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Foreword

To facilitate teachers in teaching the topic “Cost Accounting for Decision Making”

covered under the Accounting Module of the Business Accounting and Financial Studies (BAFS) curriculum, the Technology Education Section of Curriculum Development Institute, Education Bureau developed this learning and teaching resource materials to provide teachers with a variety of learning and teaching examples for reference.

This resource materials include lesson plans, PowerPoint presentation slides, home assignment as well as quiz with suggested answer.

This resource materials are by no means exhaustive. Teachers are advised to update any business data/information adopted in this resource materials if deemed

necessary.

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Topic Overview

Topic BAFS (Elective Part)

Cost Accounting – Cost Accounting for Decision-making

Level S6

Duration 8 lessons (40 minutes per lesson)

Learning Objectives:

1. Identify the nature of various cost items and their relevance to decision-making.

2. Apply costing concepts and techniques in different types of short-term business decisions.

Overview of Contents:

Lesson 1 Describe and identify relevant and irrelevant costs for making business decisions Lesson 2 Apply costing concepts and techniques in business decisions

Lesson 3 Analyze hire, make or buy decisions (1) Lesson 4 Analyze hire, make or buy decisions (2) Lesson 5 Analyze special order decisions

Lesson 6 Analyze eliminate or retain unprofitable segment decisions Lesson 7 Analyze retain or replace equipment decisions

Lesson 8 Analyze sell or process further decisions and revision

Resources:

 Topic Overview and Teaching Plan

 PowerPoint Presentation

 Student Worksheet

Suggested Activities:

 Group discussion

 Class discussion

 In-class exercise

 Assignment

 Quiz

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Lesson 1

Theme Describe and identify relevant and irrelevant costs for making business decisions Duration 40 minutes

Expected Learning Outcomes:

Upon completion of this lesson, students will be able to:

1. classify costs for decision-making purpose;

2. describe and identify different types of relevant costs: opportunity costs, incremental / differential costs, and avoidable costs; and

3. describe and identify different types of irrelevant costs: sunk costs, and unavoidable cost.

Teaching Sequence and Time Allocation:

Activities Reference Time Allocation

Part I: Introduction

 Teacher starts the lesson by asking a question.

 Teacher invites students to share their ideas on how to recognize and classify costs.

PPT #3 3 minutes

Part II: Content

 Activity 1: Group Discussion

 Students are divided into groups of three to four and teacher invites them to share their ideas on how to classify the costs.

 Teacher makes comment and discusses the answers.

PPT #4

PPT #5 – 6

7 minutes

5 minutes

 Teacher explains third type of cost classification: for decision-making purpose.

PPT #7 3 minutes

 Activity 2: Class Discussion

 Teacher asks students to identify relevant and irrelevant costs from the question.

 Teacher goes through the answers.

PPT #8 PPT #9

3 minutes 2 minutes

 Teacher explains relevant and irrelevant costs with examples.

PPT #10 – 18 15 minutes

Part III: Conclusion

 Teacher concludes the lesson by reviewing the key points covered.

2 minutes

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Lesson 2

Theme Apply costing concepts and techniques in business decisions Duration 40 minutes

Expected Learning Outcomes:

Upon completion of this lesson, students will be able to:

1. define what is a business decision;

2. identify steps for making a business decision; and

3. present the business decision using two different formats.

Teaching Sequence and Time Allocation:

Activities Reference Time Allocation

Part I: Introduction

 Teacher starts the lesson using a question. PPT #3 3 minutes Part II: Content

 Teacher explains what decision-making is.

 Teacher explains six steps to follow for making business decisions.

PPT #4 PPT #5 – 6

3 minutes 4 minutes

 Activity 1: Classwork

 Teacher asks students to construct two income statements in columnar form and make decision from their answers.

 Teacher goes through the answers and makes conclusion.

PPT #7 - 8

PPT #9 – 10

8 minutes

3 minutes

 Teacher introduces two different formats to present the answers for decision making questions.

PPT #11 4 minutes

 Activity 2: Classwork

 Teacher asks students to determine whether to purchase the machine or not.

 Teacher goes through the answers and makes conclusion.

PPT #12 - 13 PPT #14

10 minutes 3 minutes

Part III: Conclusion

 Teacher concludes the lesson by reviewing the key points covered.

2 minutes

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Lesson 3

Theme Analyze hire, make or buy decisions (1) Duration 40 minutes

Expected Learning Outcomes:

Upon completion of this lesson, students will be able to:

1. analyze make or buy decisions; and

2. evaluate some qualitative factors for make or buy decisions.

Teaching Sequence and Time Allocation:

Activities Reference Time Allocation

Part I: Introduction

 Teacher recaps the decision-making process and introduces five types of decision-making situations.

PPT #3 2 minutes

Part II: Content

 Teacher explains hire, make or buy decisions and the decision rule.

 Teacher illustrates this type of decision using an example.

PPT #4 – 5 PPT #6 – 13

3 minutes 15 minutes

 Activity 1: Class Discussion

 Teacher asks students to identify some qualitative factors that need to consider before making a final decision.

 Teacher makes comments and provides answers.

PPT #14

PPT #15

3 minutes

2 minutes

 Activity 2: Classwork

 Teacher asks students to work out the answers for the classwork and comment the decision that they have made.

 Teacher goes through the answers and provides feedbacks.

PPT #16 - 17

PPT #18 - 19

10 minutes

3 minutes

Part III: Conclusion

 Teacher concludes the lesson by reviewing the key points covered.

2 minutes

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Lesson 4

Theme Analyze hire, make or buy decisions (2) Duration 40 minutes

Expected Learning Outcomes:

Upon completion of this lesson, students will be able to:

1. define what is a constraint in production process;

2. determine the production plan when resources are constrained; and 3. provide solutions for managing constraints.

Teaching Sequence and Time Allocation:

Activities Reference Time Allocation

Part I: Introduction

 Teacher recaps the decision-making process and introduces five types of decision-making situations.

PPT #3 2 minutes

 Teacher starts the lesson using a question and discusses the answers.

PPT #4 - 5 5 minutes

Part II: Content

 Teacher introduces the concept of constraints and explains how to manage constraints.

 Teacher illustrates how to manage constraints using an example.

PPT #6 – 8 PPT #9 - 15

5 minutes 8 minutes

 Activity 1: Classwork

 Teacher asks students to work out the answers for the classwork.

 Teacher goes through the answers and makes a conclusion.

PPT #16 - 18

PPT # 19 - 22

15 minutes

5 minutes Part III: Conclusion

 Teacher concludes the lesson by reviewing the key points covered.

2 minutes

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Lesson 5

Theme Analyze special order decisions Duration 40 minutes

Expected Learning Outcomes:

Upon completion of this lesson, students will be able to:

1. analyze special order decisions; and

2. evaluate some qualitative factors for special order decisions.

Teaching Sequence and Time Allocation:

Activities Reference Time Allocation

Part I: Introduction

 Teacher recaps the decision-making process and focuses on special order decisions.

PPT #3 2 minutes

Part II: Content

 Teacher explains special order decisions and the decision rule.

 Teacher illustrates this type of decision using an example.

PPT #4 – 5 PPT #6 – 10

4 minutes 14 minutes

 Activity 1: Class Discussion

 Teacher asks students to identify some qualitative factors that need to consider before making a final decision.

 Teacher makes comments and provides answers.

PPT #11

PPT #12

3 minutes

2 minutes

 Activity 2: Classwork

 Teacher asks students to work out the answers for the classwork and comment the decision that they have made.

 Teacher goes through the answers and provides feedbacks.

PPT #13 - 14

PPT #15 - 16

10 minutes

3 minutes

Part III: Conclusion

 Teacher concludes the lesson by reviewing the key points covered.

2 minutes

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Lesson 6

Theme Analyze eliminate or retain unprofitable segment decisions Duration 40 minutes

Expected Learning Outcomes:

Upon completion of this lesson, students will be able to:

1. analyze eliminate or retain unprofitable segment decisions; and 2. evaluate some qualitative factors for such decision.

Teaching Sequence and Time Allocation:

Activities Reference Time Allocation

Part I: Introduction

 Activity 1: Group Discussion

 Students are divided into groups of three to four and teacher invites them to share their ideas.

 Teacher makes comments and discusses the answers.

PPT #3 PPT #4

4 minutes 3 minutes Part II: Content

 Teacher explains eliminate or retain unprofitable segment decisions and the decision rule.

 Teacher illustrates this type of decision using an example.

PPT #5 – 7 PPT #8 – 9

3 minutes 10 minutes

 Activity 2: Class Discussion

 Teacher asks students to identify some qualitative factors that need to consider before making a final decision.

 Teacher makes comments and provides answers.

PPT #10

PPT #11

3 minutes

2 minutes

 Activity 3: Classwork

 Teacher asks students to work out the answers for the classwork and comment the decision that they have made.

 Teacher goes through the answers and makes a conclusion.

PPT #12 - 13

PPT #14 - 15

10 minutes

3 minutes

Part III: Conclusion

 Teacher concludes the lesson by reviewing the key points covered.

2 minutes

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Lesson 7

Theme Analyze retaining or replacing equipment decisions Duration 40 minutes

Expected Learning Outcomes:

Upon completion of this lesson, students will be able to:

1. analyze retaining or replacing equipment decisions; and 2. evaluate some qualitative factors for such decision.

Teaching Sequence and Time Allocation:

Activities Reference Time Allocation

Part I: Introduction

 Teacher recaps the decision-making process and focus on retain or replace equipment decisions.

PPT #3 2 minutes

Part II: Content

 Teacher explains retain or replace equipment decisions and the decision rule.

 Teacher illustrates this type of decision using an example.

PPT #4 – 6 PPT #7 – 9

3 minutes 10 minutes

 Activity 1: Class Discussion

 Teacher asks students to identify some qualitative factors that need to consider before making a final decision.

 Teacher makes comments and provides answers.

PPT #10

PPT #11

3 minutes

3 minutes

 Activity 2: Group Discussion

 Students are divided into groups of three to four and they are required to determine the answers of the question.

 Teacher explains the answers and provides feedbacks.

PPT #12 - 13

PPT #14 - 15

12 minutes

5 minutes Part III: Conclusion

 Teacher concludes the lesson by reviewing the key points covered.

2 minutes

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Lesson 8

Theme Analyze selling or processing further decisions and revision Duration 40 minutes

Expected Learning Outcomes:

Upon completion of this lesson, students will be able to:

1. analyze selling or processing further decisions; and 2. review the materials that they have learned in this topic.

Teaching Sequence and Time Allocation:

Activities Reference Time Allocation

Part I: Introduction

 Teacher recaps the decision-making process and focus on sell or process further decisions.

PPT #3 2 minutes

Part II: Content

 Teacher explains sell or process further decisions and the decision rule.

 Teacher illustrates this type of decision using an example.

PPT #4 – 5 PPT #6 – 8

5 minutes 8 minutes

 Activity 1: Classwork

 Teacher asks students to work out the answers for the classwork and makes comments.

 Teacher goes through the answers and makes a conclusion.

PPT #9 PPT # 10

8 minutes 4 minutes

Part III: Conclusion

 Teachers reviews the following key notes of the topic

 Types of relevant and irrelevant costs

 Five types of business decisions

 Teacher makes a conclusion for this topic.

PPT # 12 PPT # 13-14 PPT # 15

4 minutes 6 minutes 3 minutes

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1

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There are three parts in this whole set of materials:

Part I is ‘Describe and Identify Relevant and Irrelevant Costs for Making Business Decisions’, and will be covered in Lesson 1.

Part II is ‘Apply Costing Concepts and Techniques in Business Decisions’, and will be covered in Lesson 2.

Part III is ‘Understand Different Types of Business Decisions’, and will be covered in Lessons 3 to 8.

2

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3

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Students are divided in groups of three to four to discuss classification of costs that they have learned.

4

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Teacher recaps the first type of cost classification that students have learned before and asks students to provide examples.

• Direct cost e.g. Raw materials and direct labor used in production vs Indirect cost e.g. Janitor’s wages in the factory

• Prime cost e.g. Raw materials and direct labor used in production vs Overhead e.g. Depreciation for factory equipment

• Product cost e.g. Raw materials and direct labor used in production vs Period cost e.g. Selling expense

• Expired cost e.g. Advertising expense charges for the year vs Unexpired cost e.g. Prepaid insurance

5

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Teacher recaps the second type of cost classification that students have learned before and asks students to provide examples.

• Fixed cost e.g. Factory rent, production manager’s salary

• Variable cost e.g. Direct materials, direct labor

• Mixed cost e.g. A sales representative’s salary (including basic salary plus sales commission), Telephone bill (including basic monthly charges plus long distance charges)

• Step cost e.g. Repair technician wages, supervisor’s salaries

6

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Teacher introduces the third type of cost classification that is commonly used for decision-making.

• Relevant costs are those future costs that will differ across options.

• Irrelevant costs are those future costs that will not be affected by a business decision.

7

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Teacher asks students to identify relevant or irrelevant costs from the above scenario.

8

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Teacher provides answer for activity 2.

9

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Teacher explains the concept of relevant costs for decision-making purpose.

10

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Teacher provides an example to explain the concept of relevant costs.

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Teacher explains the concept of opportunity cost and provides an example.

12

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Teacher explains the concept of incremental cost and provides an example.

13

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Teacher explains the concept of avoidable cost and provides an example.

14

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Teacher explains the concept of irrelevant costs for decision-making purpose.

15

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Teacher provides an example to explain the concept of irrelevant costs.

16

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Teacher explains the concept of sunk cost and provides an example.

17

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Teacher explains the concept of unavoidable cost and provides an example.

18

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Teacher asks students to do Question 1 at home.

19

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20

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1

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2

(33)

Teacher starts the lesson with above question and explains to students that making business decision is one of the basic functions of a manager.

3

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Teacher explains what is decision-making.

4

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Teacher introduces the steps to follow for making business decision.

5

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Teacher explains some points that students should keep in mind when making business decisions.

6

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Teacher provides an example to illustrate how to make a business decision.

7

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Teacher asks students to:

1. construct two income statements;

2. compare the results; and 3. make a decision.

8

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Teacher provides answers.

9

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Teacher explains the answers and makes conclusion.

10

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Teacher explains that there are two formats to present the answers in making a cost decision.

Teacher explains that either one can be used in answering this type of question.

For the first format, it considers all costs and benefits, both relevant and irrelevant. For the second format, it only considers the incremental costs and benefits. Students can obtain the same answer under both formats. If only incremental information is given, students can just use the second format.

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Teacher goes through the above question.

12

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Teacher goes through the above requirement.

13

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Teacher discusses the calculations and makes a conclusion.

14

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Teacher asks students to do Question 2 at home.

15

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1

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2

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Teacher states different types of decision-making situations will be covered in the coming lessons.

3

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4 Teacher explains hire, make or buy decisions and introduces the term ‘outsourcing’.

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Teacher explains the decision rule for hire, make or buy decisions.

5

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6 Teacher illustrates with an example on the outsourcing decision that would be made

under the circumstance that there is no alternative use form the capacity released from outsourcing.

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7

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Teacher explains some points that are relevant to make the decision.

8

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9 Teacher explains the solution for this example.

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Teacher illustrates another example on the outsourcing decision that would be made under the circumstance that there is alternative use for the capacity released from outsourcing.

10

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Teacher explains some points that are relevant to make the decision.

11

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12 Teacher explains the solution for outsourcing example.

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13 Teacher explains the answers and makes a conclusion.

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Teacher invites students to share their ideas on the decision made in the previous example.

14

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Teacher makes comments and provides answers.

15

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Teacher explains the question.

16

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Teacher asks students to do the calculations and provide comments.

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18 Teacher explains the solution and makes a conclusion.

Teacher highlights the $15,000 and explains that although this amount is a fixed

overhead, it could be avoided if the production of lens is outsourced, and thus becomes relevant for decision-making.

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Teacher explains some possible qualitative factors for this question.

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Teacher asks students to do Question 3 and 4 at home.

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21

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1

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2

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Teacher recaps the first type of decision-making situations – Hire, make or buy, and highlights further discussion on outsourcing will be covered in this lesson.

3

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Teacher starts the lesson with above question and asks students to share their views.

4

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Teacher explains how to solve the problem of insufficient production capacity.

5

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Teacher explains the ways in managing contraints.

6

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Teacher explains the points to note in managing constraints.

7

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Teacher explains how to determine the production plan when the company has constraints in its production, and find solutions to overcome the production shortfall.

8

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9 Teacher illustrates an example of managing constraints.

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Teacher explains the requirements for the example.

10

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Teacher explains the steps in making the decision.

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Teacher explains how to determine a constraint to a company

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Teacher explains how to determine the product mix when there is a constraint in the production process.

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14

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Teacher explains the conclusion.

15

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Teacher asks students to complete the classwork.

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Teacher asks students to do the calculations and make decision.

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18

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Teacher explains the solution for part A and makes a conclusion.

*

The direct materials (in kg) required for A: $24 / $10 = 2.4 kg; therefore the contribution per kg for A: $48 / 2.4 = $20

The direct materials (in kg) required for B: $15 / $10 = 1.5 kg; therefore the contribution per kg for B: $27 / 1.5 = $18

The direct materials (in kg) required for A: $20 / $10 = 2.0 kg; therefore the contribution per kg for C: $46 / 2.0 = $23

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20

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i. New contribution per unit:

*

A = $(80 – 15 x 2.4 kg – 8) = $36 B = $(56 – 15 x 1.5 kg – 14) = $21

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22

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Teacher asks students to do Question 5 at home.

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24

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1

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2

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Teacher hightlights the second type of decision-making situation – Accept or reject an order at a special price.

3

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4 Teacher explains the meaning of a special order and reminds students the two

important points in making this type of decision.

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Teacher explains the decision rule to accept or reject an order at a special price.

5

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6 Teacher illustrates the meaning of a special sales order with an example.

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7

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Teacher explains some points that are relevant to make the decision.

8

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9 Teacher explains the solution.

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Teacher explains the solution and makes a conclusion.

*

The total variable costs per box: DM + DL + VMOH = $10 + $3 + $2 = $15 The total variable costs: $15 x 40,000 boxes = $600,000

10

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Teacher invites students to share their ideas on qualitative factors for this special order decision.

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Teacher explains some possible qualitative factors for consideration in making decision on special order.

1. Effect on the workforce – e.g. Will this special order help to avoid layoffs?

2. Competitive considerations – e.g. Will this special order price start a price war with competitors?

3. Prospects of future deals – e.g. Will this special order help to establish a long-term relationship between the company and the customer?

4. Effect on normal sales – e.g. Will regular customers find out about this special order and ask for lower price?

12

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Teacher asks students to complete the classwork.

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14

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Teacher explains the solution and makes a conclusion.

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Teacher makes comments and explains some possible qualitative factors that would affect the decision made on the special order.

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Teacher asks students to do Question 6 at home.

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1

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2

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Students are divided into groups of three to four for discussion. Teacher invites students to share their views.

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4 Teacher makes comments and discusses the answers.

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Teacher highlights the third type of decision-making situation – elimination or retain an unprofitable segment.

5

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Teacher explains what is a segment and how to calculate segment margin.

6

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Teacher explains the decision rule for eliminating or retaining an unprofitable segment.

* Even the segment has negative segment margin, it may be still continued if it can generate more sales of other segments.

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8 Teacher illustrates segment decision with an example.

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9 Teacher explains the solution and makes a conclusion.

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Teacher invites students to share their ideas on qualitative factors for eliminating a segment.

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Teacher explains some possible factors for consideration in making decision on the closure of segment.

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Teacher asks students to do the calculations and provide comments.

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Teacher explains the details of the question.

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14 Teacher explains the solution and makes a conclusion.

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15

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Teacher asks students to do Question 7 at home.

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1

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2

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Teacher highlights the fourth type of decision-making situation – retain or replace equipment.

3

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Teacher introduces some considerations in retaining/replacing non-current assets.

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Teacher explains some important factors for consideration in making replacement / retainment decision.

5

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Teacher explains the decision rule for retaining or replacing an equipment.

6

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Teacher uses the example to illustrate the decision to retain or replace an equipment.

7

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Teacher explains the relevant points in making the decision.

8

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9 Teacher explains the solution and makes a conclusion.

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Teacher invites students to share their ideas on the factors that should be considered in making the replacement decision.

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Teacher explains some possible factors for replacement decision..

11

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Students are divided into groups of three to four and they are required to determine the answers for the question.

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13

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Teacher explains the answers and makes comments.

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*

• Operating costs for the old van: ($60,000 - $10,000) x 6 years = $300,000

• Operating costs for the new van: $20,000 x 6 years = $120,000

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Teacher asks students to do Question 8 at home.

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2

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Teacher highlights the fifth type of decision-making situation – sell or process further.

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4 Teacher explains that there are cases that profit from selling will be

higher if the company further processes the product.

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Teacher explains the decision rule to sell or process further a product.

5

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Teacher uses the example to illustrate a sell or process further decision.

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Teacher explains some points that are relevant to make the decision.

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Teacher explains the solution and makes a conclusion.

8

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Teacher asks students to do the calculations

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10 Teacher explains the solution.

Remarks: Total fixed costs remain the same regardless if the ‘Model A’ is processed further or not. They are irrelevant for making decision in this case.

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Teacher summarize all types of relevant costs and irrelevant costs that students have learned.

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Teacher summarizes the types of business decisions that students have learned.

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Teacher summarizes the types of business decisions that students have learned.

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Teacher asks students to do Questions 9 and 10 at home.

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Cost Accounting for Decision-making Case Study

Questions

Senior Citizen Association (SCA) is a non-profit making organization in Hong Kong. Its mission is to enhance the living quality of the elderly in the community through using technology and people-oriented services.

Three major services are provided for seniors.

1. Call and Care service (CC)– It provides a territory-wide 24-hour support and caring services for the elderly and needy.

2. Easy Home service (EH)– It provides high quality, reliable and comprehensive home care services for the silver-aged group and their families. The services include integrated discharge support, home care planning, recover training at home, household supporting and caring services.

3. Life Book Personalized Printing service (LBPP)– It enables the elderly to record their life experience and wisdom.

Revenue and expenses for last year are as follows:

CC EH LBPP Total

$’000 $’000 $’000 $’000

Revenue (Includes donation from that service) 800 400 200 1,400

Less: Variable expenses 350 150 100 600

Contribution margin 450 250 100 800

Less: Fixed expenses 200 130 150 480

Net income 250 120 (50) 320

Because of economic downturn, the Chief Executive Officer of SCA, Tommy Yeung, is concerned about the organization’s financial position. He wants to save some resources to prepare for the coming recession.

After seeing the above data, he considers dropping the LBPP service.

Additional information:

(i) The above fixed expenses comprise the following:

CC EH LBPP

$’000 $’000 $’000

Depreciation 60 40 45

Insurance 20 25 35

Salaries 75 30 33

Rent 25 15 27

General administrative overhead 20 20 10

(ii) The depreciation in LBPP is for a printing machine that is used to print the life books for the seniors. If this service terminates, the machine will dispose.

(iii) Total general administrative overhead and rent will remain the same even SCA drops LBPP service.

(iv) Insurance and salaries for LBPP will be saved if SCA drops LBPP service.

Required:

(a) Prepare a statement for Tommy to assess the long term financial viability of the organization, showing separately the margin of each of the above three services. (8 marks)

(b) Should LBPP service be discontinued? Why? (8 marks)

(c) What other factors that Tommy should consider before terminating LBPP service. (4 marks)

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Cost Accounting for Decision-making Case Study

Suggested Solution

(a)

CC EH LBPP Total

$’000 $’000 $’000 $’000 Revenues (Includes donation from that service) 800 400 200 1,400

Less: Variable expenses 350 150 100 600

Contribution margin 450 250 100 800

Less: Traceable fixed expenses:

Depreciation 60 40 45 145

Insurance 20 25 35 80

Salaries 75 30 33 138

Service margins 295 155 (13) 437

Less: Common fixed expenses*:

Rent 67

General administrative overhead 50

Net income 320

*Remark: To help Tommy has a clear picture of the financial viability of each of the organization’s services, rent and general administrative overhead should not be allocated. They are common costs that should be deducted from the total service segment margin.

(8 marks) (b) Impact of dropping LBPP service on net income:

$’000 Reduction in contribution margin if LBPP terminates: (100) Cost savings from tracable fixed costs:

Insurance 35

Salaries 33

Decrease in net income (32)

As shown from the above calculation, LBPP service should not be terminated. It is because if this service is dropped, the overall net income will be decreased by $32,000.

Remarks: Depreciation for the printing machine is a sunk cost and the machine has no disposal value.

The rent and general administrative overhead are allocated and cannot be avoided if LBPP service is dropped; therefore, they are not relevant to the decision. (8 marks) (d) Senior Citizen Association (SCA) is a non-profit making organization which serves the seniors in this community. LBPP service gathers life experience and wisdom of seniors. It can also be shared with their families, friends, and become part of the valuable memories for next generation. The mission for SCA is not profit maximisation, therefore Tommy should weigh non-financial factors more than financial

factors when he makes decision. (4 marks)

(Total: 20 marks)

(163)

Cost Accounting for Decision-making Home Assignment

Questions

Question 1

(a) What is a relevant cost? (1 mark)

(b) ‘All future costs are relevant costs’. Do you agree with the statement? Illustrate your answer with

an example in the case of a factory. (5 marks)

(Total: 6 marks) Level of difficulty: *

Question 2

Peter’s bicycle is broken and a repair cost of $300 is needed to make it runs again. At the same time, his friend, Hilary offers to sell him a used bicycle in good condition at a cost of $300. The following are the estimates made by Peter on the two bicycles:

Peter’s bicycle Hilary’s bicycle

$ $

Purchase price 3,500 300

Repair cost 300 0

Annual operating costs 160 120

Required:

(a) Identify relevant cost(s) and irrelevant cost(s) from the above question and state the reason?

(5 marks)

(b) What is your advice to Peter? (3 marks)

(c) What other factors that he should consider before making a final decision? (2 marks) (Total: 10 marks) Level of difficulty: **

Question 3

Fenny Company manufactures camera lens at its factory plant at Nanjing. An external supplier has made an offer to sell 20,000 units of ‘Len100’ to the company at a price of $25 per unit. The accounting department has provided the following estimated manufacturing costs of ‘Len100’:

$ / per unit

Direct materials 8

Direct labor 9

Variable overheads 5

Fixed overheads 4

Total costs 26

Required:

(a) Should Fenny Company accept the offer if its factory plant at Nanjing has idle capacity now?

(5 marks) (b) If the plant is in full capacity, what will be the maximum acceptable external purchase price if the company have to use other type of lens’ capacity with similar cost structure to manufacture ‘Len100’?

(3 marks) (Total: 8 marks) Level of difficulty: **

(164)

Question 4

Jenny Company manufactures three components: A, B and C. Data collected for the coming year is shown below:

Component A B C Number of units produced 15,000 30,000 60,000

Production costs per unit $ $ $

Direct materials 60 75 30

Direct labor 120 135 60

Variable overhead 30 45 15

Specific fixed overhead incurred from producing each type of the component will be:

$

A 15,000

B 75,000

C 90,000

General fixed overhead of producing all components will be $450,000.

An offer was received from an external supplier for the supply of all the components and the company had collected the following information for consideration:

(i) The prices quoted by the external supplier were:

Component $ / per unit

A 90

B 315

C 150

(ii) Carriage inwards for the purchased component will be $1 per unit.

(iii) Indirect labor will be increased by $38,000 annually for receiving, inspecting and handling of all the purchased components.

(iv) General fixed cost of $280,000 can be avoided annually if the production of all the components is outsourced.

Required:

(a) Prepare a statement to show the total costs if the company manufactures all the components.

(6 marks) (b) Prepare a statement to show the total costs if the company outsources all the components.

(5 marks) (c) Referring to the calculations in (a) and (b), advise whether Jenny Company should outsource all

the components. (3 marks)

(d) If the company wants to maximize the profit, determine the most profitable decision by deciding which components should be manufactured and which should be outsourced. What is the total

costs for your answer? (6 marks)

(e) Suggest TWO qualitative factors that the company needs to consider in deciding whether to

manufacture or outsource. (5 marks)

(Total: 25 marks) Level of difficulty: ***

(165)

Question 5

William Coffee Cups manufactures a variety of coffee cups. The demand for the cups has kept increasing and the management foresees that the production line would not have enough capacity to satisfy the market. In the view of such, the company makes the following estimates for next year:

Product Demand (units) Price ($) Direct materials ($) Direct labor ($)

A 8,000 15 4.5 6

B 10,000 18 3.5 8

C 24,000 10 2.5 4

D 125,000 4.5 0.8 1.6

Additional information:

(i) The factory has a capacity of 10,000 direct labor hours per annum.

(ii) The direct labor rate is estimated at $40 per hour.

(iii) Total fixed cost per annum is $620,000.

(iv) Variable manufacturing overheads are $8 per direct labor hour.

Required:

(a) Determine the contribution margin per direct labor hour for each product. (6 marks) (b) Calculate the number of units of each product that the company should produce to maximize the

profit. (4 marks)

(c) Determine the highest direct labor rate that the company would be willing to pay for additional

capacity. (2 marks)

(d) If the company does not want to loss sales, suggest some ways other than (c) for the company to meet the production quantity for the expected sales demand. (3 marks) (Total: 15 marks) Level of difficulty: ***

Question 6

Shiny Company manufactures and sells a variety favour of chocolate bars. The average selling price and costs per box of chocolate bars are as follows:

$

Selling price 36

Costs incurred:

Direct materials (5)

Direct labor (7)

Variable manufacturing overhead (4) Variable selling expenses (2) Fixed manufacturing overhead (3)

Profit 15

Chocolate bars are manufactured in batch sizes of 50 boxes. Each batch requires 6 machine hours to manufacture. The production capacity is 5,000 machine hours per month and the company only produces at 80% of its capacity.

A retail shop approaches Shiny to buy 6,000 boxes each month for three months. The shop requests Shiny to repack the box with new design that costs $1 per box. However, no variable selling expenses will be incurred for this order.

(166)

Required:

(a) Does Shiny Company have enough capacity to accept this order? (3 marks) (b) Determine the minimum price per box that the company should charge for this order. (5 marks) (c) What other factors that the company should consider before making a final decision. (2 marks) (Total: 10 marks) Level of difficulty: **

Question 7

Harry Company manufactures and sells three models of speakers. The management considers dropping Model 003 from its product lines because it has been incurring losses over the past few years. The following is the segment income statement of last year:

Model 001 Model 002 Model 003 Total $’000 $’000 $’000 $’000

Sales 800 400 300 1,500

Less: Variable costs 300 150 230 680

Contribution margin 500 250 70 820

Less: Fixed costs:

Factory rent 50 20 30 100

Depreciation for factory machines 15 16 20 51

Utilities expenses 30 19 40 89

Maintenance expenses 18 17 15 50

Wages and salaries 25 24 28 77

Advertising expenses 8 10 15 33

Operating income / (loss) 354 144 (78) 420

Additional information if Model 003 is dropped:

(i) Factory rent and depreciation for factory machines will not be affected.

(ii) Total utility expense will be reduced by $50,000.

(iii) Wages and salaries for Model 003 can be eliminated.

(iv) Sales of Model 002 will be decreased by 5%.

(v) One-third of total advertising expense will be saved.

Required:

(a) Should Harry Company drop Model 003? (6 marks)

(b) The management of the company believes that if advertising expense is to be increased by $32,000, the sales of Model 003 will be raised by 50%. Should the company drop Model 003 or increase the

advertising expense for more sales? (6 marks)

(Total: 12 marks) Level of difficulty: ***

(167)

Question 8

Pleasure Company purchased a welding machine three years ago. The company wants to replace it with a new model. The following information relating to the two machines is available:

Old machine New machine

$ $

Purchase cost 150,000 170,000

Remaining useful life 5 years 5 years

Current disposal value 40,000 -

Disposal value at the end of its useful life 3,000 60,000

The company produces 160,000 units per annum. Annual operating costs, excluding depreciation, for the old and the new machine are $50,000 and $35,000 respectively. If the company uses the new machine in production, the defective rate will be reduced by 2%. The rework cost for the defected product is $0.5 per unit.

Required:

(a) Should Pleasure Company replace the old machine with the new machine? (7 marks) (b) What cost should the company be considered as sunk cost when making this decision? (1 mark) (c) What other factors should the company consider before making a final decision. (2 marks) (Total: 10 marks) Level of difficulty: **

Question 9

Susan Inc. manufactures products C03 from processing one ton of cotton. Each ton of cotton can make 500 meters of C03 which can then be sold at $15 per meter in the market. The company can use these 500 meters of C03 for further processing into 450 meters of D04 at a total cost of $2,600 and a selling price of $23 per meter.

Required:

Should the company sell C03 at present orfurther process it to D04if the production costs of $80,000 is

allocated to produce C03.? (5 marks)

(Total: 5 marks) Level of difficulty: **

(168)

Question 10

The sales manager of Stella Ltd. intended to tender for a one-off order from overseas. The costs associated with the project were as follows:

$

Material X 50,000

Material Y 90,000

Direct labor 70,000

Supervision 17,500

Overheads 105,000

332,500 Additional information:

(i) Material X was in stock and with no scrap value if re-sold. Material Y would have to be ordered at the cost shown above.

(ii) Direct labor costs of $70,000 was related to workers that would be transferred to this project from another project. In this connection, extra labor was needed to be recruited and transferred back to the other project at a cost of $80,000.

(iii) Supervision costs had been allocated to the project on the basis of 25% of direct labor costs and would be carried out by existing staff within their normal duties.

(iv) Overheads had been allocated to the project at the rate of 150% on direct labor.

(v) The company was currently operating at its normal capacity.

(vi) The project would need the utilization of machinery that would have no other use to the company after the project had finished. The machinery would have to be purchased at a cost of $100,000 and then disposed of for $40,000 at the end of the project.

(vii) The sales manager knew that an oversea customer was prepared to pay up to a maximum of

$250,000 for the project and a competitor was prepared to accept the order at that price. Regarding this, the production manager commented that the minimum price that the sales manager should charge was $350,000 given the above estimations plus the cost of the machine.

Required:

(a) Calculate the contribution of the above project when the selling price is $350,000. (8 marks) (b) Advise the sales manager whether the company should go ahead with the tender for the project,

state the reason. (2 marks)

(c) If the sales manager finally decides to make the tender, should he take the advice from the production manager to charge $350,000 for the project? Why or why not? (6 marks) (d) State other factors that should be taken into accounts before making the tender for this project.

(4 marks) (Total: 20 marks) Level of difficulty: ***

(169)

Cost Accounting for Decision-making Home Assignment

Suggested Solutions

Question 1

(a) A relevant cost is a future cost that differs across options. (1 mark) (bi) No, not agree. Only those future costs that will differ across options under consideration are

relevant. (2 marks)

(bii) For example, if the factory signs a long-term lease agreement with the landlord, then the future rental fee will be an irrelevant cost because the amount of it remains unchanged across

production options. (3 marks)

(Total: 6 marks) Question 2

(a) Relevant costs include:

• Purchase price of Hilary’s bicycle (Avoidable cost) • Repair cost for Peter’s bicycle (Avoidable cost)

• Annual operating costs for Hilary’s bicycle (Incremental cost) • Annual operating costs for Peter’s bicycle (Incremental cost)

Irrelevant cost:

• Purchase price of Peter’s bicycle (Sunk cost)

(1 mark each, total: 5)

(b) No matter to repair or to purchase, Peter still needs to pay $300 in either case. Therefore it is more advisable for Peter to buy Hilary’s bicycle as he can save $40 ($160 - $120) operating costs

per annum in future. (3 marks)

(c) Other factors that Peter needs to consider include:

1. Number of years that Hilary’s bicycle can ride before disposal.

2. Expected resale values of both bicycles.

3. Personal preference of Peter to ride on his own bike or Hilary’s one.

(1 mark each, max: 2) (Total: 10 marks) Question 3

(a) In the view that fixed overheads are unavoidable, Fenny Company should not accept the offer because it can save $3* per unit if the lenses are manufactured internally instead of making

external direct purchase. (5 marks)

*Workings:

Make Buy

$ $

Direct materials 8

Direct labor 9

Variable overhead 5

Purchase price 25

Total costs 22 25

(170)

(b) Since the incremental cost of using the production capacity of other type of lens is approximately

$4 per unit (i.e. the fixed overheads), the maximum external acceptable purchase price would be

$26 per unit. (3 marks)

(Total: 8 marks) Question 4

(a) Component A B C Total

($000) ($000) ($000) ($000) Direct materials (15,000 x $60 / 30,000 x $75 / 60,000 x $30) 900 2,250 1,800 4,950 Direct labor (15,000 x $120 / 30,000 x $135 / 60,000 x $60) 1,800 4,050 3,600 9,450 Variable overhead (15,000 x $30 / 30,000 x $45 / 60,000 x $15) 450 1,350 900 2,700

Specific fixed overhead 15 75 90 180

3,165 7,725 6,390 17,280

General fixed overhead 450

Total manufacturing costs 17,730

(6 marks)

(b) Component A B C Total

($000) ($000) ($000) ($000) Payment to the supplier

(15,000 x $90 / 30,000 x $315 / 60,000 x $150)

1,350 9,450 9,000 19,800 Additional carriage inward

(15,000 x $1 / 30,000 x $1 / 60,000 x $1) 15 30 60 105

Additional indirect labor 38

General fixed cost ($450,000 - $280,000) 170

Total outsourcing costs 20,113

(5 marks) (c) An extra cost of $2,383,000 ($20,113,000 - $17,730,000) would be incurred if all the components are outsourced, therefore the company should not do so. (3 marks) (d) The manufacturing costs for A is $3,165,000 {15,000 x $(60 + 120 + 30) + $15,000}, which is greater than the outsourcing costs of $1,365,000 {15,000 x $(90 +1)}, therefore the company should outsource A.

The manufacturing costs for B is $7,725,000 {30,000 x $(75 + 135 + 45) + $75,000}, which is less than the outsourcing costs of $9,480,000 {30,000 x $(315 +1)}, therefore the company should produce B.

The manufacturing costs for C is $6,390,000 {60,000 x $(30 + 60 + 15) + $90,000}, which is less than the outsourcing costs of $9,060,000 {60,000 x $(150 +1)}, therefore the company should produce C.

If the company wants to maximize the profit, the company should outsource A and produce B and C, and the total costs will be $15,968,000 as shown below:

$’000

Purchase price for A (15,000 x $90) 1,350

Manufacturing costs for B and C

{30,000 x $(75 + 135 + 45) + 60,000 x $(30 + 60 + 15) + $75,000 +$90,000} 14,115

General fixed cost 450

Additional carriage inward (15,000 x $1) 15

Additional indirect labor 38

Total costs 15,968

(6 marks)

(171)

(e) Qualitative factors which would influence the decision to make or buy are:

1. Dependability of suppliers: Whether the external supplier can be relied upon for the delivery of goods at a specified time.

2. Availability of resources: Whether there is any limitation on the company to have access to the available resources to make the components intenally.

3. Quality control of purchased goods: Whether it would be difficult for the company to have control over the quality of the goods purchased.

4. Technology and personnel: Whether the company has the required special technology and personnel to produce the components.

5. Trend of future costs of production: Whether the future costs of production of the component from the supplier would increase relative to the cost of production by the company.

(5 marks) (Total: 25 marks) Question 5

(a) A ($) B ($) C ($) D ($)

Selling price 15 18 10 4.5

Direct materials (4.5) (3.5) (2.5) (0.8)

Direct labor (6) (8) (4) (1.6)

Variable manufacturing overheads (VOH) (W1) (1.2) (1.6) (0.8) (0.32)

Contribution margin 3.3 4.9 2.7 1.78

Contribution margin per DLH 22 24.5 27 44.5

Ranking 4 3 2 1

(6 marks) (W1) Direct labor required for A: $6 / $40 = 0.15 per unit

Direct labor required for B: $8 / $40 = 0.2 per unit Direct labor required for C: $4 / $40 = 0.1 per unit Direct labor required for D: $6 / $40 = 0.04 per unit VOH for A = $8 x 0.15 = $1.2

VOH for B = $8 x 0.2 = $1.6 VOH for C = $8 x 0.1 = $0.8 VOH for D = $8 x 0.04 = $0.32

(b) Product Hour required / unit Units Hours

D 0.04 hour 125,000 5,000

C 0.1 hour 24,000 2,400

B 0.2 hour 10,000 2,000

A 0.15 hour 8,000 1,200

Total hours required 10,600

(172)

The company does not have enough production capacity to fulfil the expected sales since the total number of hours required for producing all the four products is 10,600, while the production capacity of the compant is only 10,000 hours.

To maximize its profits, the company should produce 125,000 units (5,000 hours) of D, 24,000 units (2,400 hours) of C, 10,000 units (2,000 hours) of B, and 4,000 units (10,000 – 5,000 –

2,400 – 2,000 = 600 hours) of A. (4 marks)

(c) Because the additional capacity would be used to produce A, the company should be willing to pay up to $66 per hour ($40 usual rate plus $22 contribution margin per hour for A) for additional

labor time. (2 marks)

(d) The company may consider to ask the labor to work overtime; add another shift; expand the workforce; outsource part of the work to external suppliers; and eliminate wasted labor time in

the production process etc. (3 marks)

(Total: 15 marks)

Question 6

(a) This order will consume 720 {6 x (6000 / 50)} machine hours per month for three months. Since there is excess capacity of 1,000 {5,000 × (100% − 80%)} machine hours per month, Shiny Company can accept this order without expanding its current capacity. (3 marks) (b) The company only has to charge the incremental variable costs per box for this order because it

has enough capacity to handle this order.

$

Direct material 5

Direct labor 7

Variable manufacturing overhead 4

Additional cost of repacking 1

Minimum price to be charged for this order 17

Therefore, the minimum price for this order is $17 per box. (5 marks) (c) Factors that the company should consider before making a final decision:

- The company should determine whether the estimate costs are accurate as they are average costs in the past only.

- The company should also consider how its regular customers might react to the lower price offered to the retail shop.

(2 marks) (Total: 10 marks)

(173)

Question 7

(a) Impact of dropping Model 003 on operating income:

$’000 Reduction in contribution margin:

Model 003 (70)

Model 002 (12.5)

Cost savings:

Utilities expense 50

Wages and salaries 28

Advertising expense 11

Increase in operating income 6.5

Therefore, Model 003 should be dropped because the company can increase the income by

$6,500. (6 marks)

(b) Impact of increasing advertising expense on operating income:

$’000 Increase in contribution margin ($70,000 x 50%) 35

Increase in advertising expense (32)

Increase in operating income 3

From (a), if the company drops Model 003, the operating profit will be increased by $6,500.

From (b), if the company increases the advertising expense on Model 003, the operating profit will be increased by $3,000. As a conclusion, the company still should drop Model 003.

($6,500 > $3,000 by $2,500) (6 marks)

(Total: 12 marks) Question 8

(a) If the company purchases the new machine and disposes the old one:

$ Difference in disposal value at the end of 5 years ($60,000 - $3,000) 57,000 Decrease in annual operating costs {5  $(50,000 – 35,000) 75,000 Decrease in rework cost (160,000 x 0.02 x $0.5 x 5) 8,000

Disposal value of the old machine at present 40,000

Purchase cost for new machine (170,000)

Net benefit 10,000

Pleasure Company should replace the old machine with the new one because it can gain a net

benefit of $10,000. (7 marks)

(b) The purchase cost of the old machine is a sunk cost. (1 mark) (c) Other factors need to consider:

(1) Will sales be increased because of a lower defective rate after using the new machine?

(2) Does the company have enough cash to purchase the new machine? (2 marks) (Total: 10 marks)

(174)

Question 9

$ Sales value after further procession ($23 x 450) 10,350

Sales value at present ($15 x 500) (7,500)

Incremental revenue 2,850

Further processing cost (2,600)

Net benefit 250

The company should further process C03 into D04 as the net benefit is $250 for each ton of cotton.

The allocated cost of $80,000 is not relevant in this decision. (5 marks) (Total: 5 marks) Question 10

(a) $

Material X (Irrelevant cost) 0

Material Y 90,000

Direct labor 80,000

Net cost of machinery ($100,000 - $40,000) 60,000

Total relevant costs 230,000

Contract price 350,000

Contribution 120,000 (8 marks)

(b) The sales manager should go ahead to tender this project because the company can earn $120,000

more of profit with the tender price at $350,000. (2 marks)

(c) The sales manager should not take the advice from the production managers to set the tender price at $350,000 because:

(i) The costs calculated in (a) do not represent incremental cash flows arising from undertaking the contract.

(ii) Assume the company has enough capacity, supervision costs and overheads are irrelevant for determining the contribution for the project

(iii) Any sales revenue in excess of $230,000 will provide an additional contribution which will result in an increase in profits.

(iv) The competitor is prepared to accept the order at $250,000, then a tender price slightly below

$250,000 would be appropriate.

(v) If the tender price is set at $250,000, then there is still a profit of $20,000 ($250,000 -

$230,000) from the project.

(2 marks each, max: 6 marks) (d) Before accepting the project, the following qualitative factors should be considered.

(i) Is there sufficient spare capacity to undertake the project?

(ii) Is the oversea customer credit worthy?

(iii) Does the workforce have the necessary skills to undertake the project?

(iv) Is the contract likely to result in repeat sales from the oversea customer?

(4 marks) (Total: 20 marks)

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