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Cost and Management Accounting
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CHAPTER 7
ADDITIONAL QUESTIONS
7.1
Acer manufactures computer components. Health and safety regulations mean that one of its
processes can only be operated eight hours a day. The hourly capacity of this process is 500
units per hour. The selling price of each component is R100 and the unit material cost is
R40. The daily total of all factory costs (conversion costs) is R144 000, excluding materials.
Expected production is 3 600 units per day.
Required:
(a) Total profit per day
(b) Return per factory hours
(c) Throughput accounting ratio
7.2
Why do you think it would be incorrect for companies to cut spending on quality in times of
economic downturn?
7.3
FANTASY designs and makes a single product, the X4, used in the telecommunications
industry. The organisation has a goods received store which employs staff who carry out
random checks to ensure materials are of the correct specification. In addition to the random
checks, a standard allowance is made for failures due to faulty materials at the completion
stage and the normal practice is to charge the cost of any remedial work required to the cost
of production for the month. Once delivered to the customer, any faults discovered in the X4
during its warranty period become an expense of the customer support department.
At the end of each month, management reports are prepared for the board of directors. These
identify the cost of running the stores and the number of issues, the cost of production and
the number of units manufactured, and the cost of customer support.
Required:
(a) Briefly discuss why the current accounting system fails to highlight the cost of quality.
(b) Identify four categories (or classifications) of FANTASY’s activities where expenditure
making up the explicit cost of quality will be found and an example of a cost found
within each category.
(c) Give one example of a cost of quality not normally identified by the accounting system.
Cost and Management Accounting
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7.4
Compare and contrast value chain analysis with conventional management accounting by
completing the table below:
Traditional management
Value chain
accounting
analysis
Focus
Perspective
Cost driver concept
Cost containment philosophy
Insight for strategic decision
7.5
Outline different ways in which a restaurant can ‘create’ value.
7.6
MPKG is a management accounting consultancy that specialises in providing services to
small businesses that do not have in-house expertise in management accounting techniques.
Its clients vary in size and operate in many different sectors, including manufacturing, retail
and service industries. Although they are different, all clients require similar services, most
of which are provided by MPKG’s team of employed accountants and support staff.
Occasionally MPKG will engage the services of specialists on a one-off contract basis to
help solve problems that a particular client may face.
Before accepting clients, MPKG will meet with them to discuss their requirements and agree
the basis of their fees.
MPKG has an on-going relationship with many clients. This level of involvement within the
client’s business enables MPKG to foresee potential problems for the client and offer further
services. This works well for the clients and particularly well for MPKG who gains a
considerable number of new assignments in this away.
New clients tend to be initially for ‘one-off’ assignments. Working with new clients requires
time and effort to be invested to become familiar with the client’s business and procedures.
MPKG hopes to form a relationship and attract more assignments and referrals from each
client it works with.
Required:
Explain how customer life cycle costing could be used by MPKG.
Cost and Management Accounting
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7.7
COPY CAT is a printing company that specialises in producing high quality cards and
calendars for sale as promotional gifts. Much of the work produced by COPY CAT uses
similar techniques and for a number of years COPY CAT has successfully used a standard
costing system to control its costs.
COPY CAT is now planning to diversify into other promotional gifts such as plastic
moulded items including key fobs, card holders and similar items. There is already a wellestablished market place for these items but COPY CAT is confident that with the existing
business contacts it can be successful if it controls its costs. Initially COPY CAT will need
to invest in machinery to mould the plastic, and it is likely that this machinery will have a
life of five years. An initial appraisal of the proposed diversification based on low initial
sales volumes and marginal cost-based product pricing for year 1, followed by increases in
both volumes and selling prices in subsequent years, shows that the investment has a
payback period of four years.
Required:
(a) Explain the relationship between target cost and standard costs and how COPY CAT can
derive target costs from target price.
(b) Discuss the conflict that will be faced by COPY CAT when making pricing decisions
based on marginal cost in the short term and the need for full recovery of all costs in the
long term.
(c) Standard costs are the estimated costs of providing one units of goods or services. They
are determined by identifying the resources expected to be required for the completion
of the unit and the price expected to be paid for each unit of those resources.
7.8
THULI’S manufactures and sells consumer electronics. It is constantly working to design
the latest gadgets and ‘must-haves’ which are unique in the market place at the time they are
launched. The management of THULI’S is aware of the short product life cycles in this
competitive market and consequently uses a market skimming pricing strategy at the
introduction stage.
Required:
Explain the changes that are likely to occur in the following items at the three later stages
in the product life cycle of a typical THULI’S product.
(a) Selling price
Cost and Management Accounting
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(b) Production costs
(c) Selling and marketing costs
7.9
JONTY manufactures and sells a range of products. It is not dominant in the market in
which it operates and, as a result, it has to accept the market price for each of its products.
The company is keen to ensure that it continues to compete and earn satisfactory profit at
each stage throughout a product's life cycle.
Required:
Explain how JONTY could use target costing and Kaizen costing to improve its
future performance. Your answer should include an explanation of the differences between
target costing and Kaizen costing.
7.10
LASCON manufactures and sells a number of products. All of its products have a life cycle
of six months or less. LASCON uses a four-stage life cycle model (Introduction; Growth;
Maturity; and Decline) and measures the profits from its products at each stage of their life
cycle.
LASCON has recently developed an innovative product. Since the product is unique it was
decided that it would be launched with a market skimming pricing policy. However,
LASCON expects that other companies will try to enter the market very soon.
This product is generating significant unit profits during the Introduction stage of its life
cycle. However, there are concerns that the unit profits will reduce during the other stages of
the product's life cycle.
Required:
Explain, for each of the growth and maturity stages of the new product's life cycle, the likely
changes that will occur in the unit selling prices and in the unit production costs, compared
to the preceding stage.
7.11
CONTRA is a company that manufactures machine parts from sheet metal to specific
customer order for industrial customers. CONTRA is considering diversification into the
production of metal ornaments. The ornaments would be produced at a constant rate
throughout the year. It then plans to sell these ornaments from inventory through
wholesalers and via direct mail to consumers.
Cost and Management Accounting
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Presently, each of the machine parts is specific to a customer's order. Consequently, the
company does not hold an inventory of finished items but it does hold the equivalent of one
day's production of sheet metal so as to reduce the risk of being unable to produce goods
demanded by customers at short notice. There is a one day lead time for delivery of sheet
metal to CONTRA from its main supplier, though additional supplies could be obtained at
less competitive prices.
Demand for these industrial goods is such that delivery is required almost immediately after
the receipt of the customer order. CONTRA is aware that if it is unable to meet an order
immediately, the industrial customer would seek an alternative supplier, despite CONTRA
having a reputation for high quality machine parts.
The management of CONTRA is not aware of the implications of the diversification for its
production and inventory policies.
Required:
(a)
Compare and contrast CONTRA's present production and inventory policy and
practices with a traditional production system that uses constant production
levels and holds inventory to meet peaks of demand.
(b)
Discuss the importance of a total quality management (TQM) system in a
just-in-time (JIT) environment. Use CONTRA to illustrate your discussion.
7.12
Explain why a backflush cost accounting system may be considered more appropriate than a
traditional cost accounting system in a company that operates a just-in-time production and
purchasing system.
7.13
Explain the benefits that an organisation can gain from operating a JIT purchasing
system for materials.