PRODUCT LIFE CYCLE

QUESTION 01
Oria Software Ltd, a computer software company is developing a new accounting package, “Future
Accounting”. The following are the budgeted amounts for the product over a four-year product life-cycle
Year 0 Year 1 Year 2 Year 3 Year 4
Estimated quantity in units 3,500 5,000 2,000 500
Research & Dev’t costs 360,000
Design costs 240,000 250,000
Production costs:
Variable cost per unit 42 35 35 40
Fixed costs 150,000 150,000 120,000 100,000
Marketing costs:
Variable cost per unit 40 35 10 22
Fixed costs 30,000 20,000 12,000 15,000
Distribution:
Variable cost per unit 20 22 18 10
Fixed costs 50,000 60,000 40,000 30,000
Customer service:
Variable cost per unit 8 12 14 10
Fixed costs 80,000 85,000 45,000 -
To be profitable, Oria Software Ltd must generate revenues to cover costs for all six-business functions
taken together and, in particular, its high non-production costs. The company has therefore proposed a
selling price of GH¢ 250 per software over the entire product life cycle.
Required:
i) Explain lifecycle costing and identify TWO (2) benefits Oria Software Ltd will derive from using lifecycle
costing. (3 marks)
ii) Calculate cost per software taking into account the entire lifecycle and comment on the proposed
selling price.
CVP ANALYSIS
QUESTION 02
Boasiako Ltd manufactures high quality coffee biscuits that are sold to hotels and restaurants in
Koforidua. Two months ago it had prepared a budget for the forthcoming financial year.
Details of the budget is presented below:
TZS
Sales 6,000,000
Less:
Direct materials 2,080,000
Direct labour 1,160,000
Variable overheads 840,000
Fixed overheads 972,600
Total costs 5,052,600
Profit 947,400
The budget above has been prepared on the assumption that sales will be 800,000 packets of biscuits.
However, due to changing economic conditions, the sales forecast for the year is now 720,000 packets
of biscuits. It is expected that selling price per unit, direct costs per unit and variable overhead cost per
unit will not change from those budgeted. It is also expected that fixed overheads will be the same as
those budgeted.
Management is now considering a number of options so as to improve profitability for the forthcoming
financial year:
Option 1:
Decrease the selling price by 20%. It is anticipated that this would increase sales volume by 25% on the
forecast sales for the current year.
Option 2:
Decrease all variable costs by 10% and decrease fixed costs by 10%. This is not expected to have any
impact on the sales level.
Option 3:
Decrease the selling price by 10% and decrease fixed costs by 5%. This is expected to increase sales
volume by 25% on the forecast sales for the current year.
Required:
a) Calculate the expected profit for the current year (forecast sales). (2 marks)
b) Based on the forecast activity for the year, calculate:
i) The breakeven point in packets of biscuits.
ii) The margin of safety in percentage terms.
iii) The sales revenue required to earn a profit of GH¢1,440,000. (6 marks)
c) Evaluate the profitability of the three options and recommend the option that Boasiako Ltd should
adopt. (7 marks)
(Total: 15 marks)
STANDARD COSTING AND VARIANCE ANALYSIS
QUESTION 03
Emefa Ltd bakes cakes by mixing three ingredients namely Flour, Sugar and Butter in the standard
proportions 5:3:2 respectively. However, the production process does not always mix the ingredients in
these proportions, but the cake can be sold if the mixture is within certain limits.
The new production manager (a celebrity chef) has argued that the business should use only organic
ingredients in its cake production. Organic ingredients are more expensive but should produce a product
with an improved flavour and give health benefits for the customers. It was hoped that this would stimulate
demand and enable an immediate price increase for the cakes.
The standard prices for the ingredients are:
Flour – TZS 2.50 per kilo
Sugar – TZS 3.00 per kilo
Butter - TZS 2.00 per kilo
There is 5% normal loss in the production process.
The budget for production and sales in the period was 50,000 cakes. Actual production and sale of
cake mixture was 228,000 kg.
During the period the inputs were as follows:
Kg TZS
Flour 96,000 249,600
Sugar 72,000 216,000
Butter 50,000 105,000
Required:
Calculate the following variances:
i) Material Mix Variance (3 marks)
ii) Material yield variance (3 marks)
iii) Material usage variance (3 marks)
b) Differentiate between planning variances and operational variances. (2 marks)
c) Explain why separating variances into their planning and operational components provides better
information for planning and control purposes. (4 marks)
(Total: 15 marks)
STANDARD COSTING AND VARIANCE ANALYSIS
QUESTION 04
The underlisted data relate to actual output, costs and variances for the monthly accounting period of a
company that makes only one product. Opening and closing work in progress were the same.
Variances: TZS
Direct materials price 30000 F
Direct materials usage 18000 A
Direct labour rate 16000 A
Direct labour efficiency 32000 F
Variable production overhead expenditure 12000 A
Variable production overhead efficiency 8000 F
Variable production overhead varies with labour hours worked.
A standard marginal costing system is operated.
Actual production of product BM 36,000 units
Actual costs incurred:
Direct materials purchased and used (300,000 kg) TZS 420,000
Direct wages for 64000 hours TZS 272,000
Variable production overhead TZS 76,000
Required:
(a) (i) Calculate the standard cost of materials and standard rate per labour hour.
(ii) Prepare a standard product cost sheet for one unit of product BM.
(12 marks)
(b) Explain the possible causes of the following variances:
(i) Material price variance
(ii) Material usage variance
(iii) Wage rate variance
(iv) Labour efficiency variance (8 marks)
(Total: 20 marks)
THROUGHPUT ACCOUNTING
QUESTION 05
KYC Ltd makes three products Hand Chew (HC), Yogurt Swallow (YS) and Canned Lick (CL). All three
products are sold as a package and so are offered for sale each month in order to be able to provide a
complete market service. The products are fragile, and their quality deteriorates rapidly once they are
manufactured. The products are produced on two types of machines and worked on by a single grade of
direct labour. Five direct employees are paid GH¢8 per hour for a guaranteed minimum of 160 hours
each per month. All of the products are first moulded on machine type 1 and then finished and sealed on
machine type 2. The machine hour requirements for each of the products are as follows:
Product Product Product
HC YS CL
Hours/Unit Hours/Unit Hours/Unit
Machine type 1 1.5 4.5 3
Machine type 2 1 2.5 2
The capacity of the available machines type 1 and 2 are 600 hours and 500 hours per month respectively.
Details of the selling prices, unit costs and monthly demand for the three products are as follows:
Product Product Product
HC YS CL
TZS/Unit TZS/Unit TZS/Unit
Selling price 91 174 140
Component cost 22 19 16
Other direct material cost 23 11 14
Direct labour cost at TZS 8 per hour 6 48 36
Overheads 24 62 52
Profit 16 34 22
Maximum monthly demand (units) 120 70 60
Although KYC Ltd uses marginal costing and contribution analysis as the basis for its decision-making
activities, profits are reported in the monthly management accounts using the absorption costing basis.
Finished goods (inventories) are valued in the monthly management accounts at full absorption cost.
Required:
i) Calculate the machine utilisation rate per month for each machine and explain which of the machines
is the bottleneck/limiting factor. (4 marks)
ii) Using the current system of marginal costing and contribution analysis, calculate the profit maximising
monthly output of the three products. (5 marks)
iii) Explain why throughput accounting might provide more relevant information in KYC’s circumstances.
(4 marks)
iv) Using a throughput approach, calculate the throughput-maximising monthly output of the three
products. (5 marks)
(Total: 25 marks)
STANDARD COSTING AND VARIANCES ANALYSIS
QUESTION 06
The following information relates to product Jupiter, produced by Bfield Ltd during January. This
represents the information that remains after a fire in the premises destroyed most of the accounting
records.
Variances TZS
Selling price 50,000 A
Materials price 28,500 F
Materials usage 7,500 A
Labour rate 18,700 F
Labour efficiency 20,400 A
Actual data
Sales (25,000 units at TZS10) 250,000
Materials costs (112,500 kg at TZS 1.20) 135,000
Labour costs (75,000 hrs. at TZS 1.9) 142,500
There was no opening or closing inventories.
Required:
Calculate the following;
i) Standard selling price per unit; (3 marks)
ii) Standard cost of material per kilogram; (3 marks)
iii) Standard kilograms of materials required per unit; (2 marks)
iv) Standard labour rate per hour; (2 marks)
v) Standard hours of labour required per unit. (2 marks)
b) Prepare the standard cost card per unit of product Jupiter. (3 marks)
(Total: 15 marks)
STANDARD COSTING AND VARIANCES ANALYSIS
QUESTION 07
Odumasi Ltd has just introduced a new standard marginal costing system to assist in the planning and
control of the production activities for the single product, which the company manufactures – ‘Tekie’.
The system became operational on 1 March 2021.
The Management Accountant has consulted with the Senior Engineer, and they have agreed on the
following standard specifications to manufacture one unit of the product ‘Tekie’.
Direct materials 4kg @ TZS 1.75 per kg
Direct labour 2 hours @ TZS 10 per hour
Variable overhead 2 hours @ TZS 8.25 per hour
According to the Marketing Director, Odumasi Ltd operates in an industry where the budgeted selling
price is normally calculated to achieve a markup of 30% on cost. The budgeted level of production and
sales activity has been agreed with both production managers and sales staff at 24,000 units per month.
The actual results for the month of March 2021 are as follows:
Sales - 22,000 units yielding a total revenue of TZS 1,276,000.
Production - 23,000 units.
Direct Materials - 90,000 kg @ TZS 162,000.
Direct labour - 48,000 hours @ TZS 576,000
Variable overhead – TZS 350,000
Required:
Calculate the relevant variances for March 2021 under the headings of sales, materials, labour and
overheads. (10 marks)
STANDARD COSTING AND VARIANCE ANALYSIS
QUESTION 08
Jungle Twist Ltd manufactures quality blocks for the housing industry in Ghana. It operates a standard
marginal costing system. The following standard costs, volume and revenue data for the quarter ending
31 October 2015 are provided:
Standard cost card:
Selling price TZS 18 per block
Costs:
Direct material P 3 kg at TZS 2.60 per kg
Q 2 kg at TZS 2.50 per kg
Direct labour 2 hours at TZS 0.60 per hour
Budgeted sales for the quarter: 62,500 blocks
Variable overheads are absorbed at the rate of TZS 0.50 per direct labour hour.
Fixed production overheard for the quarter are estimated to be TZS 78,500
The following actual results were recorded for the quarter just ended 31 October 2015:
Production : 60,000 blocks
Sales : 58,000 blocks
Price : TZS 17.00 per block
Direct material P 150,000 kg were bought and used at GH¢360,000
Q 109,000 kg were bought and used at TZS 327,000
Direct labour 108,000 hours were worked for at a cost of TZS 90,400
Variable overheads TZS 82,000
Fixed production overheads TZS 80,000
Required:
Calculate the following variances for the quarter just ended 30 September 2015 the:
i) Sales volume and sales price variances; (3 marks)
ii) Price and usage variances for each material; (3 marks)
iii) Mix and yield variance for each material; (3 marks)
iv) Labour rate, labour efficiency and idle time variances; and (3 marks)
v) Variable overheads expenditure and variable overheads efficiency variances.
(3 marks)
CVP ANALYSIS
QUESTION 09
Anima Ventures wants to start a new bakery at Bodwease in Ashanti Region. She plans to rent a
storeroom for her operations under the following terms and conditions.
Option 1 Option 2
Fixed Rent Charge TZS 5,000 TZ 3,000
Variable Rent - 10% of selling price of each loaf.
The following data are also relevant for her business:
TZS TZS
Selling Price 5.00
Material cost:
Flour 0.80
Margarine 0.70
Labour cost 0.50
Required:
i) Determine the break-even point in units under each option. (2marks)
ii) Calculate the degree of operating leverage (DOL) for the two options if 10,000 loaves of bread are to
be sold in the current year. (4marks)
iii) What would be the expected operating income if sales increase by 25% next year? (4marks)
iv) Which of the two options would you recommend to Anima Ventures and why? (3marks)
(Total: 20 marks)
CVP ANALYSIS
QUESTION 10
Kwame after his National Service and with no hope of securing a job in the formal sector has decided to
run a taxi service. The following forecast has been made for the operation of a service between Abisim
and Sunyani.
i) Revenue totalling TZS 300 a week for 52 weeks in a year. This is net of fuel and other variable costs.
ii) Tyres; four pieces for a year at TZS 120 per unit.
iii) Maintenance and servicing; TZS 120 per month.
iv) Salaries TZS 3,000 per year
v) Insurance TZS 350 per year
The net cash flow will increase at 5% per annum for the next five years due to inflation. The cost of the
vehicle is estimated at TZS 28,000. The project appears quite profitable based on the NPV criteria
using the Government policy rate of 26%. However, the banks are offering rates far higher than the
policy rate.
Required:
You are to calculate the break-even rate for the project. (10 marks)
TARGET COSTING
QUESTION 11
Wham limited assembles and sells many types of android smart phones. It is considering extending its
product range to include window phones. These smart phones produce a better sound quality than
traditional keypad (Yam) phones and have a large number of potential additional features not possible
with the previous technologies (station scanning, more choice, one touch tuning, station identification text
and song identification text etc.).
Android smart phones are produced by assembly workers assembling a variety of components.
Production overheads are currently absorbed into product costs on an assembly labour hour basis. Wham
limited is considering a target costing approach for its new window phone product.
Required:
i) Briefly describe the target costing process that Wham limited should undertake in order to successfully
introduce its new window phone. (3 marks)
ii) Assuming a cost gap was identified in the process, outline possible steps Wham limited could take to
reduce the target cost gap. (3 marks)
c) Jam limited is introducing life cycle costing to enable it to profile the cost of its product through the life
cycle, including the pre-production stage. The CEO of the firm has discussed this with you for advice.
Required:
As the Management Accountant, state and explain TWO cost reduction strategies which the CEO of Jam
limited should adopt to reduce the cost throughout the life cycle of its product. (4 marks)
ACTIVITY BASED COSTING
QUESTION 12
Santo has three product lines: P1, P2 and P3. Since its inception, the company has been using a single
direct labour cost percentage to assign overhead costs to products.
Despite P3 being a relatively new product line, it is attracting additional business. However, increasing
overhead costs has resulted in loss-making in recent times. P2 particularly has been a significant product
line since its inception. However, it has lost a considerable market share due to an increase in overhead
cost in recent times and consequent increase in price per unit. Management is, therefore, convinced that
the costing system needs some review.
A team led by the management accountant was put together to develop an improved system of costing
based on activities. The team spent several weeks collecting data for the different activities and products.
Below is data on Santo's three product lines and overhead costs for the current accounting period:
P1 P2 P3
Production volume (units) 7,500 12,500 4,000
Selling price per unit (TZS) 47 80 68
Material cost per unit (TZS) 18 25 16
Direct labour cost per unit (TZS) 4 8 6.4
Materials movements (in total) 4 25 50
Machine hours per unit 0.5 0.5 0.2
Set-ups (in total) 1 5 10
The proportion of engineering work 30% 20% 50%
Orders packed (in total) 1 7 22
Activities overhead cost: TZS
Machine maintenance and depreciation 390,000
Material receiving and handling 150,000
Engineering 100,000
Packing 60,000
Set-up labour 18,688
Total 718,688
Required:
Identify for each overhead activity, an appropriate cost driver from the information supplied, and then
calculate the product unit costs using a system that assigns overheads based on the use of activities.
(10 marks)
THROUGHPUT ACCOUNTING
QUESTION 13
Glam Co is a hairdressing salon which provides both ‘cuts’ and ‘treatments’ to clients. All cuts and
treatments at the salon are carried out by one of the salon’s three senior stylists. The salon also has two
salon assistants and two junior stylists.
Every customer attending the salon is first seen by a salon assistant, who washes their hair; next, by a
senior stylist, who cuts or treats the hair depending on which service the customer wants; then finally, a
junior stylist who dries their hair. The average length of time spent with each member of staff is as follows:
Cut Treatment
Hours Hours
Assistant 0·1 0·3
Senior stylist 1 1·5
Junior stylist 0·5 0·5
The salon is open for eight hours each day for six days per week. It is only closed for two weeks each
year. Staff salaries are TZS 40,000 each year for senior stylists, TZS 28,000 each year for junior stylists
and TZS 12,000 each year for the assistants. The cost of cleaning products applied when washing the
hair is TZS 0·60 per client. The cost of all additional products applied during a ‘treatment’ is TZS 7·40 per
client. Other salon costs (excluding labour and raw materials) amount to TZS 106,400 each year. Glam
Co charges TZS 60 for each cut and TZS 110 for each treatment. The senior stylists’ time has been
correctly identified as the bottleneck activity.
Required:
(a) Briefly explain why the senior stylists’ time has been described as the ‘bottleneck activity’, supporting
your answer with calculations. (4 marks)
(b) Calculate the throughput accounting ratio (TPAR) for ‘cuts’ and the TPAR for ‘treatments’ assuming
the bottleneck activity is fully utilised. (6 marks)
(10 marks)
STANDARD COSTING AND VARIANCE ANALYSIS
QUESTION 14
The Safe Soap Co makes environmentally friendly soap using three basic ingredients. The standard cost
card for one batch of soap for the month of September was as follows:
Material Kilograms Price per kilogram ($)
Lye 0·25 10
Coconut oil 0·6 4
Shea butter 0·5 3
The budget for production and sales in September was 120,000 batches. Actual production and sales
were 136,000 batches. The actual ingredients used were as follows:
Material Kilograms
Lye 34,080
Coconut oil 83,232
Shea butter 64,200
Required:
(a) Calculate the total material mix variance and the total material yield variance for September. (8 marks)
(b) In October the materials mix, and yield variances were as follows:
Mix: TZS 6,000 adverse
Yield: TZS 10,000 favourable
The production manager is pleased with the results overall, stating:
‘At the beginning of September, I made some changes to the mix of ingredients used for the soaps. As I
expected, the mix variance is adverse in both months because we haven’t yet updated our standard cost
card but, in both months, the favourable yield variance more than makes up for this. Overall, I think we
can be satisfied that the changes made to the product mix are producing good results and now we are
able to produce more batches and meet the growing demand for our product.’
The sales manager, however, holds a different view and says:
‘I’m not happy with this change in the ingredients mix. I’ve had to explain to the board why the sales
volume variance for October TZS 22,000 was adverse. I’ve tried to explain that the quality of the soap
has declined slightly and some of my customers have realised this and simply aren’t happy, but no-one
seems to be listening. Some customers are even demanding that the price of the soap be reduced and
threatening to go elsewhere if the problem isn’t sorted out.’
Required:
(i) Briefly explain what the adverse materials mix and favourable materials yield variances indicate about
production at Safe Soap Co in October.
Note: You are NOT required to discuss revision of standards or operational and planning variances.
(4 marks)
(ii) Discuss whether the sales manager could be justified in claiming that the change in the materials mix
has caused an adverse sales volume variance in October. (3 marks)
(15 marks)
PRICING DECISION
QUESTION 15
ALG Co is launching a new, innovative product onto the market and is trying to decide on the right launch
price for the product. The product’s expected life is three years. Given the high level of costs which have
been incurred in developing the product, ALG Co wants to ensure that it sets its price at the right level
and has therefore consulted a market research company to help it do this. The research, which relates
to similar but not identical products launched by other companies, has revealed that at a price of TZS 60,
annual demand would be expected to be 250,000 units.
However, for every TZS 2 increase in selling price, demand would be expected to fall by 2,000 units and
for every TZS 2 decrease in selling price, demand would be expected to increase by 2,000 units.
A forecast of the annual production costs which would be incurred by ALG Co in relation to the new
product are as follows:
Annual production (units) 200,000 250,000 300,000 350,000
TZS TZS TZS TZS
Direct material 2,400,000 3,000,000 3,600,000 4,200,000
Direct labour 1,200,000 1,500,000 1,800,000 2,100,000
Overheads 1,400,000 1,550,000 1,700,000 1,850,000
Required:
(a) Calculate the total variable cost per unit and total fixed overheads. (3 marks)
(b) Calculate the optimum (profit maximising) selling price for the new product AND calculate the
resulting profit for the period.
Note: If P = a – bx then MR = a – 2bx. (7 marks)
(c) The sales director is unconvinced that the sales price calculated in (b) above is the right one to
charge on the initial launch of the product. He believes that a high price should be charged at launch so
that those customers prepared to pay a higher price for the product can be ‘skimmed off’ first.
Required:
Discuss the conditions which would make market skimming a more suitable pricing strategy for ALG,
and recommend whether ALG should adopt this approach instead. (5 marks)
(15 marks)
LEARNING CURVE
QUESTION 16
Bokco is a manufacturing company. It has a small permanent workforce, but it is also reliant on temporary
workers, whom it hires on three-month contracts whenever production requirements increase. All buying
of materials is the responsibility of the company’s purchasing department and the company’s policy is to
hold low levels of raw materials in order to minimise inventory holding costs. Bokco uses cost plus pricing
to set the selling prices for its products once an initial cost card has been drawn up. Prices are then
reviewed on a quarterly basis. Detailed variance reports are produced each month for sales, material
costs and labour costs. Departmental managers are then paid a monthly bonus depending on the
performance of their department.
One month ago, Bokco began production of a new product. The standard cost card for one unit was
drawn up to include a cost of TZS 84 for labour, based on seven hours of labour at TZS 12 per hour.
Actual output of the product during the first month of production was 460 units and the actual time taken
to manufacture the product totalled 1,860 hours at a total cost of TZS 26,040. After being presented with
some initial variance calculations, the production manager has realised that the standard time per unit of
seven hours was the time taken to produce the first unit and that a learning rate of 90% should have been
anticipated for the first 1,000 units of production. He has consequently been criticised by other
departmental managers who have said that ‘He has no idea of all the problems this has caused.’

Required:
(a) Calculate the labour efficiency planning variance and the labour efficiency operational variance
AFTER taking account of the learning effect.
Note: The learning index for a 90% learning curve is –0·1520 (5 marks)
(b) Discuss the likely consequences arising from the production manager’s failure to take into account
the learning effect before production commenced.