Topic: Cost Management Strategies

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PM – Nov 2024 – L2 – Q2 – Cost Management Strategies

Evaluation of Ope-Olu Limited's inventory holding cost and the impact of switching to a JIT production system.

Question

Ope-Olu Limited produces and sells household items. For a particular product, the marketing department has prepared the following quarterly expected demand for next year:

Quarter	Expected Demand (Units)
1	400,000
2	440,000
3	760,000
4	560,000

The existing production facility can only produce 540,000 units per quarter under regular time. However, it is possible to increase output by 40% if working overtime is introduced.

It is the policy of the company to manufacture units using a constant level of production system. This means that although the opening and closing levels of inventory for the year are zero units, there are increases and decreases in the quarterly inventory levels. Based on this policy, the unit selling price, variable production costs, and contribution for next year are expected to be as follows:

Additional Information:

Overtime is paid at 150% of the normal rate, and the unit variable production overhead cost will increase by 25% for those units produced during overtime.
The company incurs a holding cost (based on average inventory) of N25 per unit per quarter for each item that is held in inventory.
The company is considering switching to a Just-in-Time (JIT) production system due to fluctuating sales demand.

Required:

a. Discuss generally, the key conditions that are necessary for the successful implementation of a JIT manufacturing system. (7 Marks)

b. Calculate the cost of holding inventory for each of the quarters and the year in total under the current production system. (6 Marks)

c. Calculate the financial impact of changing to a JIT production system. (7 Marks)

Answer

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Tags: Cost Analysis, Demand forecast, Inventory Holding, JIT, Overtime Production
Level: Level 2

Topic: Cost Management Strategies

PM – May 2017 – L2 – SA – Q3 – Cost Management Strategies

Calculate relevant cost for engine production for Tadex and factors influencing component opportunity cost.

Question

Tadex Nigeria Limited is an engineering company specializing in building engines for grinding machines. One of the components for building these engines is sourced from Toka Nigeria Limited, a company in the same group as Tadex Nigeria Limited. Each component is transferred to Tadex, taking into account Toka’s opportunity cost of the component. The variable cost for Toka is N280 per component.
A prospective customer has approached Tadex to submit a quotation for a contract to build a new engine. This is a new customer for Tadex, but the directors of Tadex are keen on winning this contract, as they believe it may lead to more contracts in the future. As a result, they intend to price the contract using relevant costs.

The following cost data is provided for the contract:

(i) Production Director’s Salary: Annual salary equivalent to N15,000 per 8-hour day.

(ii) Materials for the Contract:
- Material A: 110 square meters needed, with 200 square meters in stock, bought at N120 per square meter. Resale value: N105 per square meter; Replacement cost: N125 per square meter.
- Material B: 30 liters needed, must purchase a minimum of 40 liters at N90 per liter, with no future use after the contract.
- Components from Toka: 60 units at N500 per unit.
(iii) Direct Labor Hours: 240 hours required; 75 hours available as spare capacity. Additional hours are sourced at overtime cost of N140/hour or temporary staff at N120/hour (10 hours supervision by an existing supervisor at N180/hour).

(iv) Machine Hours: 25 hours needed, with the machine leased weekly at N6,000 and sufficient spare capacity. Running cost: N70 per hour.

(v) Fixed Overhead Absorption Rate: N200 per direct labor hour.

Requirements:

a. Calculate the relevant cost of building the new engine and explain why you have included or excluded any costs in your calculations.
(15 marks)

b. Discuss the factors that would be considered by Toka to determine the opportunity cost of the component.
(5 marks)

Answer

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Tags: Cost Analysis, Opportunity Cost, Project Quotation, Relevant Costing
Level: Level 2

Topic: Cost Management Strategies
Series: MAY 2017

PM – May 2023 – L2 – SA – Q6 – Cost Management Strategies

Evaluate the financial impact of hiring equipment and assess sensitivity to changing demand.

Question

TK is a theme park. The following information is available for the forthcoming month:

Forecast daily ticket sales and prices:

Ticket	Price per ticket	Forecast Sales
Pre-booked discounted ticket	N580	1,500
Standard ticket	N780	8,000
Premium family ticket (admits 4)	N3,700	675

The theme park will be open for 30 days in the month.

Costs:

Variable costs per person per day are forecast to be N2050.
Fixed costs for the month are forecast to be N130,000,000.

Pricing Information:

The sales of pre-booked discounted tickets and standard tickets will be restricted to 1,500 and 8,000 per day respectively for the forthcoming month. It is forecast that all of these tickets will be sold.
A premium family ticket admits four people to the theme park and allows them to go to the front of the queues in the theme park. The price of a premium family ticket has been set at N3,700 to maximize profit.

Market information shows that for every N100 increase in the selling price of a premium family ticket, the demand would reduce by 25 tickets. For every N100 decrease in the selling price, the demand would increase by 25 tickets.

The theme park has adequate capacity to accommodate any level of demand for premium family tickets. It is assumed that four people would always be admitted on every premium family ticket sold. Sales of the different ticket types are independent of each other.

Equipment Hire:

TK is considering hiring some automated ticket reading equipment for the forthcoming month. The hire of this equipment would increase fixed costs by N5,000,000 for the month. However, variable costs per person would be reduced by 8% during the period of the hire.

Required:

a) Calculate the financial benefit of hiring the equipment for the forthcoming month given its impact on variable cost and the price charged for premium family tickets. (11 Marks)

b) It has now been realized that a competing theme park is planning to offer discounted ticket prices during the forthcoming months. It is thought that this will reduce the demand for TK’s standard tickets. TK will not be able to reduce the price of the standard tickets for the forthcoming month.

Discuss the sensitivity of the decision to hire the equipment to a change in the number of standard tickets sold per day. (Note: Your answer should include the calculation of the sensitivity.) (4 Marks)

Answer

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Tags: Equipment Hire, Fixed Costs, Sensitivity Analysis, Variable Costs
Level: Level 2

Topic: Cost Management Strategies
Series: MAY 2023

PM – Nov 2016 – Q2 – Cost Management Strategies

Question requires explanation of Life Cycle Costing concepts and calculation of unit costs over 3-year product lifecycle for a CD manufacturer.

Question

Tadesco Limited manufactures Compact Disks. It is planning to introduce a new model and production will begin very soon. It expects the new product to have a life cycle of three years and the following costs have been estimated.

You are required to:
a. Explain Life Cycle Costing and state what distinguishes it from traditional costing technique. (10 Marks)
b. Calculate the cost per unit over the whole life cycle and comment on the price to be charged. (10 Marks)

Answer

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Tags: Cost Analysis, Life Cycle Costing, Manufacturing Costs, Product Life Cycle, Traditional Costing
Level: Level 2

Topic: Cost Management Strategies
Series: NOV 2016

PM – Nov 2019 – L2 – Q6b – Cost Management Strategies

Prepare a cost of quality report for Dynamic Plc for the year ended August 31, 2018.

Question

b. Benson Dinka is the management accountant of Dynamic Plc. Mr. Dinka
realises that the present performance reporting system does not highlight
quality costs. The reports contain the information below, but he wants this to
be reported in an appropriate format.
The following information is available in respect of the year ended August 31,
2018

1. Production data:

2. Cost data: Naira

3. Staff training costs amounted to N3,000,000 and product testing costs
were N980,000.
4. The marketing director has estimated that sales of 1,400 units were lost
as a result of bad publicity in trade journals. The average contribution
per heating system unit is estimated at N120,000.
Required:

Prepare a cost of quality report for Dynamic plc. that shows its costs of
quality (using appropriate headings) for the year ended August 31,
2018. (14 Marks)

Answer

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Tags: Cost of Quality, Quality Management, Quality Reporting
Level: Level 2

Topic: Cost Management Strategies
Series: NOV 2019

PM – Nov 2019 – L2 – Q6a – Cost Management Strategies

Discuss the four classifications of cost of quality with examples.

Question

a. Explain the FOUR classifications of cost of quality with examples of each. (6 Marks)

Answer

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Tags: Appraisal, External Failure, Internal Failure, Prevention, Quality Costs
Level: Level 2

Topic: Cost Management Strategies
Series: NOV 2019

PM – Nov 2019 – L2 – Q4 – Cost Management Strategies

Calculate the learning curve rate, forecast shut-down costs for year 2 and 3, and discuss potential errors in the forecast.

Question

Akoko plc. has recently developed a new product called “EKO” which has been in production for the past year. The plant producing “EKO” shuts down for routine inspection and maintenance every three months, and during the first year’s operation, the costs of shut-down have been as follows:

Quarter	Shut-Down Cost (₦)
I	36,000
2	28,800
3	27,000
4	25,200

The management accountant attempts to forecast maintenance costs for the coming year. On examining the data, it appears that these costs have steadily decreased, which may be due to maintenance engineers becoming more efficient or the plant settling down after initial operational issues. The learning curve might explain this trend.

Required:
a. Explain the concept of a learning curve. (4 Marks)
b. Estimate the rate of learning inherent in the data and explain its meaning. (4 Marks)
c. Using the learning rate determined, forecast the total cost of shut-down for routine maintenance during the coming year. (5 Marks)
d. Assume learning ceases at the end of the second year; forecast the total cost of shut-down for routine maintenance during the third year. (4 Marks)
e. State TWO specific reasons why this forecast may be inaccurate. (3 Marks)

Answer

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Tags: Cost reduction, Forecasting, Learning Curve, Maintenance
Level: Level 2

Topic: Cost Management Strategies
Series: NOV 2019

PM – Nov 2024 – L2 – Q2 – Cost Management Strategies

Evaluation of Ope-Olu Limited's inventory holding cost and the impact of switching to a JIT production system.

Question

Ope-Olu Limited produces and sells household items. For a particular product, the marketing department has prepared the following quarterly expected demand for next year:

Quarter	Expected Demand (Units)
1	400,000
2	440,000
3	760,000
4	560,000

The existing production facility can only produce 540,000 units per quarter under regular time. However, it is possible to increase output by 40% if working overtime is introduced.

Additional Information:

Overtime is paid at 150% of the normal rate, and the unit variable production overhead cost will increase by 25% for those units produced during overtime.
The company incurs a holding cost (based on average inventory) of N25 per unit per quarter for each item that is held in inventory.
The company is considering switching to a Just-in-Time (JIT) production system due to fluctuating sales demand.

Required:

a. Discuss generally, the key conditions that are necessary for the successful implementation of a JIT manufacturing system. (7 Marks)

b. Calculate the cost of holding inventory for each of the quarters and the year in total under the current production system. (6 Marks)

c. Calculate the financial impact of changing to a JIT production system. (7 Marks)

Answer

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Tags: Cost Analysis, Demand forecast, Inventory Holding, JIT, Overtime Production
Level: Level 2

Topic: Cost Management Strategies

PM – May 2017 – L2 – SA – Q3 – Cost Management Strategies

Calculate relevant cost for engine production for Tadex and factors influencing component opportunity cost.

Question

Tadex Nigeria Limited is an engineering company specializing in building engines for grinding machines. One of the components for building these engines is sourced from Toka Nigeria Limited, a company in the same group as Tadex Nigeria Limited. Each component is transferred to Tadex, taking into account Toka’s opportunity cost of the component. The variable cost for Toka is N280 per component.
A prospective customer has approached Tadex to submit a quotation for a contract to build a new engine. This is a new customer for Tadex, but the directors of Tadex are keen on winning this contract, as they believe it may lead to more contracts in the future. As a result, they intend to price the contract using relevant costs.

The following cost data is provided for the contract:

(i) Production Director’s Salary: Annual salary equivalent to N15,000 per 8-hour day.

(ii) Materials for the Contract:
- Material A: 110 square meters needed, with 200 square meters in stock, bought at N120 per square meter. Resale value: N105 per square meter; Replacement cost: N125 per square meter.
- Material B: 30 liters needed, must purchase a minimum of 40 liters at N90 per liter, with no future use after the contract.
- Components from Toka: 60 units at N500 per unit.
(iii) Direct Labor Hours: 240 hours required; 75 hours available as spare capacity. Additional hours are sourced at overtime cost of N140/hour or temporary staff at N120/hour (10 hours supervision by an existing supervisor at N180/hour).

(iv) Machine Hours: 25 hours needed, with the machine leased weekly at N6,000 and sufficient spare capacity. Running cost: N70 per hour.

(v) Fixed Overhead Absorption Rate: N200 per direct labor hour.

Requirements:

a. Calculate the relevant cost of building the new engine and explain why you have included or excluded any costs in your calculations.
(15 marks)

b. Discuss the factors that would be considered by Toka to determine the opportunity cost of the component.
(5 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cost Analysis, Opportunity Cost, Project Quotation, Relevant Costing
Level: Level 2

Topic: Cost Management Strategies
Series: MAY 2017

PM – May 2023 – L2 – SA – Q6 – Cost Management Strategies