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Cost and Management Accounting Additional questions 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 Additional questions 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 Additional questions 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 Additional questions (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 Additional questions 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.