Question Tag: Pricing Decisions

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PM – Mar/Jul 2020 – L2 – Q3 – Activity-Based Costing vs. Traditional Costing for Sedeco Nigeria

Calculation of unit costs for three products using traditional and activity-based costing approaches.

Sedeco Nigeria Limited manufactures and sells three products, Alpha, Beta, and Gamma. For some time now, the company has been concerned about its cost allocation system and has been searching for a more efficient way of cost allocation. The company recently employed a management accountant who informed the management that activity-based costing is a more efficient cost allocation system, leading to improvements in cost accuracy and reduction.

The management accountant discovered that the company has direct materials, direct labor, and five indirect cost pools which represent the five activity areas. The prior product costing system uses the two direct cost categories and a single indirect cost pool where overheads are allocated using direct labor hours. The following information is provided for the next period:

Direct labor is paid at N100 per hour. Overhead costs in the period are expected to be as follows:

Also, the company is considering the pricing of the three products because sales prices have remained uncertain as shown in the table below:

Required:
a. Calculate the unit costs of each product using:
(i) Prior product costing approach (traditional cost)
(ii) The Activity-Based Costing method (ABC). (10 Marks)

b. Compute the expected sales prices for the three products and the profit or loss that will arise from the implementation of the ABC costing approach and the traditional costing method. (8 Marks)

c. State reasons why the activity-based costing approach may be preferred to the traditional absorption costing approach in a modern manufacturing environment. (2 Marks)

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  • 20 Marks

PM – Mar/Jul 2020 – L1 – SB – Q2 – Budgetary Process and Behavioural Problems for Toby Nigeria

Discussion on budgeting and behavioral issues at Toby Nigeria Limited and redrafting of a budget statement.

Toby Nigeria Limited is a publishing company established in the early 1970s. The company has recently been taken over by Superior Quality Limited – a multinational company operating in Europe.
Mr. Edet Akpan, a staff of Superior Quality Limited, has been sent from the company’s headquarters to review, among other things, the budgeting and reporting system used by Toby Nigeria Limited.
During his visit to all the departments, he discovered that monthly budgets are prepared for each department in the company. Upon request, the last budget statement for the School Stationery Production Department (SSP) for period V was presented to him.
The budget statement presented was as follows:
Budget statement for period V
Department: SSP Department

Mr Tola Ademola, the School Stationery Manager, revealed that the budget statement presented was based on 40,000 units with a standard labour content of 3 hours per unit.
Mr. Akpan observed that Tola was not in any way enthusiastic about the budget system. He saw it as a pressure system imposed by the company’s top management to indict some of the managers. He pointed out that the system was hurriedly introduced by High Flyer Consults, about twelve months ago. The consultant never took time to talk to the managers or provide explanation that
could assist users to understand the system. The experienced School Stationery Manager was doubtful about the competence of the consultant. He was of the
opinion that the system introduced in Toby Nigeria Limited was either a ready-made one developed for another company or that the consultant did not understand the system well enough to give him the needed confidence to educate the users. He concluded by stating that he was sure his department made a loss as
against the positive figure recorded in the report and there was the possibility of reporting a loss at another period when profit was actually made. The situation reported above cuts across virtually all the departments and so the need to nip the situation in the bud became very urgent.
The task of making budgeting system more useful and acceptable in a biased environment like this, no doubt, seems difficult therefore, Mr. Akpan has requested from you an advice that will assist him in getting out of the woods.

Required:
a. Redraft the budget statement in a more informative manner. (12 Marks)
b. Discuss the behavioral problems brought out in this situation. (4 Marks)
c. Discuss the steps Mr. Akpan should take to remedy the situation. (4 Marks)

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  • 20 Marks

PM – Mar/Jul 2020 – L2 – Q3 – Activity-Based Costing vs. Traditional Costing for Sedeco Nigeria

Calculation of unit costs for three products using traditional and activity-based costing approaches.

Sedeco Nigeria Limited manufactures and sells three products, Alpha, Beta, and Gamma. For some time now, the company has been concerned about its cost allocation system and has been searching for a more efficient way of cost allocation. The company recently employed a management accountant who informed the management that activity-based costing is a more efficient cost allocation system, leading to improvements in cost accuracy and reduction.

The management accountant discovered that the company has direct materials, direct labor, and five indirect cost pools which represent the five activity areas. The prior product costing system uses the two direct cost categories and a single indirect cost pool where overheads are allocated using direct labor hours. The following information is provided for the next period:

Direct labor is paid at N100 per hour. Overhead costs in the period are expected to be as follows:

Also, the company is considering the pricing of the three products because sales prices have remained uncertain as shown in the table below:

Required:
a. Calculate the unit costs of each product using:
(i) Prior product costing approach (traditional cost)
(ii) The Activity-Based Costing method (ABC). (10 Marks)

b. Compute the expected sales prices for the three products and the profit or loss that will arise from the implementation of the ABC costing approach and the traditional costing method. (8 Marks)

c. State reasons why the activity-based costing approach may be preferred to the traditional absorption costing approach in a modern manufacturing environment. (2 Marks)

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  • 20 Marks

PM – Mar/Jul 2020 – L1 – SB – Q2 – Budgetary Process and Behavioural Problems for Toby Nigeria

Discussion on budgeting and behavioral issues at Toby Nigeria Limited and redrafting of a budget statement.

Toby Nigeria Limited is a publishing company established in the early 1970s. The company has recently been taken over by Superior Quality Limited – a multinational company operating in Europe.
Mr. Edet Akpan, a staff of Superior Quality Limited, has been sent from the company’s headquarters to review, among other things, the budgeting and reporting system used by Toby Nigeria Limited.
During his visit to all the departments, he discovered that monthly budgets are prepared for each department in the company. Upon request, the last budget statement for the School Stationery Production Department (SSP) for period V was presented to him.
The budget statement presented was as follows:
Budget statement for period V
Department: SSP Department

Mr Tola Ademola, the School Stationery Manager, revealed that the budget statement presented was based on 40,000 units with a standard labour content of 3 hours per unit.
Mr. Akpan observed that Tola was not in any way enthusiastic about the budget system. He saw it as a pressure system imposed by the company’s top management to indict some of the managers. He pointed out that the system was hurriedly introduced by High Flyer Consults, about twelve months ago. The consultant never took time to talk to the managers or provide explanation that
could assist users to understand the system. The experienced School Stationery Manager was doubtful about the competence of the consultant. He was of the
opinion that the system introduced in Toby Nigeria Limited was either a ready-made one developed for another company or that the consultant did not understand the system well enough to give him the needed confidence to educate the users. He concluded by stating that he was sure his department made a loss as
against the positive figure recorded in the report and there was the possibility of reporting a loss at another period when profit was actually made. The situation reported above cuts across virtually all the departments and so the need to nip the situation in the bud became very urgent.
The task of making budgeting system more useful and acceptable in a biased environment like this, no doubt, seems difficult therefore, Mr. Akpan has requested from you an advice that will assist him in getting out of the woods.

Required:
a. Redraft the budget statement in a more informative manner. (12 Marks)
b. Discuss the behavioral problems brought out in this situation. (4 Marks)
c. Discuss the steps Mr. Akpan should take to remedy the situation. (4 Marks)

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