- 30 Marks
PM – May 2015 – L2 – SA – Q1 – Cost-Volume-Profit (CVP) Analysis
Analyze Tadefo Limited's activity-based costing, discuss budgeting weaknesses, and describe the advantages of ABB and ZBB.
Question
TADEFO LIMITED is a manufacturing company which produces and assembles car components. The company has two main production departments: Machining and Assembling. Each of the two departmental managers is responsible for producing annual budgets based on targets set by the management. From last year’s budget, TADEFO Limited hoped to turn an expected 10 percent rise in total revenue into a 20 percent increase in the company’s profits.
The following budgeted information relates to TADEFO Limited for the forthcoming period:
Products Information:
| Products | ACQ | BEZ | CFJ |
|---|---|---|---|
| Sales and production (units) | 30,000 | 50,000 | 40,000 |
| Selling price (per unit) (N) | 73 | 45 | 95 |
| Prime cost (per unit) (N) | 65 | 32 | 84 |
| Machine Dept. (hrs per unit) | 4 | 2 | 5 |
| Assembly Dept. (hrs per unit) | 2 | 7 | 3 |
Overheads Re-Analyzed into Cost Pools:
| Cost Pool | Amount (N’000) | Cost Driver | Quantity for the period |
|---|---|---|---|
| Machine services | 359 | Machine hours | 425,000 |
| Assembly services | 328 | Direct labour hours | 532,000 |
| Set-up costs | 36 | Set-ups | 720 |
| Order processing | 165 | Customer orders | 34,000 |
| Purchasing | 88 | Supplier’s orders | 12,400 |
| Total Overheads | 976 |
You have also been provided with the following estimates for the period:
| ACQ | BEZ | CFJ | |
|---|---|---|---|
| Number of set-ups | 220 | 130 | 210 |
| Customer orders | 18,000 | 10,000 | 10,000 |
| Suppliers’ orders | 5,200 | 3,600 | 4,200 |
Required: a. Prepare and present a profit statement using activity-based costing. (14 Marks)
b. What would you consider to be the weaknesses of an incremental budgeting system for a company such as TADEFO Limited? (5 Marks)
c. Describe Activity-Based Budgeting (ABB) and comment on the advantages of its use by TADEFO Limited. (5 Marks)
d. Explain how the use of Zero-Based Budgeting (ZBB) can motivate employees. (3 Marks)
e. “Encouraging employee participation in budget setting is beneficial” Discuss. (3 Marks)
Find Related Questions by Tags, levels, etc.
- Tags: ABB, Activity-Based Costing, Budget Weakness, Cost Allocation, Employee Motivation, ZBB
- Level: Level 2
- Topic: Cost-Volume-Profit (CVP) Analysis
- Series: MAY 2015