Question Tag: Relevant Costs

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  • 20 Marks

PM – May 2023 – L2 – SA – Q4 – Decision-Making Techniques

Evaluate the costs and desirability of mutually exclusive contracts for Tayo Limited, considering penalties and other relevant factors.

Tayo Limited is a civil engineering company based in Benin. Contracts are carried out under the supervision of project managers who are sent out from Head Office and remain on-site for the duration of the contract. The project manager recruits local labour and arranges for plant and materials to be provided by Head Office.

Some time ago, the company successfully tendered for two contracts that have now become mutually exclusive. It is currently considering which of these to accept. Both jobs would last for 12 months.

The following information about each contract is available:

Notes:

(i) The materials which would be used on the Abuja job have increased in money value by 60% over their purchase cost. Tayo Limited has no other use for these materials on any other contract apart from the Abuja one, but they could be re-sold to other companies in the industry at 90% of their value. Transportation and other selling costs would further decrease the cash inflow from the sale by 16.67% of the sales price.

(ii) The materials for the Lagos job have no other obvious use, but could be sold for scrap if the contract were cancelled. The scrap value would be 10% of cost, and costs of transport, etc., would be paid by the scrap merchant. It is likely, however, that the materials could be used next year on another contract in substitution for a different material normally costing 20% less than the cost of the materials to be used on the Lagos contract.

(iii) Local labour can be hired as and when required.

(iv) Plant is depreciated on a straight-line basis, and the interest on plant charge is a nominal cost added for accounting purposes.

(v) The two contracts would require similar plant, although more plant would be required for the Lagos than for the Abuja job. The plant not required on the Abuja job would be sub-contracted out by Head Office for ₦200,000 per annum.

(vi) Head Office administration costs are fixed at ₦2,500,000 for the coming year. This excludes project managers’ salaries.

Required:

a. Present the data to management in a form which will assist in making the decision as to which job to undertake. Provide notes to explain the principles which have been used in selecting the data and to support any calculations made. (12 Marks)

b. Comment on the appropriateness of the approach used in your analysis. (4 Marks)

c. List briefly any other factors which ought to be considered before finally making the decision in this case. (4 Marks)

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  • 20 Marks

PM – May 2023 – L2 – SA – Q3 – Decision Making Techniques

Evaluate the desirability of a contract for Product X by analyzing the labour, material, and overhead costs involved.

Kenny Limited (KL) has been offered a contract that, if accepted, would significantly increase next year’s activity levels. The contract requires the production of 20,000 kg of product X and specifies a contract price of N10,000 per kg. The resources used in the production of each kg of X include the following:

Resources per kg of X:

Labour:

  • Grade 1: 2 hours
  • Grade 2: 6 hours

Materials:

  • Material A: 2 units
  • Material B: 1 litre

Costs:

  • Grade 1 Labour: N400 per hour
  • Grade 2 Labour: N200 per hour
  • Material A: Replacement cost N1,000 per unit, Net Realisable Value N900
  • Material B: Replacement cost N3,200 per litre, Net Realisable Value N2,500
  • Fixed production overheads: N60,000,000 based on 300,000 productive labour hours
  • Incremental overheads for the contract: N22,800,000
  • Variable production overheads: N300 per productive labour hour

The contract could also result in a 5,000-unit decrease in sales of another product, Y, which contributes N7,000 per unit in revenue and incurs variable costs of N1,200 and 4 hours of Grade 2 labour per unit. However, avoiding the production of Y will save attributable fixed overheads of N5,800,000.

Required:

a. Advise KL on the desirability of the contract. (8 Marks)
b. Show how the contract, if accepted, will be reported on the routine job costing system used by KL. (6 Marks)
c. Briefly explain the reasons for any differences between the figures used in (a) and (b) above. (6 Marks)

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  • 15 Marks

PM – Nov 2015 – L2 – Q6 – Decision-Making Techniques

Evaluate whether Tee Company should replace Green with Brace and the best timing for changeover.

Tee Company makes and sells a product, the Green, which is nearing the end of its life. A replacement product, Brace, has been designed and test marketed, and the company is trying to decide when to replace Green with Brace. Tee Company only has the capability to produce one of the two products at a time.

Sales of Green are expected to be 100,000 units in the first quarter of Year 7 and are forecast to fall after that so that each quarter’s sales will be 10% less than those of the previous quarter. Green has a selling price of ₦14 per unit, and its Contribution to Sales ratio (C/S ratio) is 40%. The fixed costs of making Green in Year 7 will be ₦200,000 per quarter.

Test market results for Brace were very good, and demand for similar products is growing rapidly. Tee Company believes that sales of Brace can be predicted by the following equation:

Y = 80,000 + 6,000 T

Where:

  • Y = Sales of Brace in units per quarter
  • T = Time, measured in quarters. For the first quarter of Year 7 (January to March Year 7), T = 1; for the second quarter of Year 7, T = 2; etc.

The selling price of Brace will be ₦16, and its contribution per unit will be ₦6. Fixed costs will increase to ₦240,000 per quarter if Green is replaced by Brace.

To avoid disruption of the production of Tee’s other products, the changeover between Green and Brace must take place on either 1 January Year 7 or 1 July Year 7. The costs of changeover will differ depending upon which date is chosen, and the following information is available:

  1. Some of the machinery used to make the Green will no longer be required for the Brace. The written-down value of this machinery will be ₦250,000 on 1 January Year 7, and ₦220,000 by 1 July Year 7. Its net realizable value at 1 January Year 7 will be ₦140,000, but by 1 July Year 7, it will be ₦30,000.
  2. Some redundancies will result from the change of products. Redundancy payments of ₦40,000 will be made if the changeover occurs on 1 January, but these will rise to ₦50,000 by 1 July. The five administration workers concerned are each paid ₦20,000 per annum and will not be replaced. Their wages are not included in the costs given above.

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  • 10 Marks

PM – May 2022 – L2 – SA – Q1B – Costing Systems and Techniques

Appraisal of a one-off order outside normal operations with relevant cost considerations.

The company is considering the viability of investing in a one-off order outside its normal budgeted routine operation. The Management Accountant is requested to appraise the procurement and sale of some useful medical equipment. The following cost estimate has been prepared by a junior accountant:

  1. The steel is regularly used and has a current stock value of N50 per square meter. There are currently 400 square meters in stock. The steel is readily available at a price of N55 per square meter.
  2. The brass fittings would have to be bought specifically for the job. A supplier has quoted N800 for the fittings required.
  3. The skilled labor is currently employed by the company and paid at the rate of N80 per hour. If this job were undertaken, it will be necessary to either work 100 hours overtime which would be paid at time plus one half (N120 per hour), or hire additional labor at N100 per hour.
  4. The company has sufficient unused capacity in terms of general fixed overheads. The junior accountant has made no allocation for fixed overheads.
  5. The company’s policy is to add 20% to the production cost as an allowance against administrative costs associated with the jobs accepted.
  6. The standard profit added by the company as part of its pricing strategy is N150.

Required:

  1. Prepare, on a relevant cost basis, the lowest cost estimate that could be used as the basis for a quotation. Explain briefly your reasons for using each of the values in your estimates. (6 Marks)
  2. There may be a possibility of repeat orders from your company which would occupy part of the normal production capacity. What factors need to be considered before quoting for this order? (4 Marks)

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  • 10 Marks

PM – Nov 2019 – L2 – Q1c – Decision-Making Techniques

Advise management on whether to accept a special order for 25,000 units of Apet at a price of N12 per unit, considering material procurement.

A customer has just placed a special order for 25,000 units of Apet and the customer is willing to pay N12.00 per unit. Advise the management whether to accept or reject the order. Assume that for any shortfall in material A required to produce the order, it can be bought at a price of N2.00 per kg. (10 Marks)

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  • 10 Marks

PM – Nov 2019 – L2 – Q1b – Decision-Making Techniques

Discuss management accounting techniques and principles that aid decision-making in scenarios like production reduction or factory closure.

b. Discuss the management accounting technique and principle that a management accountant will apply in preparing calculations to support management decisions in such a circumstance as above. (10 Marks)

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  • 20 Marks

PM – Nov 2019 – L2 – Q1a – Decision-Making Techniques

Analyze business decision on factory closure by comparing sales volume, advertising costs, and other production costs for two proposals.

Adeco Nigeria plc. is a large and diversified company with several factories. One of its factories that produces “Apet” has not been able to meet its sales target for over two years. The board has mandated the company’s management to take an urgent decision on what to do with the factory.

The management has therefore set up a committee of three, the factory manager, the marketing manager, and the management accountant to analyze the situation and come up with a report on what they felt the management should do. The marketing manager has submitted two proposals to the committee. These are:

  • A sales volume of 25,000 units can be achieved with a selling price of N13.50 per unit and an advertising campaign of N37,500; or
  • A sales volume of 35,000 units can be achieved at a selling price of N11.25 with an advertising campaign costing N52,500.

The management accountant is to work on these proposals with the information provided by the factory manager and show with calculations that will help the committee determine which proposal to be recommended to management. The management accountant is also to provide a third option, the closure of the factory.

The factory manager has submitted the following information to the management accountant:

The following additional information has also been made available:
(i) There are 50,000 kg of material A in inventory. This originally cost N1.5 per
kg. Material A has no other use and unless it is used by the division, it will
have to be disposed of at a cost of N750 for every 5,000 kg.
(ii) There are 30,000 litres of material B in inventory. Any unused material can be
used by another department to substitute for an equivalent amount of a
material, which currently costs N1.875 per litre. The original cost of material B
was N0.75 per litre and it can be replaced at a cost of N2.25 per litre.
(iii) All production labour hours are paid on an hourly basis. Rumours of the
closure of the department have led to a large proportion of the department‟s
employees leaving the organisation. Uncertainty over its closure has also
resulted in management not replacing these employees. The department is
therefore, short of labour hours and has sufficient to produce only 25,000
units. Output in excess of 25,000 units would require the department to hire
contract labour at a cost of N5.625 per hour. If the department is shut down
the present labour force will be redeployed within the organisation.
(iv) Included in the variable overhead is the depreciation of the only machine
used in the department. The original cost of the machine was N300,000 and it
is estimated to have a life of 10 years. Depreciation is calculated on a straightline basis. The machine has a current resale value of N37,500. If the
machinery is used for production, it is estimated that the resale value of the
machinery will fall at the rate of N150 per 1,000 units produced. All other
costs included in variable overhead vary with the number of units produced.
(v) Included in the fixed production overhead is the salary of the factory manager
which amounts to N30,000. If the department were to shut down the manager
would be made redundant with a redundancy pay of N37,500. All other costs
included in the fixed production overhead are general factory overheads and
will not be affected by any decision concerning the factory.
(vi) The non-production cost charged to the factory is an apportionment of the
total non-production costs incurred by the factory.
The committee will be meeting in a week‟s time to prepare its report to
management on the line of action management should follow, either one of the
marketing manager‟s proposals or to close down the factory.
63
Required:

As the management accountant of Adeco plc., you are to:
a. Prepare detailed calculations to support the committee‟s recommendation to
the management whether to:
i. reduce production to 25,000 units
ii. reduce production to 35,000 units
iii. shut down the factory. (20 Marks)

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  • 8 Marks

PM – May 2018 – L2 – Q3b – Cost-Volume-Profit (CVP) Analysis

Calculate the relevant cost for a special contract and determine if it should be accepted.

Deban Construction Limited is deciding whether or not to proceed with a one-off special contract for which it would receive a one-off payment of N2,000,000. Details of relevant costs are provided for labor, materials, storage, and overheads. Calculate the relevant cost of the contract and advise whether the contract should be accepted or not on financial grounds.

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  • 12 Marks

PM – May 2018 – L2 – Q3a – Cost-Volume-Profit (CVP) Analysis

Explain the different concepts of relevant costs in the context of decision-making.

In the context of relevant costs, explain the following:
i. Incremental costs;
ii. Differential costs;
iii. Avoidable and unavoidable costs;
iv. Committed costs;
v. Sunk costs; and
vi. Opportunity costs.

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  • 1 Marks

BMF – Nov 2021 – L1 – SA – Q15 – Investment Decisions

Question about the relevant cost for capital investment decisions.

The concept of cash flow is of vital importance to capital investment appraisal. Which of the following costs is relevant to investment decisions?

A. Future costs
B. Notional costs
C. Committed cost
D. Absorbed cost
E. Apportionment cost

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  • 20 Marks

PM – May 2023 – L2 – SA – Q4 – Decision-Making Techniques

Evaluate the costs and desirability of mutually exclusive contracts for Tayo Limited, considering penalties and other relevant factors.

Tayo Limited is a civil engineering company based in Benin. Contracts are carried out under the supervision of project managers who are sent out from Head Office and remain on-site for the duration of the contract. The project manager recruits local labour and arranges for plant and materials to be provided by Head Office.

Some time ago, the company successfully tendered for two contracts that have now become mutually exclusive. It is currently considering which of these to accept. Both jobs would last for 12 months.

The following information about each contract is available:

Notes:

(i) The materials which would be used on the Abuja job have increased in money value by 60% over their purchase cost. Tayo Limited has no other use for these materials on any other contract apart from the Abuja one, but they could be re-sold to other companies in the industry at 90% of their value. Transportation and other selling costs would further decrease the cash inflow from the sale by 16.67% of the sales price.

(ii) The materials for the Lagos job have no other obvious use, but could be sold for scrap if the contract were cancelled. The scrap value would be 10% of cost, and costs of transport, etc., would be paid by the scrap merchant. It is likely, however, that the materials could be used next year on another contract in substitution for a different material normally costing 20% less than the cost of the materials to be used on the Lagos contract.

(iii) Local labour can be hired as and when required.

(iv) Plant is depreciated on a straight-line basis, and the interest on plant charge is a nominal cost added for accounting purposes.

(v) The two contracts would require similar plant, although more plant would be required for the Lagos than for the Abuja job. The plant not required on the Abuja job would be sub-contracted out by Head Office for ₦200,000 per annum.

(vi) Head Office administration costs are fixed at ₦2,500,000 for the coming year. This excludes project managers’ salaries.

Required:

a. Present the data to management in a form which will assist in making the decision as to which job to undertake. Provide notes to explain the principles which have been used in selecting the data and to support any calculations made. (12 Marks)

b. Comment on the appropriateness of the approach used in your analysis. (4 Marks)

c. List briefly any other factors which ought to be considered before finally making the decision in this case. (4 Marks)

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  • 20 Marks

PM – May 2023 – L2 – SA – Q3 – Decision Making Techniques

Evaluate the desirability of a contract for Product X by analyzing the labour, material, and overhead costs involved.

Kenny Limited (KL) has been offered a contract that, if accepted, would significantly increase next year’s activity levels. The contract requires the production of 20,000 kg of product X and specifies a contract price of N10,000 per kg. The resources used in the production of each kg of X include the following:

Resources per kg of X:

Labour:

  • Grade 1: 2 hours
  • Grade 2: 6 hours

Materials:

  • Material A: 2 units
  • Material B: 1 litre

Costs:

  • Grade 1 Labour: N400 per hour
  • Grade 2 Labour: N200 per hour
  • Material A: Replacement cost N1,000 per unit, Net Realisable Value N900
  • Material B: Replacement cost N3,200 per litre, Net Realisable Value N2,500
  • Fixed production overheads: N60,000,000 based on 300,000 productive labour hours
  • Incremental overheads for the contract: N22,800,000
  • Variable production overheads: N300 per productive labour hour

The contract could also result in a 5,000-unit decrease in sales of another product, Y, which contributes N7,000 per unit in revenue and incurs variable costs of N1,200 and 4 hours of Grade 2 labour per unit. However, avoiding the production of Y will save attributable fixed overheads of N5,800,000.

Required:

a. Advise KL on the desirability of the contract. (8 Marks)
b. Show how the contract, if accepted, will be reported on the routine job costing system used by KL. (6 Marks)
c. Briefly explain the reasons for any differences between the figures used in (a) and (b) above. (6 Marks)

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  • 15 Marks

PM – Nov 2015 – L2 – Q6 – Decision-Making Techniques

Evaluate whether Tee Company should replace Green with Brace and the best timing for changeover.

Tee Company makes and sells a product, the Green, which is nearing the end of its life. A replacement product, Brace, has been designed and test marketed, and the company is trying to decide when to replace Green with Brace. Tee Company only has the capability to produce one of the two products at a time.

Sales of Green are expected to be 100,000 units in the first quarter of Year 7 and are forecast to fall after that so that each quarter’s sales will be 10% less than those of the previous quarter. Green has a selling price of ₦14 per unit, and its Contribution to Sales ratio (C/S ratio) is 40%. The fixed costs of making Green in Year 7 will be ₦200,000 per quarter.

Test market results for Brace were very good, and demand for similar products is growing rapidly. Tee Company believes that sales of Brace can be predicted by the following equation:

Y = 80,000 + 6,000 T

Where:

  • Y = Sales of Brace in units per quarter
  • T = Time, measured in quarters. For the first quarter of Year 7 (January to March Year 7), T = 1; for the second quarter of Year 7, T = 2; etc.

The selling price of Brace will be ₦16, and its contribution per unit will be ₦6. Fixed costs will increase to ₦240,000 per quarter if Green is replaced by Brace.

To avoid disruption of the production of Tee’s other products, the changeover between Green and Brace must take place on either 1 January Year 7 or 1 July Year 7. The costs of changeover will differ depending upon which date is chosen, and the following information is available:

  1. Some of the machinery used to make the Green will no longer be required for the Brace. The written-down value of this machinery will be ₦250,000 on 1 January Year 7, and ₦220,000 by 1 July Year 7. Its net realizable value at 1 January Year 7 will be ₦140,000, but by 1 July Year 7, it will be ₦30,000.
  2. Some redundancies will result from the change of products. Redundancy payments of ₦40,000 will be made if the changeover occurs on 1 January, but these will rise to ₦50,000 by 1 July. The five administration workers concerned are each paid ₦20,000 per annum and will not be replaced. Their wages are not included in the costs given above.

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  • 10 Marks

PM – May 2022 – L2 – SA – Q1B – Costing Systems and Techniques

Appraisal of a one-off order outside normal operations with relevant cost considerations.

The company is considering the viability of investing in a one-off order outside its normal budgeted routine operation. The Management Accountant is requested to appraise the procurement and sale of some useful medical equipment. The following cost estimate has been prepared by a junior accountant:

  1. The steel is regularly used and has a current stock value of N50 per square meter. There are currently 400 square meters in stock. The steel is readily available at a price of N55 per square meter.
  2. The brass fittings would have to be bought specifically for the job. A supplier has quoted N800 for the fittings required.
  3. The skilled labor is currently employed by the company and paid at the rate of N80 per hour. If this job were undertaken, it will be necessary to either work 100 hours overtime which would be paid at time plus one half (N120 per hour), or hire additional labor at N100 per hour.
  4. The company has sufficient unused capacity in terms of general fixed overheads. The junior accountant has made no allocation for fixed overheads.
  5. The company’s policy is to add 20% to the production cost as an allowance against administrative costs associated with the jobs accepted.
  6. The standard profit added by the company as part of its pricing strategy is N150.

Required:

  1. Prepare, on a relevant cost basis, the lowest cost estimate that could be used as the basis for a quotation. Explain briefly your reasons for using each of the values in your estimates. (6 Marks)
  2. There may be a possibility of repeat orders from your company which would occupy part of the normal production capacity. What factors need to be considered before quoting for this order? (4 Marks)

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  • 10 Marks

PM – Nov 2019 – L2 – Q1c – Decision-Making Techniques

Advise management on whether to accept a special order for 25,000 units of Apet at a price of N12 per unit, considering material procurement.

A customer has just placed a special order for 25,000 units of Apet and the customer is willing to pay N12.00 per unit. Advise the management whether to accept or reject the order. Assume that for any shortfall in material A required to produce the order, it can be bought at a price of N2.00 per kg. (10 Marks)

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  • 10 Marks

PM – Nov 2019 – L2 – Q1b – Decision-Making Techniques

Discuss management accounting techniques and principles that aid decision-making in scenarios like production reduction or factory closure.

b. Discuss the management accounting technique and principle that a management accountant will apply in preparing calculations to support management decisions in such a circumstance as above. (10 Marks)

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  • 20 Marks

PM – Nov 2019 – L2 – Q1a – Decision-Making Techniques

Analyze business decision on factory closure by comparing sales volume, advertising costs, and other production costs for two proposals.

Adeco Nigeria plc. is a large and diversified company with several factories. One of its factories that produces “Apet” has not been able to meet its sales target for over two years. The board has mandated the company’s management to take an urgent decision on what to do with the factory.

The management has therefore set up a committee of three, the factory manager, the marketing manager, and the management accountant to analyze the situation and come up with a report on what they felt the management should do. The marketing manager has submitted two proposals to the committee. These are:

  • A sales volume of 25,000 units can be achieved with a selling price of N13.50 per unit and an advertising campaign of N37,500; or
  • A sales volume of 35,000 units can be achieved at a selling price of N11.25 with an advertising campaign costing N52,500.

The management accountant is to work on these proposals with the information provided by the factory manager and show with calculations that will help the committee determine which proposal to be recommended to management. The management accountant is also to provide a third option, the closure of the factory.

The factory manager has submitted the following information to the management accountant:

The following additional information has also been made available:
(i) There are 50,000 kg of material A in inventory. This originally cost N1.5 per
kg. Material A has no other use and unless it is used by the division, it will
have to be disposed of at a cost of N750 for every 5,000 kg.
(ii) There are 30,000 litres of material B in inventory. Any unused material can be
used by another department to substitute for an equivalent amount of a
material, which currently costs N1.875 per litre. The original cost of material B
was N0.75 per litre and it can be replaced at a cost of N2.25 per litre.
(iii) All production labour hours are paid on an hourly basis. Rumours of the
closure of the department have led to a large proportion of the department‟s
employees leaving the organisation. Uncertainty over its closure has also
resulted in management not replacing these employees. The department is
therefore, short of labour hours and has sufficient to produce only 25,000
units. Output in excess of 25,000 units would require the department to hire
contract labour at a cost of N5.625 per hour. If the department is shut down
the present labour force will be redeployed within the organisation.
(iv) Included in the variable overhead is the depreciation of the only machine
used in the department. The original cost of the machine was N300,000 and it
is estimated to have a life of 10 years. Depreciation is calculated on a straightline basis. The machine has a current resale value of N37,500. If the
machinery is used for production, it is estimated that the resale value of the
machinery will fall at the rate of N150 per 1,000 units produced. All other
costs included in variable overhead vary with the number of units produced.
(v) Included in the fixed production overhead is the salary of the factory manager
which amounts to N30,000. If the department were to shut down the manager
would be made redundant with a redundancy pay of N37,500. All other costs
included in the fixed production overhead are general factory overheads and
will not be affected by any decision concerning the factory.
(vi) The non-production cost charged to the factory is an apportionment of the
total non-production costs incurred by the factory.
The committee will be meeting in a week‟s time to prepare its report to
management on the line of action management should follow, either one of the
marketing manager‟s proposals or to close down the factory.
63
Required:

As the management accountant of Adeco plc., you are to:
a. Prepare detailed calculations to support the committee‟s recommendation to
the management whether to:
i. reduce production to 25,000 units
ii. reduce production to 35,000 units
iii. shut down the factory. (20 Marks)

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  • 8 Marks

PM – May 2018 – L2 – Q3b – Cost-Volume-Profit (CVP) Analysis

Calculate the relevant cost for a special contract and determine if it should be accepted.

Deban Construction Limited is deciding whether or not to proceed with a one-off special contract for which it would receive a one-off payment of N2,000,000. Details of relevant costs are provided for labor, materials, storage, and overheads. Calculate the relevant cost of the contract and advise whether the contract should be accepted or not on financial grounds.

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  • 12 Marks

PM – May 2018 – L2 – Q3a – Cost-Volume-Profit (CVP) Analysis

Explain the different concepts of relevant costs in the context of decision-making.

In the context of relevant costs, explain the following:
i. Incremental costs;
ii. Differential costs;
iii. Avoidable and unavoidable costs;
iv. Committed costs;
v. Sunk costs; and
vi. Opportunity costs.

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  • 1 Marks

BMF – Nov 2021 – L1 – SA – Q15 – Investment Decisions

Question about the relevant cost for capital investment decisions.

The concept of cash flow is of vital importance to capital investment appraisal. Which of the following costs is relevant to investment decisions?

A. Future costs
B. Notional costs
C. Committed cost
D. Absorbed cost
E. Apportionment cost

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