Subject (SQ): MANAGEMENT ACCOUNTING

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  • 20 Marks

MA – L2 – Q44 – Relevant cost and revenue

Recommend whether TechLink Solutions should buy new equipment or outsource electronic modules for 400,000 units annually.

TechLink Solutions Limited manufactures and sells routers. It manufactures its own electronic modules (EM), an important part of the router. The present cost to manufacture an EM is as follows:

GH¢
Direct material 250
Direct labour 300
Variable overheads 150
Fixed overheads
Depreciation 100
General overheads 150
Total cost per unit 950

The company manufactures 400,000 units annually. The equipment being used for manufacturing EM has worn out completely and requires replacement. The company is presently considering the following options:
(A) Purchase new equipment which would cost GH¢ 240 million and have a useful life of six years with no salvage value. The company uses straight-line method of depreciation. The new equipment has the capacity to produce 600,000 units per year. It is expected that the use of new equipment would reduce the direct labour and variable overhead cost by 20%.
(B) Purchase from an external supplier at GH¢ 730 per unit under a two-year contract.
The total general overheads would remain the same in either case. The company has no other use for the space being used to manufacture the EMs.

Required:
(a) Which course of action would you recommend to the company assuming that 400,000 units are needed each year? (Show all relevant calculations)

(b) What would be your recommendation if the company’s annual requirements were 600,000 units?

(c) What other factors would the company consider, before making a decision?

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  • 20 Marks

MA – L2 – Q43 – Decision Making Techniques

Recommend whether to shut down internal production of Component A or B and switch to external purchasing based on cost analysis.

Vento Industries makes two components, A and B, for which costs in the next year are expected to be as follows:

A B
Production (units) 30,000 20,000
Variable costs per unit: GH¢ GH¢
Direct materials 6 5
Direct labour 3 9
Variable production overheads 1 3
Variable production cost 10 17

Direct labour is paid GH¢12 per hour. There will be only 19,500 hours of direct labour time available next year, and any additional components must be purchased from an external supplier.
Total fixed costs per annum are expected to be as follows:

GH¢
Incurred as a direct consequence of making A 40,000
Incurred as a direct consequence of making B 50,000
Other fixed costs 30,000
120,000

An external supplier has offered to supply units of A for GH¢12.50 and units of B for GH¢23.

Required:
(a) Recommend whether Vento Industries should shut down internal production of Component A or Component B and switch to external purchasing.

(b) Recommend the quantities that Vento Industries should make of the components, and the quantities that it should buy externally, in order to obtain the required quantities of both components at the minimum cost. Calculate what the total annual cost will be.

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  • 20 Marks

MA – L2 – Q42 – Decision Making Techniques

Determine optimal production mix for four liquids with a contract obligation, maximizing profit within labour hour constraints.

NexGen Ltd. manufactures four liquids: A, B, C, and D. The selling price and unit cost details for these products are as follows:

Liquid A Liquid B Liquid C Liquid D
GH¢ per litre GH¢ per litre GH¢ per litre GH¢ per litre
Selling price 100 120 120 110
Costs:
Direct materials 24 30 21 18
Direct labour (GH¢6/hour) 18 15 24 12
Direct expenses 0 0 0 0
Variable overhead 12 10 18 12
Fixed overhead (note 1) 24 20 36 24
Total cost per litre 78 75 102 66
Profit per litre 22 35 18 44

Note 1: Fixed overhead is absorbed on the basis of labour hours, based on a budget of 1,600 hours per quarter (three months).
During the next three months, the number of direct labour hours is expected to be limited to 1,345 hours. The same labour is used for all products.
The marketing director has identified the maximum demand for each of the four products during the next three months as follows:

  • Liquid A: 200 litres
  • Liquid B: 150 litres
  • Liquid C: 100 litres
  • Liquid D: 120 litres
    No inventories are held at the beginning of the period that could be used to satisfy demand in the period.

Required:
(i) Determine the number of litres of liquids A, B, C, and D to be produced and sold in the next three months in order to maximise profits.
(ii) Calculate the profit that this would yield.

(B)  Suppose that a contract has been made before the beginning of the period by NexGen Ltd. and one of its customers, PrimeCorp. NexGen Ltd. has agreed to supply PrimeCorp with 20 litres of each A, B, C, and D during the three-month period.
This sales demand from PrimeCorp is included in the demand levels shown above in part (a) of the question.

Required:
(i) Given the contract with PrimeCorp, determine the number of litres of liquids A, B, C, and D to be produced and sold in the next three months in order to maximise profits, if the maximum number of labour hours remain 1,345 hours for the period.
(ii) Calculate the profit that this would yield.

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  • 15 Marks

MA – L2 – Q41 – Cost-volume-profit (CVP) analysis

Calculate breakeven point in units and sales value for Nartey Enterprises based on budgeted profit statement.

Nartey Enterprises, a manufacturing organisation, has a budgeted profit statement for its next financial year, when it is expected to be operating at 75% level of capacity. The budget is given below:

GH₵ GH₵
Sales 9,000 units at GH₵32 288,000
Less:
Direct materials 54,000
Direct wages 72,000
Production overhead:
fixed 36,000
variable 18,000
Administration and distribution costs:
fixed 42,000
variable 27,000 249,000
Profit 39,000

Required:
(a) Calculate the breakeven point in units and in sales value.

  (b) Calculate the contribution/sales ratio.                                                                                                                                                                  (c) Calculate the number of units to be sold to earn a profit of GH₵52,000.

    (d) Calculate the profit that would be expected if the company operated at full capacity.

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  • 15 Marks

MA – L2 – Q40 – Cost-volume-profit (CVP) analysis

Compute break-even point in GH¢ and units for AquaPure Limited at GH¢16 per bottle using budgeted cost data.

AquaPure Limited is planning to produce mineral water. It is contemplating to purchase a plant with a capacity of 100,000 bottles a month. For the first year of operation the company expects to sell between 60,000 to 80,000 bottles. The budgeted costs at each of the two levels are as follows:

Particulars 60,000 bottles 80,000 bottles
Material 360,000 480,000
Labour 200,000 260,000
Factory overheads 120,000 150,000
Administration expenses 100,000 110,000

The production would be sold through retailers who will receive a commission of 8% of sale price.

Required:
(a) Compute the break-even point in GH¢ and units if the company decides to fix the sale price at GH¢16 per bottle.

(b) Compute the break-even point in units if the company offers a discount of 10% on purchase of 20 bottles or more, assuming that 20% of the sales will be to buyers who will avail the discount.

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  • 20 Marks

MA – L2 – Q39 – Cost-volume-profit (CVP) analysis

Compute break-even sales for Fuseni Limited's two products, maintaining budgeted sales ratio, with detailed overhead allocation.

Fuseni Limited has two divisions each of which makes a different product. The budgeted data for the next year is as under:

Product A Product B
Sales GH¢ 200,000,000 GH¢ 150,000,000
Direct material GH¢ 45,000,000 GH¢ 30,000,000
Direct labour GH¢ 60,000,000 GH¢ 45,000,000
Factory overheads GH¢ 35,000,000 GH¢ 15,000,000
Price per unit GH¢ 20 GH¢ 25

Details of factory overheads are as follows:
(i) Product A is stored in a rented warehouse whose rent is GH¢0.25 million per month. Product B is required to be stored under special conditions. It is stored in a third party warehouse and the company has to pay rent on the basis of space utilised. The rent has been budgeted at GH¢0.12 million per month.
(ii) Indirect labour has been budgeted at 20% of direct labour. 70% of the indirect labour is fixed.
(iii) Depreciation for assets pertaining to product A and B is GH¢6.0 million and GH¢2.0 million respectively.
(iv) 80% of the cost of electricity and fuel varies in accordance with the production in units and the total cost has been budgeted at GH¢4.0 million.
(v) All other overheads are fixed.

Required:
Compute the break-even sales assuming that the ratio of quantities sold would remain the same, as has been budgeted above.

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  • 15 Marks

MA – L2 – Q38- Cost-volume-profit (CVP) analysis

Compute break-even point in GH¢ and margin of safety for Ofori Fabricators based on last year's sales and cost data.

Ofori Fabricators produces and markets a single product. Presently, the product is manufactured in a plant that relies heavily on direct labour force. Last year, the company sold 5,000 units with the following results:

GH¢
Sales 22,500,000
Less: Variable expenses 13,500,000
Contribution margin 9,000,000
Less: Fixed expenses 6,300,000
Net income 2,700,000

Required:
(a) Compute the break-even point in GH¢ and the margin of safety.

(b) Calculate the contribution margin ratio and the break-even point in units if the variable cost per unit increases by GH¢600? Also calculate the selling price per unit if the company wishes to maintain the contribution margin ratio achieved during the previous year.

(c) The company is also considering the acquisition of a new automated plant. This would result in the reduction of variable costs by 50% of the amount computed in (b) above whereas the fixed expenses will increase by 100%. If the new plant is acquired, how many units will have to be sold next year to earn net income of GH¢3,150,000.

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  • 15 Marks

MA – L2 – Q37 – Decision Making Techniques

Calculate the unit price Gems Limited should bid for a special order of 150,000 units of Product Beta for Opal Limited.

Gems Limited (GL) is a manufacturer of consumer durables based in the Upper Region. Opal Limited, one of the major customers, has invited GL to bid for a special order of 150,000 units of Product Beta.

Following information is available for the preparation of the bid:

(i) Each unit of Beta requires 0.5 kilograms (kg) of material “C”. This material is produced internally in batches of 25,000 kg each, at a variable cost of GH₵200 per kg. The setup cost per batch is GH₵80,000. Material “C” could be sold in the market at a price of GH₵225 per kg. GL has the capacity to produce 100,000 kg of material “C”, however, the current demand for material “C” in the market is 75,000 kg.

(ii) Every 100 units of Product Beta requires 150 labour hours. Workers are paid at the rate of GH₵9,000 per month. Idle labour hours are paid at 40% of normal rate and GL currently has 20,000 idle labour hours. The standard working hours per month are fixed at 200 hours.

(iii) The variable overhead application rate is GH₵25 per labour hour. Fixed overheads are estimated at GH₵22 million. It is estimated that the special order would occupy 30% of the total capacity. The production capacity of Beta can be increased up to 50% by incurring additional fixed overheads. The fixed overhead rate applicable to enhanced capacity would be 1.5 times the current rate. The utilised capacity at current level of production is 80%.

(iv) The normal loss is estimated to be 4% of the input quantity and is determined at the time of inspection which is carried out when the unit is 60% complete. Material is added to the process at the beginning while labour and overheads are evenly distributed over the process.

(v) GL has the policy to earn profit at the rate of 20% of the selling price.

Required:

Calculate the unit price that GL could bid for the special order to Opal Limited.

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  • 15 Marks

MA – L2 – Q36 – Decision Making Techniques

Decide whether Akroma Ghana Limited should produce Item B internally or buy from a supplier under two conditions.

Akroma Ghana Limited has a machine with which it produces Item A. Ten (10) machine hours are required to produce the item. This product’s selling price is GH₵150 with a variable cost of GH₵60. The company has just received an order for the supply of Item B. Each unit of Item B will require four (4) machine hours. The annual quantity of Item B required is 12,000 units and the cost estimates for the quantity is given below:

GH₵
Direct material 125,000
Direct wages 52,000
Variable overheads 58,000
Floor space occupancy 11,500
Depreciation 7,500
Salary of Inspector for Item B alone 10,000
Total Cost 264,000

It was noted that Item B could be outsourced from a supplier at a cost of GH₵28 per unit.
You are required to assist management to decide whether to produce Item B internally or to buy from an outside supplier if the following conditions exist:
(i) Production of Item B will not in any way disturb the production of Item A.
(ii) The machine producing Item A is already fully engaged.

(B) List any FIVE steps in the management decision-making process.

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  • 15 Marks

MA – L2 – Q35 – Relevant cost and revenue

Compute relevant cost of producing a motor, considering materials, labour, machine costs, and overheads, with reasons for cost inclusion/exclusion.

Apex Manufacturing Limited (AML) is engaged in the manufacture of specialised motors. The company has been asked to provide a quotation for building a motor for a large textile industrial unit in Kumasi. Following information has been obtained by AML’s technical manager in a one-hour meeting with the potential customer. The manager is paid an annual salary equivalent to GH¢2,500 per eight-hour day.

(i) The motor would require 120 ft. of Wire-C which is regularly used by AML in production. AML has 300 ft. of Wire-C in inventory at the cost of GH¢65 per ft. The resale value of Wire-C is GH¢63 and its current replacement cost is GH¢68 per ft.

(ii) 50 kg of another material viz. Wire-D and 30 other small components would also be required by AML for the motor. Wire-D would be purchased from a supplier at GH¢10 per kg. The supplier sells a minimum quantity of 60 kg per order. However, the remaining quantity of Wire-D will be of no use to AML after the completion of the contract. The other small components will be purchased from the market at GH¢80 per component.

(iii) The manufacturing process would require 250 hours of skilled labour and 30 machine hours.
The skilled workers are paid a guaranteed wage of GH¢20 per hour and the current spare capacity available with AML for such class of workers is 100 direct labour hours. However, additional labour hours may be obtained by either:

  • Paying overtime at GH¢23 per hour; or
  • Hiring temporary workers at GH¢21 per hour. These workers would require 5 hours of supervision by AML’s existing supervisor who would be paid overtime of GH¢20 per hour.
    The machine on which the motor would be manufactured was leased by AML last year at a monthly rent of GH¢5,000 and it has a spare capacity of 110 hours per month. The variable running cost of the machine is GH¢15 per hour.

(iv) Fixed overheads are absorbed at the rate of GH¢25 per direct labour hour.

Required:
Compute the relevant cost of producing the textile motor. Give brief reasons for the inclusion or exclusion of any cost from your computation.

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