How often Relevant costing for short-term decisions is asked

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The questions

1. Oct/Nov 2015, Q3(a)15 marks

   Beka's Business (Pty) Ltd operates in the sportswear industry and has recently established a cricket division, referred to as 'Division: Cricket'. This division is still deciding which single product it should buy and sell, choosing between three options: cricket bats, cricket balls, or wicket sets. Option 1, cricket bats: there is a 35% chance the division's profit for 2015 will be R500 000, a 50% chance the profit will be R200 000, and the only other possibility is a loss of R100 000. Option 2, cricket balls: these would be imported and sold locally. There is a 10% chance that customers will not like the product, resulting in a loss of R140 000. If customers do like the product, the following possibilities apply to the 2015 market: a 30% probability that the exchange rate improves, giving a conditional profit of R180 000; a 25% probability that the exchange rate stays constant, giving a conditional profit of R150 000; and a 45% probability that the exchange rate deteriorates, giving a conditional profit of R120 000. Option 3, wicket sets: this option offers a certain profit of R170 000, based on a special order already received. For Beka's Business (Pty) Ltd's Division: Cricket, draw a decision tree covering the three possible products (cricket bats, cricket balls, and wicket sets) using the profit/loss figures and probabilities given, and on the basis of quantitative factors alone recommend which product the division should choose to buy and sell. Show all your calculations.

2. Oct/Nov 2015, Q4.72 marks · multiple choice

   For Question 4, answer each multiple-choice item by writing down the sub-question number together with the letter of the correct alternative (for example, 1.a). Note that when rounding is required you may need to choose the option closest to your calculated answer. Identify which of the following is NOT one of the preconditions for setting a special order price.

3. May/Jun 2015, Q4.110 marks

   Question 4 consists of two independent parts, Part 4.1 and Part 4.2, both of which must be answered. Home Decorations (Pty) Ltd manufactures and sells four different home décor products and is currently planning for the 2016 financial year. The company has made the following estimates: for the Clock, demand is 8 000 units, contribution per unit is R100, and required labour hours per unit is 1,2; for the Lamp, demand is 6 000 units, contribution per unit is R400, and required labour hours per unit is 1,0; for the Scatter cushion, demand is 10 000 units, contribution per unit is R150, and required labour hours per unit is 2,0; for the Cake stand, demand is 2 000 units, contribution per unit is R120, and required labour hours per unit is 0,8. All resources are freely available except for labour hours, which are limited to 12 400 for the 2016 financial year. You have already identified labour hours as the limiting factor and calculated the shortage. Calculate the optimal production mix for Home Decorations (Pty) Ltd for the 2016 financial year, rounding to two decimals throughout your calculations.

4. May/Jun 2015, Q4.210 marks

   Question 4 consists of two independent parts, Part 4.1 and Part 4.2, both of which must be answered. Moodlely Blankets (Pty) Ltd buys and sells blankets. The company's management accountant prepared the following budgeted contribution statement for June 2015: sales of R1 500 000, less variable costs of R890 000 (comprising opening inventory of R125 000, purchases of R950 000, less closing inventory of R210 000, plus variable selling costs of R25 000), giving contribution of R610 000; less fixed costs of R105 000 (comprising production overheads of R35 000 and administration overheads of R70 000), giving a net profit before tax of R505 000. Additional information: the opening bank balance on 1 June 2015 is expected to be R150 000. Cash sales will amount to 60% of total sales for June, increasing to 70% of total sales in July 2015. Of inventory purchased in June, 80% will be on a cash basis, rising to 90% for July purchases; all June credit purchases will only be paid in July or August. The company's total credit purchases in May amounted to R300 000, of which 90% will be settled in June and the remaining balance settled in July. Cash receipts in June relating to credit sales made in May amounted to R200 000. Total depreciation amounts to R10 000 per month and is included in the budgeted fixed costs above. All other expenses in the contribution statement will be incurred on a cash basis. In June 2015, the company is expected to settle a liability of R34 000 in cash. Prepare a cash budget for Moodlely Blankets (Pty) Ltd for June 2015 and calculate the expected closing balance in the bank account as at 30 June 2015, ignoring taxation.

5. Oct/Nov 2013, Q1.92 marks · multiple choice

   Question 1 is a multiple-choice section made up of ten short questions, numbered 1.1 to 1.10, each worth 2 marks. For each one you must write down the question number together with the letter (A, B, C or D) of the option you consider correct. Choose the correct term for the following definition: an amount that was incurred in the past and that cannot be changed by any future decision. A. Committed (unavoidable) cost; B. Committed (unavoidable) income; C. Incremental cost; D. Sunk cost.

6. Oct/Nov 2013, Q1.102 marks · multiple choice

   Question 1 is a multiple-choice section made up of ten short questions, numbered 1.1 to 1.10, each worth 2 marks. For each one you must write down the question number together with the letter (A, B, C or D) of the option you consider correct. Which one of the following methods would be most appropriate for allocating resources where more than one (multiple) constraints apply and the organisation produces a single product, given that feasible production output is less than demand? A. Use the contribution per limiting factor to rank products for the optimal product mix; B. Produce the full number of units for which there is a demand; C. Limit output to the resource with the highest (most constrictive) constraint; D. Use the contribution per unit of output to rank products for the optimal product mix.

7. May/Jun 2013, Q3(a)8 marks

   Greyton Glass (Pty) Ltd manufactures and sells two different glass products, namely vases and cutting boards. The management accountant has begun preparing the budget for the 2014 financial year and has identified labour hours as the only limiting factor in the production process. To meet full regular demand, 1 500 labour hours would be required for vases and 1 000 labour hours for cutting boards, giving a total requirement of 2 500 hours; however, only 1 600 labour hours are available in total, resulting in a shortfall of 900 hours. The company cannot obtain any additional labour, but the available labour hours can be reassigned between the two products as needed. Additional information: (1) budgeted fixed costs for the year amount to R480 000; (2) vases are expected to sell for R30 per unit and cutting boards for R25 per unit; (3) expected regular demand for 2014 is 3 000 vases and 4 000 cutting boards; (4) budgeted variable costs per unit are as follows: for vases, variable manufacturing costs of R8 and variable selling costs of R3, giving total variable costs of R11; for cutting boards, variable manufacturing costs of R12 and variable selling costs of R1, giving total variable costs of R13. Using the information given about Greyton Glass (Pty) Ltd's labour hour limitation, selling prices, variable costs and expected demand, determine the sales mix (that is, the number of sales units of vases and the number of sales units of cutting boards) that should be budgeted for the coming 2014 financial year in order to maximise Greyton Glass (Pty) Ltd's budgeted profit.

8. May/Jun 2013, Q3(b)2 marks

   Greyton Glass (Pty) Ltd manufactures and sells two different glass products, namely vases and cutting boards. The management accountant has begun preparing the budget for the 2014 financial year and has identified labour hours as the only limiting factor in the production process. To meet full regular demand, 1 500 labour hours would be required for vases and 1 000 labour hours for cutting boards, giving a total requirement of 2 500 hours; however, only 1 600 labour hours are available in total, resulting in a shortfall of 900 hours. The company cannot obtain any additional labour, but the available labour hours can be reassigned between the two products as needed. Additional information: (1) budgeted fixed costs for the year amount to R480 000; (2) vases are expected to sell for R30 per unit and cutting boards for R25 per unit; (3) expected regular demand for 2014 is 3 000 vases and 4 000 cutting boards; (4) budgeted variable costs per unit are as follows: for vases, variable manufacturing costs of R8 and variable selling costs of R3, giving total variable costs of R11; for cutting boards, variable manufacturing costs of R12 and variable selling costs of R1, giving total variable costs of R13. Suppose a potential once-off customer asks Greyton Glass (Pty) Ltd to quote a total price for a special order of 200 vases. With regard to setting a selling price for these 200 vases, one of the following four statements is incorrect; simply write down the number of the incorrect statement: (i) the budgeted fixed costs for the year of R480 000 are irrelevant to the pricing decision; (ii) Greyton Glass (Pty) Ltd will also have to take into account the net opportunity costs associated with giving up its regular sales; (iii) Greyton Glass (Pty) Ltd should also consider qualitative factors before making a final decision about the price to be quoted; (iv) if Greyton Glass (Pty) Ltd sets the special order selling price at an amount lower than the minimum price that can be charged for the special order, this will put the company in a better overall cash position.