Question Tag: Variable Costs

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  • 15 Marks

May 2023 – L2 – SA – Q7 – Pricing Decisions

Calculation of minimum price Kola Plc should quote for 400 units of special security padlock keys using learning curve principles.

Kola Plc produces and sells a brand of security padlock keys. Its budget for next year is as follows:

Further research showed that the time taken for the first 50 units was 1,800 hours and the first 100 units took 3,000 hours. The customer is insistent that Kola Plc at least quotes a price for his requirement of 400 units.

Kola Plc is reluctant because the order would divert labour away from the regular padlock keys, and they cannot recruit more staff. If the contract is taken on, the same material would be used, with fixed production overheads of N150,000 and N30,000 administration costs.

Required:

Calculate the minimum price Kola Plc should quote for the 400 units of the special padlock keys.
(Total 15 Marks)

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  • 15 Marks

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

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

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)

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  • 20 Marks

PM – Nov 2021 – L2 – Q2 – Decision-Making Techniques

Determine whether to outsource production, calculate indifference price, and evaluate non-financial factors for internal production.

Divine Grace (DG) Limited currently produces “Part-2011” internally but has received an offer from KK Plc to outsource the production. The offer is for 1,000 units at N100 per unit for the next five years. The cost accountant provides the following cost breakdown for internal production of 1,000 units:

Cost Components Amount (₦)
Direct materials 44,000
Direct production labour 22,000
Variable production overhead 14,000
Depreciation on machine 20,000
Product and process engineering 8,000
Rent 4,000
General overheads 10,000
Total 122,000

Additional information:

  1. The machine used exclusively for “Part 2011” was acquired last year for ₦120,000 and has a useful life of six years with no residual value.
  2. The machine could be sold today for ₦30,000.
  3. Product and process engineering costs will cease after one year if outsourced.
  4. Rent savings from storage use if “Part-2011” production stops is ₦2,000.
  5. General overheads are fixed and not allocated to “Part-2011” if outsourced.
  6. Assume a required rate of return of 12%.

Required:
a. Should DG Limited outsource “Part 2011”? (10 Marks)
b. What maximum price should KK Plc quote for 1,000 units to make DG indifferent between outsourcing and internal production? (5 Marks)
c. What non-financial factors would favor internal production over outsourcing? (5 Marks)

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  • 1 Marks

MI – Nov 2020 – L1 – SA – Q5 – Costing Methods

Identify an incorrect statement about marginal costing in process costing.

When marginal costing is used in process costing, which of the following is NOT correct?

A. Process accounts will contain variable costs only

B. Equivalent units are valued at variable cost

C. Transfer from one process to another will be at total costs of the process

D. Losses, abnormal and normal will be valued at variable cost only

E. All fixed costs will be written off, each period, to costing profit or loss

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  • 1 Marks

MI – Nov 2020 – L1 – SA – Q2 – Cost-Volume-Profit (CVP) Analysis, Break-Even Point

Calculate the total fixed costs using the break-even point and contribution margin.

Given breakeven point of 6,000 units, unit selling price of N90, and unit variable cost of N40, the total fixed cost is:

A. N240,000

B. N300,000

C. N360,000

D. N540,000

E. N600,000

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  • 1 Marks

MI – Nov 2015 – L1 – SA – Q7 – Costing Techniques

Uses the high-low method to calculate fixed and variable cost elements from activity data.

Use the high-low method to calculate the Fixed Cost (FC) and Variable Cost (VC) elements of the

A. VC = N0.08/unit, FC = N1,120/unit
B. VC = N0.88/unit, FC = N1,020/unit
C. VC = N0.80/unit, FC = N1,220/unit
D. VC = N0.82/unit, FC = N1,320/unit
E. VC = N0.85/unit, FC = N1,330/unit

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  • 1 Marks

MI – May 2018 – L1 – SA – Q3 – Cost Classifications

Examining the relationship between direct and variable costs.

Which of the following statements is NOT correct in the relationship between direct and variable costs?
A. Direct costs and variable costs are one and the same
B. Direct costs can be directly traced to a product while variable costs vary with the level of production output
C. Direct costs are traceable to cost objects, e.g. goods or services, departments or projects while all variable costs are not necessarily traceable
D. Direct costs may include fixed and variable costs
E. Both direct costs and variable costs are traceable to production

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  • 20 Marks

MI – Nov 2014 – L1 – SB – Q3 – Cost-Volume-Profit (CVP) Analysis

This question involves break-even point, target profit, and the effect of cost changes on break-even.

A company that operates below break-even point year-after-year needs to be restructured.

a. What is break-even point? (2 Marks)

b. Elebu Nig. Plc. manufactures four products at its GBOOPA Plant in Olorungbebe Industrial Estate.

The company sold 450,000 units of its product at N60 per unit. Variable costs are N45 per unit, while the fixed cost incurred evenly throughout the year amounted to N2,916,000, which comprises of manufacturing costs of N1,800,000 and selling costs of N1,116,000.

You are required to calculate:
i. The break-even point in units and in value (5 Marks)
ii. The number of units that must be sold to earn an income of N225,000 before income tax (3 Marks)
iii. The number of units that must be sold to generate after-tax profit of N300,000 if the income tax rate is 40% (5 Marks)
iv. The number of units required to break-even if the fixed cost increases by 2.5% and variable cost increases by 5% (5 Marks)

 

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  • 1 Marks

MI – Nov 2014 – L1 – SA – Q19 – Cost-Volume-Profit (CVP) Analysis

This question focuses on identifying the cost pattern that includes both fixed and variable components.

The cost behavioral pattern which shows element of fixed and variable components is:
A. Variable cost
B. Standard cost
C. Full cost
D. Semi-variable cost
E. Fixed cost

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  • 1 Marks

MI – Nov 2022 – L1 – SA – Q8 – Costing Methods

Calculation of unit cost when production increases by 25%

The cost per unit of a product manufactured in a factory amounts to ₦160 (75% variable) when production is 10,000 units. When production increases by 25%, the unit cost of production will be:
A. ₦145
B. ₦150
C. ₦152
D. ₦140
E. ₦120

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  • 40 Marks

PM – Mar/Jul 2020 – L2 – Q1 – Decision Making and Capacity Constraints for Benco Limited

Evaluate which of two components, K or T, should be produced and sold to maximize profit based on given cost and capacity constraints.

Benco Limited produces two critical components, K and T, both of which are used in petroleum refinery. The components are made by passing each one through two fully automatic computer-controlled machine lines – A and B – with respective maximum capacity of 13,600 hours and 15,360 hours. The following details are available:
(i) Due to production constraints, the company has decided to produce only one of the two components, K or T, for the next period but not both.
(ii) Market demand is limited to 59,200 units of K and 80,000 units of T.
(iii) Products unit data:

(iv) The maximum quantity of material X available is 136,000kg. The material is purchased at ₦50 per kg.
(v) Variable machine overhead for machine line A and line B is estimated at ₦500 and ₦600 per machine hour respectively.
(vi) The company operates a JIT system.

Required:
a. Calculate which of the components, K or T, should be produced and sold in the year in order to maximise profits. You should state the number of units to be produced and sold and the resulting contribution. (10 Marks)
b. Benco Limited wishes to consider additional sales outlets which could earn contribution at the rate of ₦400 and ₦600 per machine hour for machine line A and line B respectively. Such additional sales outlets would be taken up only to utilise any surplus hours not required for the production of the components. Calculate whether Benco Limited should now produce either component K or T and what quantity to be produced and the resulting contribution. (9 Marks)
c. Suggest ways in which the company may overcome the capacity constraints which limit the opportunities available to it in the year, and indicate the types of costs which may be incurred in overcoming each constraint. (10 Marks)

d. Illustrate the use of opportunity cost in the charging of each of material, labour and overhead elements in comparison with historic absorption cost elements. For each element, you should illustrate your answer with figures of your choice.
(11 Marks)

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  • 1 Marks

MI – May 2016 – L1 – SA – Q4 – Cost-Volume-Profit (CVP) Analysis

Identify the conditions under which total contributions equal units sold multiplied by contribution per unit.

The formula which states that total contributions equal units of sales multiplied by contribution per unit is correct if the selling price:

A. And fixed cost are constant
B. And variable cost are constant
C. Varies and variable cost is constant
D. Varies and fixed cost is constant
E. And variable cost vary

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  • 12 Marks

MA – May 2018 – L2 – Q3a – Standard Costing and Variance Analysis

Prepare profit statements for April and May using standard costing and absorption costing methods.

a) Resol Ltd commenced trading on 1 April 2011 making the product Resol. The standard cost sheet for Resol is as follows:

The fixed production overhead figure has been calculated on the basis of a budgeted normal output of 24,000 units per annum. Fixed Sales and Administration costs are estimated at GH¢24,000 per annum. You may assume that all budgeted fixed expenses are incurred evenly over the year.

The sales price is GH¢35.00 and the actual number of units produced and sold was as follows:

April May
Production – units 2,000 2,500
Sales – units 1,500 3,000

Required:
Prepare a profit statement for each of the months April and May using:

  • Standard costing
  • Absorption costing

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  • 5 Marks

MA – May 2019 – L2 – Q2a – Cost-volume-profit (CVP) analysis

Determine the total variable cost per unit, total fixed overhead, and express the cost function based on given data.

Komosa Ltd is reviewing the selling price of its product for the coming year. A forecast of the annual costs that would be incurred by Komosa Ltd in respect of this product at differing activity levels is as follows:

Annual production (unit) 100,000 160,000 200,000
Direct materials (GH¢000) 200 320 400
Direct labour (GH¢000) 600 960 1,200
Overhead (GH¢000) 880 1,228 1,460

The cost behavior represented in the above forecast will apply for the whole range of output up to 300,000 units per annum of this product.

Required:
i) Calculate the total variable cost per unit and total fixed overhead. (4 marks)
ii) State the total cost function. (1 mark)

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  • 20 Marks

MA – Nov 2015 – L2 – Q3 – Decision making techniques | Relevant cost and revenue

Analyze whether to discontinue Double beds and whether to accept a new order for all bed sizes.

Obonku Limited produces Single, Double, and King-size beds for sale to hotels in West Africa. Its manufacturing plant is located in Tema and is currently operating at 100% capacity. Below is the annual output and sales for each product and the associated costs:

Product Single bed Double bed King Size bed
Units sold 5,000 units 3,500 units 4,000 units
Sales (GHS) 2,500,000 2,800,000 3,800,000
Costs:
Material cost 750,000 1,400,000 1,520,000
Labour costs 600,000 1,050,000 1,200,000
Manufacturing O’head 200,000 650,000 300,000
Administrative cost 200,000 100,000 200,000
Total cost 1,750,000 3,200,000 3,220,000
Profit/Loss 750,000 (400,000) 580,000

The Director of Obonku is of the view that the Double bed product line is not doing well and should not be produced any longer. The following additional information has been provided:

  1. 40% of the labor cost for all bed types are fixed costs.
  2. 50% of the manufacturing overhead is variable for all products.
  3. 80% of the administrative cost is fixed.

Alom Hotel Limited, situated in Elmina, has requested 80 units of each bed and is ready to procure them at the current prices. Obonku Ltd can only produce more if they increase production capacity in the short term at an additional cost of GHS 80,000.

Assuming that costs and prices remain the same, you are required to:

a) Advise whether the company should shut down the production of Double beds. (10 marks)
b) Should the company accept the new order assuming Double beds will still be produced? (10 marks)

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  • 20 Marks

IMAC – MAR 2024 – L1 – Q1 – Cost and Cost Behaviour

Calculate total cost, unit cost, and profit per unit for a batch of 5,000 units and determine real fixed and variable costs after adjusting for inflation.

a) Atimbila Ltd manufactures a product that goes through various workshops. The following budgeted overheads for the year 2023, based on normal activity levels, have been provided:

Workshop Budgeted Overheads (GH¢) Overhead Absorption Base
Forming 360,000 30,000 labour hours
Machining 860,000 50,000 machine hours
Welding 400,000 36,000 labour hours
Assembly 300,000 20,000 labour hours

Selling and administrative overheads are 25% of factory cost.

An order for 5,000 units of the product (Batch 3391) incurred the following costs on 31 August 2023:

  • Materials: GH¢62,140
  • Labour:
    • 1,280 hours forming shop at GH¢10.50 per hour
    • 4,520 hours machining shop at GH¢11 per hour
    • 900 hours welding shop at GH¢10.50 per hour
    • 1,750 hours assembly shop at GH¢9.60 per hour
  • An amount of GH¢1,050 was paid for the hire of a special X-ray equipment for testing the welds. The time booking in the machine shop was 6,430 machine hours. Selling price was GH¢150 per product.

Required:
i) Compute the total cost of the batch. (10 marks)
ii) Calculate the unit cost per product. (1 mark)
iii) Determine the profit per product. (1 mark)

b) The following cost and production data relates to the operations of Mawuga Ltd over a two-year period:

Year Production (units) Total Costs (GH¢)
2022 50,000 1,700,000
2023 54,000 1,835,400

Between 2022 and 2023, there has been a 5% cost inflation.

Required:
i) Calculate the real fixed and variable costs. (6 marks)
ii) Estimate what the total costs will be in 2024 if it is expected that there will be 4% cost inflation and output will be 56,000 units. (2 marks)

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  • 20 Marks

IMAC – NOV 2021 – L1 – Q3 – Cost and Cost Behaviour | Marginal Costing and Absorption Costing

Explanation of different cost classifications and advantages of marginal costing over absorption costing.

a) Costs may be classified in various ways according to their nature and the information needs of management.

Required:
Explain the following pairs of costs:
i) Direct and Indirect Costs (3 marks)
ii) Fixed and Variable Costs (3 marks)
iii) Controllable and Non-controllable Costs (3 marks)
iv) Production and Non-production Costs (3 marks)
v) Relevant and Irrelevant costs (3 marks)

b) QQQ Ltd has been reporting using an absorption costing technique. However, at a management retreat attended by the Cost and Management Accountant, they discussed the information usefulness of marginal costing reports for short-term decision making extensively.

Required:
Outline FIVE (5) advantages of a marginal costing system of reporting compared to absorption costing system for consideration by the management of QQQ Ltd. (5 marks)

 

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