FEEDBACK TUTORIAL LETTER

1st SEMESTER 2017

ASSIGNMENT 2

COST AND MANAGEMENT ACCOUNTING 3A

CMA311S

1
ASSIGNMENT 02 SOLUTIONS
QUESTION 1 (25 Marks)
a)
Order Cost
56,250 = 50 orders√
1,125
= 50 x $10 = $500√

Holding Cost
1, 125 = 562.5 (Average Inventory) √
2
562.5 x $0.50 = $281.25√

Total holding and ordering costs

= $500 + $281.25 = $ 781.25√
(√ = 1 mark each, total = max 4 marks)

b)
EOQ = √

Where
d = annual demand
o – ordering cost per order
cc – carrying costs per unit per year

EOQ = √

= 1,500 units√√

This is the order quantity that minimizes ordering and holding costs. √√
(√ = 1 mark each, total = 6 marks)
c)
Costs at EOQ
Order Cost
56,250 = 37.5 orders
1500
= 37.5 x $10 = $375
Holding Cost
1500 = 750 (Average Inventory)
2
750 x $0.50 = $375

Comparison
At EQQ At Current Difference
Ordering Costs 375.00√ 500.00 125√
Holding costs 375.00√ 281.25 (93.75)√
Total costs 750.00√ 781.25 31.25√
(√ = 1 mark each, total = max 6 marks)

d)
Existing Cost – without discount N$

Material 56,250 x $3.50 196,875.00√

Ordering 375.00√
Holding 375.00√
197,625.00

Revised Cost – with dsicount

Material $196,875 x 95% 187,031.25√
Order (56,250 ÷5625) x $10 100.00√
Holding (5625 ÷ 2) x $0.50 1,406.25√
188,537.50

Therefore availing of the discount is financially worthwhile. √ √

There is a saving of $9,087.50. √
(Alternatively the student could look at the impact on each cost).
(√ = 1 mark each, total = max 9 marks)
QUESTION 2 (30 Marks)

a.) The financial consequences would be as follows;

If the Oshakati depot is closed the sales revenue of N$1.5 million will be forgone.
However, tyres cost of N$900 000, wages and salaries of N$220 000 and 15% of
overheads (15% X N$430 000 = N$64 500) would no longer be incurred. (2 marks)

That is, the business would forgo contribution of;

N$
Sales 1 500 000
Tyres cost ( 900 000)
Wages and Salaries ( 220 000)
Overheads ( 64 500)
Contribution foregone 315 500   (2 marks)

Marks should be awarded to alternative calculation that justify that the branch should not be
closed.

Eighty five percent of the overheads will still be incurred, that is N$365 500  If the depot is
kept open, the depot would contribute N$315 500 towards these overheads. If the depot
were to be closed the loss would be N$365 500 rather than N$50 000  if it is kept open.
Therefore the depot should be kept open (3 marks)

b)

Windhoek Oshakati Tsumeb

Sales N$2 000 000 N$1 500 000 N$ 2 500 000
Selling price N$25 N$25 N$25
Sale of tyres 80 000 units 60 000 units 100 000units

This is in the ratio of 8:6:10

Contribution per tyre sold will be N$ N$ N$

Selling price 25 25 25
Tyres cost (N$1 200 000/ 80 000 units) 15 15 12
(N$15 x 80%)
Wages and Salaries
(N$250 000 x 80%)/80 000 units 2.50
(N$220 000 x 80%)/60 000 units 2.93
(N$358 000 x 80%)/100 000 units 2.86

Variable overheads:
(N$450 000 x 25%)/80 000 units 1.41
(N$430 000 x 15%)/60 000 units 1.07
(N$600 000 x 20%)/100 000 units 1.20
Contribution 6.09 (3marks) 6.00 (3 marks) 8.94 (3 marks)
Weighted contribution;
Windhoek (8/24) x 100 x 6.09 = N$2.01 
Oshakati (6/24) x 100 x 6.00 = N$1.50 
Tsumeb (10/24) x 100 x 8.94 = N$3.75 
Weighted contribution = N$7.26 ( Any2 above max 2 marks)

Budgeted fixed costs N$

Windhoek = 75% X 450 000 = 337 500
Oshakati = 85% X 430 000 = 365 500
Tsumeb = 80% X 600 000 = 480 000
Total Fixed costs 1 183 000 (1 mark)

Break-even point = N$1 183 000/$7.26 = 162 948 tyres (1 mark)

c) Three non-financial issues

 The possible redundancies – this will affect the morale of the employees in
other depots

 Possible impact on brand name – the business may be viewed by customers,

suppliers and general public as failing

 Possible erosion of market share – closing the depot will increase the
competitor’s presence in the market

 Possible bad press publicity

(Any three and 2 marks for each explained)

d)
 Costs are assumed to behave in a linear fashion. Unit variable costs are
assumed to be constant and fixed costs are assumed not to change. This is
not true because in reality there are semi variable and semi fixed costs which
do not behave that way.

 Sales revenue is assumed to be constant for each unit sold. This is unrealistic
because of the necessity to reduce selling price to achieve higher volumes.

 It assumes there are no inventories which is not realistic.

 It assumes activity is the only factor affecting costs and factors such as
inflation are ignored.

 The analysis only works in short term.

 It assumes that as long as an activity is above breakeven point then it’s

profitable. This is not realistic because changes in cost and revenue pattern
may result in breakeven points after which losses are made
 (Any 4 and I mark for each. Other assumption outside this should be merited)

QUESTION 3 (25 MARKS)

(a)
 Activity Based Costing (ABC) is a cost management approach that links resource
consumption to activities that a company performs and the assigns those
activities and their associated costs to customers or product lines. √
 ABC recognises that it is activities which drive costs and aims to control cost
drivers by charging overheads to cost units on the basis of benefits received
from the particular indirect activity e.g. ordering, planning etc. √
 ABC seeks to attribute overheads to product costs on a realistic basis than
simply production volume and also tries to show the relationship between
overhead costs and the activities that cause them√
 Activity based budgeting (ABB) is a planning and control system which seeks to
support the objective continuous improvement. √
 It is a development of traditional budgeting systems based on activity analysis
techniques√.
 ABB reviews activities to ensure they are adding value and focuses on
relevant performance measures, by linking strategic objectives of the
organisation with the objectives of individual activities.√
(√= 1 mark each, total 6 marks)

(b)
(i) (ii)
Cost Pool Cost Driver Act. Based O.A.R.
Machining Machine hours√ N$1.95 per machine hour√ x 2
Stores No. of orders issued√ N$275 per order issued√ x 2
Quality Assurance Budgeted production – units√ N$9 per unit √ x 2
Maintenance No. repair hours√ N$30 per repair hour√ x 2

√ x 2 = 8 marks for OAR and

4 marks for four cost driver identified
Total = 12 marks
(c)

Dept. 1 Dept. 2 Dept. 3 Total

N$ N$ N$ N$
Machining 780,000√ 585,000√ 390,000√ 1,755,000
Stores 137,500√ 275,000√ 220,000√ 632,500
 Quality Assurance 180,000√ 90,000√ 135,000√ 405,000
Maintenance 180,000√ 42,000√ 156,000√ 378,000
Total Overhead Cost 1,277,500√ 992,000√ 901,000√ 3,170,500
Budgeted production units 20,000√ 10,000√ 15,000√ 45,000
Overhead Cost per unit N$63.88√ N$99.20√ N$60.06√

(√ = ½ mark each, max 7 marks) mark up to 14/2=7

END OF ASSIGNMENT TWO SOLUTION TOTAL= 80 MARKS