/3 Sales comm Freight (will not be in incurred for special order) Balance: variable manufacturing overhead

Rasengan (RM) 2/3*30=20 5%*200= (10) (2)

Chidori (RM) 2/3*30=20 5%*180=(9) (2)

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Fixed costs ~ not relevant Total Var OHD =(RM8*15k)+(RM9*20k) = RM300k **Determine limiting factor: Full capacity currently Spare capacity Special order

Rasengan (units) 60,000 42,000 18,000 15,000 3000 excess

Chidori (units) 40,000 28,000 12,000 20,000 8,000 shortfall

Cutdown on current sales =8,000-3,000 =5,000 units : opportunity costs The company should cutdown Chidori since it is less ranking product; cs ratio less than rasengan. Contribution margin for chidori = RM180-40-30- (2/3*30) =RM90 Opportunity costs= 5,000 * RM90 =RM450,000

c) i. “Labour costs are relevant in decision making for special order issues’. Discuss the above statement. 4

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In dealing with special order issues, two condition need to be considered, that is whether there is spare capacity or not. If there is spare capacity, the labour costs may not be relevant if the labour are paid on monthly or periodical costs. However, if the labour are paid on piecework basis, means with the increase in production, there will be an increase in wages, therefore labour costs is relevant. In the case of no spare capacity, be it the labour are paid on monthly basis or piecework basis, there will be additional cost involved. Therefore the labour cost is relevant costs. ii.

The production manager suggested outsourcing the extra 5,000 of Chidori to Vegeta Bhd, an external manufacturer. Vegeta Bhd agrees to supply the product at RM50 per unit. Advise Luffy Sdn Bhd whether to accept the production manager’s suggestions or not.

LOSS (+) Opportunity costs (-) Cost of outsourcing

RM (RM110,000) 450,000 (250,000)

(RM50x5000 units)

loss

90,000

Luffy Sdn Bhd earns additional profit of RM90,000. Therefore the company should accept the above suggestions. Question 4 a. Two (2) pricing strategies commonly use in the business are:  Premium pricing + brief explanation  Differential pricing + brief explanation  Loss leader + brief explanation  Market skimming + brief explanation  Penetration pricing + brief explanation b. i.

Target cost Competitor price Less target profit Target costs

ii.

(90%* RM150) (40% *135)

RM135 54 81

Three (3) ways that Gagafit can apply in order to achieve target costs: Reduce cost during product engineering + explanation. Reduce costs during product design stage + explanation 5

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Reduce marketing costs by selling the product online + explanation Buy materials from supplier who can offer more discount in order to reduce costs of material + explanation Any other logical answer

SOLUTION 5 a. TP general rule Minimum TP

= additional outlay costs per unit or Variable cost = direct material + direct labour + variable manufacturing OH = 38 + 12 + (50/*30%) = RM65

*Variable selling cost, RM9 is not included in the outlay cost because it is not incurred for internal sales incurred only for external sales. ii The range of transfer price should be between RM65 to RM200. Speed Control Division will not sell less than variable cost that is RM65. If Speed Control Division sells more than market price, Toys Division would buy from external supplier. When this happen, the profit for BWTech Sdn Bhd will be slightly reduced. At the same time, Speed Control Division has idle capacity and which remain unused if they did not agree with the internal transfer. This will result in less efficient management of fixed overhead cost (FC will be unabsorbed to much lower units of production).

b. Reduction in production capacity in Speed Control Division by 30% = 20,000 x 0.70 = 14,000 units Speed Control Division: Internal sales 6,500 External sales 7,500 14,000 i)

Transfer price at total production cost plus 25% mark-up: Total production cost (ED)

= 100 x 1.25 = RM125

Speed Control Division ES (7,500x200) IS (6,500x125) Less: variable production costs (65*14k) FPO (35x14,000)

1,500,000 812,500 2,312,500

Toys Division ES (6,500x750)

4,875,000

910,000

476*6500

3,094,000

490,000

FPO (24x8000)

192,000

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BWTech Sdn Bhd 6,375,000 812,500 7,187,500 4,004,000 682,000

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Gross profit Less other cost Variable selling (7500x9)

912,500

Net profit

845,000

67,500

AC/DEC 2019/MAF551

Variable selling (6500x36)

1,589,000

2,501,500

234,000

301,500

1,355,000

2,200,000

Net profit of Toys Division is higher than Speed Control Division indicated that Toys Division performed better than Speed Control Division. VPC for Toys Div= 187+125+108+56=476 VPC for Speed Control Div= 38+12+15=65 ii) Transfer price = Market price = RM200 When TP = RM 125; So TP = RM200 (increased by 75)

Total production cost = RM476 =476+75= RM551

Speed Control Division ES (7,500x200) IS (6,500x200) Less: variable production costs (65*14k) FPO/ (35x14,000)

Toys Division

1,500,000 1,300,000 2,800,000

ES (6,500x750)

4,875,000

910,000

551*6500

3,581,500

490,000

FPO (24x8000)

192,000

Gross profit Less other cost Variable selling (7500x9)

1,400,000

Net profit

1,332,500

67,500

Variable selling (6500x36)

BWTech Sdn Bhd 6,375,000 1,300,000 7,675,000 4,491,500 682,000

1,101,500

2,501,500

234,000

301,500

867,500

2,200,000

If transfer price is set at market value, profit for Speed Control Div will increased to RM1,332,500 while profit for Toys Division decreased to RM867,500. However the division still enjoys the benefits of reductions in selling expenses if they buy internally. Meanwhile profit for the company still maintained at same level as long as there is transfer of goods internally. Therefore, both division should negotiate suitable price to be set to ensure the internally transfer of goods occur for the benefit of the company as a whole.

END OF SOLUTION

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