Class will always start exactly 8:00am

First 10 minutes will be used for revision of discussion in previous class

Mic should always remain muted when not contributing/asking question
Pay attention
Feel free to always ask questions when unclear( Encouraged to use the raise hand function)
Feel free to always drop a chat for questions/clarifications/additions
Weekday classes to review past questions will commence after second weekend of lecture
5 Minutes break after the first 1 hour
10 minutes break after another 1 hour
Do your assignments
 Syllabus Overview
% Chapters
A Cost planning and control 20 1-5
B Planning and control 20 6-8
C Performance measurement and control 20 9-12
D Decision making 30 13-27
E Strategic performance measurement 5 28
F Performance and management system 5 29-31
 The purpose of management accounting is to provide information for:
a Planning
setting the objectives for the organisation;
making plans for achieving those objectives.

b Control
monitoring actual performance, and comparing same with the objective or plan
taking control action where appropriate
evaluating actual performance

c Decision Making
Managers might need to make ‘one-off’ decisions, outside the formal planning and control systems

Levels of Planning Time Frame Example

a Strategic Planning Long term Corporate strategic plan, Business Plan
b Tactical Planning Medium term Annual budget
c Operational Planning Short term Daily division of work between employees

Levels of Management
a Strategic Management
deciding on the objectives and strategies for the organisation
making or approving long-term plans for the achievement of strategic targets
monitoring actual results, to check whether these are in line with strategic targets;

where appropriate, taking control action to bring actual performance back into line with strategic targets
reviewing and amending strategies

b Tactical Management
associated with the efficient and effective use of an organisation’s resources, and the control over expenditure. In a large
organisation, tactical managers are the ‘middle managers

c Operational Management
Management of day-to-day operating activities. It is usually associated with operational managers and supervisors

Business Information
Information is processed data. Data can be defined as facts that have not been assembled into a meaningful structure. Data is
processed into a structured form that has some meaning: this is called ‘information

Information for different Levels of Plann Levels of M Time Frame Example

a Strategic Management InformaStrategic Plannin Strategic Man Long term Business Plan, Corporate strategic plan
b Tactical Information Tactical Planning Tactical Mana Medium termAnnual budget
c Operational Information Operational PlannOperational Short term Daily division of work between employees

1 Assignment
List at least 5 characteristics of the 3 levels of information

Qualities of Good Information

Relevance
Reliability
Essential
Timeliness
Economy
Completeness
Accuracy
Clarity
Consistency Others
Comprehension
Comparability
Verifiability

Sources of Information
A Internal Sources
the financial accounting records Personnel
human resource records maintained in support oPersonnel
production information Personnel
sales information Personnel
Minutes of meeting Personnel

External Sources
B market research
supplier price lists and brochures
trade journals
newspapers and other media
government reports and statistics
reports published by other organisations, such as trade bodies.

Economy/Cost of Information Explained

Value to be derived from obtaining information should exceeed to cost
Cost and Benefit/Value associtValue/Benefit
Cost Value
AR office the financial accounting records
AP officer Prepare financial statement
Tax and Filing Prepare tax returns
Financial Accountant Meaure previous performance and bencmark against obective
CFO Record keeping for regulatory purpose
Laptop To determine the financial position and performance of the business
Internet
SAP
Rent

1 Observation
2 Interviews
3 Questionnaire
4 Documentation Review

2 Assignment
What are the advantages and disadvantages of the Methods listed above

Cost classification
All organisations need to understand their costs.
Cost can be classified in different ways:

A According to behaviour
Fixed cost
Variable cost
Stepped fixed cost
Semi-fixed/variable/mixed
cost

B According to Function
Production
Non-Production (Selling,
Distribution, Administrative,
Finance)

C According to element
Material
Labour
Other expenses/Overhead

D Direct & Indirect

Direct
Indirect

E Relevant
Irrelevant

F Product
Period cost
Cost classification
according to behaviour
explained

Cost classification
According to behaviour React to changes in level of activity
a Fixed Cost Does not react to changes in level of activity
b Variable Cost Changes whenever level of activity is changing - In the same proportion
c Stepped fixed cost When relevant range for fixed cost is exceeded
d Semi-fixed/Mixed cost/Semi vaElement of both fixed and variable cost

Examples of Level of Activity/Scale of Operation/Level of Output

No of units manufactured
No of Labour Hours
No of Machine hours
No of Students
No of classes
Volume Driven
No of hours used by tutors
Fuel consumption
KM covers
Trips completed
No of passengers

Note: Only Total Fixed Cost is expected to remain constant while Fixed cost per unit is expected to reduce as the level of activity is increasing
Only Total variable cost is expected to keep changing while variable cost per unit is expected to remain constant
The changes in total variable cost should always be in the same proportion as changes in the level of activity. That is, if level of activity should increase by 30%, Total variable cost should als increase

Illustration of Fixed Cost

Consider example of Cost incurred by NPT on google drive for th purpose of sharing lecture videoes
Assume google charges 10,000 per diet, and No of students enroled in Nov 2023 diet is 50 and number of students enrolled in May 2024 diet is 83

Nov 2023 May 2024

No of students 50 83
Cost to be incurred on goog 10,000 10,000
Although the number of students have increased, the google drive cost still remains the same

Illustration of Variable Cost

Consider example of NPT incurring refreshment cost (Gala and Pepsi per student)
Assume it cost N300 to provide refreshment for each student per diet
Nov 2023 May 2024 change Change in %
No of students 50 83 33 66%
Cost of refreshement per s 300 300 0 0
Total variable cost 15,000 24,900 9900 66%
As the number of students increased, the total cost of refreshment also increased
Also note that percentage change in No of students and percentage change in total variable cost is 66%

Illustration on Stepped Fixed Cost

Consider example of Zoom subscription where it cost N10,000 to host 0-100 participants and N14,000 to host unlimited number of participants
Nov 2023 May 2024 Nov 2024
No of students 50 83 115
Zoomassubscription
long the number of students enrolled10,000 10,000
does not exceed 100. The 14,000
moment it exceed 100, fixed cost is expected to step up as noted in
November 204

Illustration on Mixed Cost

 Consider example of a Sales person paid a base salary plus commission based on sales made

Salesperson
Fixed monthly salary 10,000
Commission(10*1,000) 10000
Total Cost in Period 1 20,000

Fixed monthly salary 10,000

Commission(15*1,000) 15000
Total Cost in Period 2 25,000

Fixed monthly salary 10,000

Commission(8*1,000) 8000
Total Cost in Period 3 18,000

Total costs iluustrated above for the 3 periods cannot be regarded as fixed or variable cost but a mixed cost

High and Low Method

High/low analysis can be used to estimate fixed costs and variable costs per unit whenever:
a there are figures available for total costs at two different levels of output or activity;
b it can be assumed that fixed costs are the same in total at each level of activity
c the variable cost per unit is constant at both levels of activity.

Total Cost Function

TC=TFC+TVC
TC=TFC+(VC/unit * No of units/Level of activity)
TC=a+bx
TC=Total Cost
a=TFC
b=Variable cost per unit
x=No of units/Level of activity

Example 1
Material Study Pack
Page 29 TC=TFC+TVC

High and Low Units Cost Fixed Cost Variable Cost

January 5,800 40,300 20,000 20,300
March 8,200 48,700 20,000 28,700
Difference between H & L 2,400 8,400
Variable cost per unit 3.5

TC=a+bx January March

TC 40,300 48,700
a ?? ??
b 3.5 3.5
x 5,800.0 8,200.00
40,300=a+(3.5*5 48,700=a+(3.5*8,200)
a=40,300-(3.5*5, a=48,700-(3.5*8200)
a=40,300-20,300 a=48,700-28,700
a=20,000 a=20,000
TC=20,000+3.5xTC=20,000+3.5x
Forecasting based on cost function derived
Forecast total cost of December. Plan is to manufacture 13,000
TC=20,000+(3.5*13000)
65,500

High/low analysis with a step change in fixed costs

Example 2 Study Pack 32

No of Units Fixed Cost

0-18,999 x
19,000 and above =x+15,000

Units Total Cost Adjusted total Cost

High 22,000 195,000 180,000
Low 17,000 165,000 165,000
Difference 5,000 15,000
Variable cost per unit 3

TC=a+bx High
TC 180,000
a ??
b 3.0
x 22,000
180,000=a+(3*22000)
a=180,000-(3*22,000)
a=180,000-66,000
a=114,000
TC=114,000+3x
Total Cost Function

i 0-18,999 TC=114,000+3x
ii 19,000 and above TC=129,000+3x

Forecast total cost for 16,000 units

TC=114,000+3x
TC=114,000+(3*16,000)
TC=114,000+48,000
TC=162,000

Forecast total cost for 25,000 units

 TC=114,000+15,000+(3*25,000)
TC=114,000+15,000+75,000
TC=204,000 204,000

Alternative approach
Units Total Cost Adjusted total Cost
High 22,000 195,000 195,000
Low 17,000 165,000 180,000
Difference 5,000 15,000
Variable cost per unit 3

TC=a+bx Low
TC 180,000
a ??
b 3
x 17,000
180,000=a+(3*17,000)
a=180,000-(3*17,000)
a=180,000-51,000
a=180,000-51,00 129,000
a=129,000

19,000 and above TC=129,000+3x

0-18,999 TC=114,000+3x

The step increase in fixed costs is given as a percentage amount

Example 3 Study Pack

0-7,499 x
7,500 and above x+0.2x

Level of activity Total Cost

High 11,000 276,000
Middle 8,000 240,000
Difference 3,000 36,000
Variable cost per unit 12

TC=a+bx High
TC 276,000
a ??
b 12
x 11,000
276,000=a+(12*11,000)

a=276,000-(12*1 132000
a=276,000-132,0 144,000
a=144,000

i 7,500 and above TC=144,000+12x

ii 0-7,499 TC=120,000+12x 28,800
115,200
0-7,499 x
7,500 and above x+0.2x
x+0.2x=144,000
1.2x=144,0000
x=144,000/1.2
x=120,000

Level of Activity
January 9,000
February 8,000
March 7,800
April 10,000
May 15,000
June 7,000

Level of Activity
January 7,200
February 5,600
March 3,000
April 10,000
May 6,500
June 7,000

Change in variable cost per unit

Marginal Costing and Absorbtion Costing

Absorbtion Costing
Absorption costing measures cost of a product or a service as:
a its direct costs (direct materials, direct labour and sometimes direct expenses and variable production overheads); plus
b a share of fixed production overhead costs Cost of product/Per unit Unit Cost
Unit cost Fixed Direct Material xx 10
Absorbtion Costing N Production Direct Labour xx 7
Direct Materials xx Overhead Direct Expenses xx 3
Direct Labour xx Factory Rent 1,000,000 Factory Rent 20
Direct Expense xx Total Cost/unit xxx
Variable production overhead xx Set Selling per unit Profit Margin 15%
**(Absorbed) Fixed production xx Selling Price/Unit
Product Cost xxx
January December Jan-Dec Total Fixed 1,000,000 TFC
 Budgeted Fixed Production Overhead (Nair 1,000,000 No of Unit 50,000 LOA
Normal/Budgeted Level of Activity 50,000 Fixed overhead absorbtion ra 20 FOAR
Fixed Overhead Absorbtion rate (FOAR) 20
Absorbed fixed cost FOAR * Actual Level of Activity

Actual production(Units)

1 Actual Level of Activity 60,000

Actual Fixed cost 1,000,000
Absorbed fixed cost 1,200,000
Over absorbed 200,000

2 Actual Level of Activity 45,000

Actual Fixed cost 1,000,000
Absorbed fixed cost 900,000
Under absorbed (100,000)

3 Actual Level of Activity 50,000

Actual Fixed cost 1,000,000
Absorbed fixed cost 1,000,000
-

4 Actual Level of Activity 50,000 Absorbed fixed cost

Actual Fixed cost 1,200,000 Actual Fixed cost
Absorbed fixed cost 1,000,000 Under absorbtion
Under absorbed (200,000)

5 Actual Level of Activity 50,000

Actual Fixed cost 950,000
Absorbed fixed cost 1,000,000 Over absorbtion
Over absorbed 50,000

6 Actual Level of Activity 55,000

Actual Fixed cost 1,100,000
Absorbed fixed cost 1,100,000 Under absorbtion

7 Actual Level of Activity 58,000

Actual Fixed cost 1,300,000
Absorbed fixed cost 1,160,000
Under absorbed (140,000) Under absorbtion

Marginal Costing
In marginal costing, fixed production overheads are not absorbed into product costs but expensed in the period.
Marginal Costing
Direct Materials xx
Direct Labour xx
Direct Expense xx
Variable production overhead xx
Product Cost xxx

Under Marginal Costing, Fixed production overhead is treated as a period cost

Example 4 Study Pack 43

Profit statement using Absorbtion Costing

Budgeted Fixed Production Overhead (Nair 150,000

Normal/Budgeted Level of Activity 50,000
Fixed Overhead Absorbtion rate (FOAR) (L 3

Sales 630,000

Direct Material 130,000

Direct Labour Cost 160,000
Absorbed Fixed Production Ov 120,000 Product Cost
Product Cost 410,000 Period Cost
Gross Profit 220,000 Absorbtion
Under absorbtion 20,000 Cost of Inventory Year 1` Year 1`
Administration overhead 70,000 DM 1,000
Seling and distribution overhe 90,000 DL 2,500
180,000 DE 3,000
Profit 40,000 VPO 4,000
FPO 6,000
Using Marginal Costing Technique Product Cost 16,500 1,000 units
Sales 630,000 Cost of Sales/Expense in Year 11,550 700 units sold
Direct Material 130,000 Inventory/Asset in Year 1 4,950 300 units unsold(Inventory
Direct Labour Cost 160,000
Product Cost 290,000
Gross Profit 340,000 Marginal
Fixed Production Overhead 140,000 Cost of Inventory Year 1` Year 1`
Administration overhead 70,000 DM 1000
Selling and distribution overhe 90,000 DL 2500
300,000 DE 3000
Profit 40,000 VPO 4000
Product Cost 10,500
**Profit is the same under both techniques because Inventory level is not c Cost of Sales/Expense in Year 7,350 700 units sold
Inventory/Asset in Year 1 3,150 300 units unsold(Inventory
Opening Inventory 0 100 50
Closing Inventory 0 100 50
Level has not changed 0 0 0
Opening Inventory 0 70 100 40
Closing Inventory 50 0 40 95
Level has changed -50 70 60 -55

Example Study Pack

Page 45
Absorbtion Costing Techniques - Month of July

Absorbtion
July
Sales (150*1,500) 225,000
Less Cost of Sales
Opening Inventory 0
Variable Production Cost (70*2,000) 140,000
Absorbed Fixed Production (50*2,000) 100,000
Total cost of goods available 240,000

Less closing inventory (120*500) (60,000)

Cost of Sales 180,000
Gross Profit 45,000
Under absorbtion (10,000)
Profit 35,000

Workings
Variable Production Cost/Un 70
Fixed Production Overhead/ 50
120
Closing inventory 500 60,000

Alternatively 500/2000*240,000
60000

Budgeted Fixed Production Overhead (Nair 110,000

Normal/Budgeted Level of Activity 2,200
Fixed Overhead Absorbtion rate (FOAR) (L 50

Absorbed Fixed Production 100,000

Actual Fixed Cost 110,000
Under absorbtion 10,000

Using Marginal Costing Technique

July
Sales (150*1,500) 225,000
Less Cost of Sales
Opening Inventory 0
Variable Production Cost (70*2,000) 140,000
Total cost of goods available 140,000

Less closing inventory (70*500) (35,000)

Cost of Sales 105,000
Contribution 120,000
Fixed Production Cost - Actual 110,000
Profit 10,000

Absorbtion Costing Profit 35,000

Marginal Costing Profit 10,000
Difference in profit 25,000

Opening Inventory 0
Closing Inventory 500
Inventory level has change 500
FOAR 50
Difference in profit 25,000

Assignment
Prepare profit statement for the month of August using both absorbtion and marginal costing techniques
Single Product
Multiple Products

A B
Activity Based Costing Material xx 40% 40%
Target Costing Labour xx 45% 5%
Life cycle Costing Overhead xx 5% 45%
Throughput Accounting Total cost xxxx
Margin of 5%
Selling
Activity Based Costing
Activity-based costing (ABC) is a form of absorption costing that takes a different approach to the apportionment and
absorption of production overhead costs

In a modern manufacturing environment, a large proportion of total costs are overhead costs, and direct labour costs are
relatively small.

It is appropriate to trace these costs as accurately as possible to the products that create the cost because overhead costs
are large
The traditional methods of absorbing production overhead costs on the basis of direct labour hours or machine hours have
no rational justification as many production overhead costs are not directly related to the production work that is carried
out

Identify Activities
Identify Cost drivers
A cost driver is the factor that determines the cost of the activity. It is something that will cause the costs for an activity to
increase as more of the activity is performed.

Cost Pool

A cost pool is simply the overhead expenditure allocated and apportioned to an activity. Overhead costs are allocated (or allocated
and apportioned) to each activity, and for each activity there is a ‘cost pool’.

ABC absorbs overheads into the cost of products (or services) at a separate rate for each cost pool (each activity).

Example Page 58
Order Processing Cost

A
manufactures and sells a single product
Processed a total of 5,000 orders

B
manufactures and sells 5 different products
Order processed:

Product 1 400
Product 2 1,000

Product 3 2,000

Product 4 900

Product 5
700
5,000

Overhead 1 1,000
Overhead 2 4,000
Overhead 3 3,000
Overhead 4 4,000
Overhead 5 2,000
Total overh 14,000
 Target Cost 100 naira per unit
Target Costing

Target costing is a method of strategic management of costs and profits. As its name suggests, target costing involves setting a target
or objective for the maximum cost of a product or service, and then working out how to achieve this target.

In order to compete successfully, companies need to be able to:

continually
sell improve
their products attheir existing products
a competitive or might
price; this designbe
new
theones
same price that competitors are charging or a lower price than competitors,
and
make a profit.

In order to make a profit, companies need to make the product at a cost below the expected sales price.

Target costing is used mainly for new product development. This is because whenever a new product is designed and developed for a
competitive market, a company needs to know what the maximum cost of the new product must be so that it will sell at a profit.

Decide: The target sales price xxx

Deduct: The target profit margin (xxx)
Equals: The target cost (maximum cost in order to meet or exceed
xxx 100
the target profit)
Estimated Cost (xxx) 115
Target Cost Gap xxx 15

If estimated cost is higher that target cost, there is a target cost gap.

Elements in the estimated cost

A. Raw materials costs
The target cost should allow for expected wastage rates or loss in processing
The price of materials should also allow for any possible increases

B. Direct Labour
Should allow for allow any expected idle time that will occur during production

C. Production Overhead

Example
Study Pack
Page 82

a The expected cost of Product NP8

Direct Material 1 9
Direct Material 2 (3/0.9) 6
Direct Labour (0.5/0.95 10
Production Overhead (60*0.5) 30
Estimated Cost 55

Material M2 Workings
Metres to be introduced into productio x 3.333
Less 10% loss 0.1x 0.333
Meters required 3 0.9x 3
3=0.9x
x=3/0.9
Metres introduced into produc 3.3333
Cost per metre 1.8
Cost of Material M2 6

Direct Labour Workings

Hours to be budgeted x
Idle time 0.05x
Hours required 0.5 0.95x
0.5=0.95x
x=0.5/0.95
Hours to be budgeted 0.52632
Rate per hour 19
Labour cost 10

b The target cost for NP8

Target Selling Price 70
Less:Profit Margin (30%*70) 21
 Target Cost (70-21) 49

C The size of the cost gap (55-49) 6

Closing Target Cost Gap

Target costs are rarely achievable immediately and ways must be found to reduce costs and close the cost g
Common
To methods
re-design of closing
products to makethe target
use cost gapprocesses
of common are: and components that are already used in the manufacture of other products by
the company
To discuss with key suppliers methods of reducing materials costs.
To eliminate non value-added activities or non-value added features of the product design.
To train staff in more efficient techniques and working methods
To achieve economies of scale. Producing in larger quantities will reduce unit costs because fixed overhead costs will be spread over a
larger quantity of products

Example
Study Pack
Page 86
Before After Comment
Manufacturing Cost
Bought in parts 50,000 (100%-12%)*50,000 44,000 Reduction from 100 to 80 components resulting in 12% reducti
Direct Labour(Assembly of components 5,000 ((100%-20%)*10)*500 4,000 Assembly time will be reduced by20%
Machine costs 15,000 15,000 No change
Ordering and receiving 500 (500*80*500)/50,000 400 Reduction from 100 to 80 components reduction in cost
Quality Assurance 8,000 (6*800) 4,800 Quality assurance will only require 6 hours.
Rework Cost 1,000 5%*10,000 500 The probability of a failure at the inspection stage will fall to 5%
Distribution Cost 10,000 (10,000-1,000) 9,000 Distribution cost reduces
i. The probability by 1,000,000
of an after-sales failure will also fall to 5%.
Warranty Costs 1,500 5%*(15,000-2,000) 650 Ii. Cost of warranty corrections will fall by ₦2,000.
Estimated Cost 91,000 78,350
Target Cost 80,000 80,000
Target cost gap 11,000 (1,650) The target cost is achieved

Implications
Cost of actively
savings are using Target
soughtCosting
and made continuously over the life of the
product
There is joint responsibility for achieving benchmark savings. If one department fails to deliver the cost savings expected, other
departments may find ways to achieve the savings.
Staff are trained and empowered to find new ways to reduce costs while maintaining the required quality.

Target costing is more likely to succeed in a company where a culture of ‘continuous improvement’ exists.
volves setting a target

Mat 30
Pack 20
Lab
price than competitors, 40
25
Cost 115
15

d and developed for a

ll sell at a profit.
costs and close the cost gap.
ure of other products by

will be spread over a

omponents resulting in 12% reduction in cost

omponents reduction in cost

require 6 hours.
at the inspection stage will fall to 5%.
r-sales failure will also fall to 5%.
ons will fall by ₦2,000.

xpected, other

exists.
 Throghput

Throughput is the money generated from sales minus the cost of the materials used in making the items sold.

Throughput accounting supports a production management system which aims to maximise throughput, and therefore cash generation from sales. It is not concerned with 'traditional' measurements of profit, or maximisation of this profit.

Throughput: sales, inventory and operational expenses

Inventory is the amount of money the system has invested in purchasing things that it intends to resell within its finished products

Inventory' should also be considered as costs of materials purchased. Inventory has no value because it does not create throughput until it is used to sell products.

Operational expenses, also known as factory expenses, are all the other costs of operations. They include what in traditional costing would be both direct labour costs and overhead costs.

All operational expenses or factory expenses are assumed to be 'fixed' costs.

Throughput = Sales – Material costs

Bottleneck factor: The theory of constraint

The objective should be to maximise throughput.

The theory of constraints also states that at any time there will always be a bottleneck resource or factor that sets a limit on the amount of throughput that is possible.
Example:
a A production resource, such as time available on a type of machine, or the available amount of skilled employee time
b A selling resource, such as the number of sales representatives
c The lack of reliable material suppliers

The theory states that the aim should be to maximise total throughput. The only way to increase throughput is to increase the capacity of the bottleneck constraint

Throughput = Sales – Material costs

Example

Weekly capacity Additional Machine

Machine A 1,800
Machine B 1,600
Machine C 1,500

Purchase Machine B alone

Purchase Machine C alone

Weekly capacity Additional MachiNew Capacity
Machine A 1,800 - 1,800
Machine B 1,600 0 1,600
Machine C 1,500 600 2,100

New Weekly Capacity 1,600

Initial Capacity 1,500
Increase in capacity 100
Profit per extra unit 50,000
Total Benefit from increasing Cap 5,000,000
Cost of increasing capacity (8,000,000)
Loss (3,000,000)

Both Machine B and C

Additional
Weekly capacity New Capacity
Machine
Machine A 1,800 - 1,800
Machine B 1,600 300 1,900
Machine C 1,500 600 2,100

New Weekly Capacity 1,800

Initial Capacity 1,500
Increase in capacity 300
Profit per extra unit 50,000 100 naira per hour
Total Benefit from increasing Cap (300*50,000) 15,000,000 Minimum Guarantee 320 hours
Cost of increasing Machine C (8,000,000) Hours Worked Labour
Cost of increasing Maching B (5,000,000) 320 32,000
Profit 2,000,000 400 42,000
300 32,000

January 300 32,000

February 200 32,000
March 310 32,000
April 215 32,000

Throughout Accounting
Throughput accounting (TA) is an approach to production management which aims to maximise sales revenue less materials cost, while also reducing inventory and operational expenses.

Concept 1: In the short run, all costs in the factory (with the exception of materials costs) are fixed costs. These fixed costs include direct labour costs. It is useful to group all these costs and call them
Total Factory Costs (TFC).

Concept 2: In a JIT environment, all inventory is a 'bad thing' and the ideal inventory level is zero. Products should not be made unless a customer has ordered them. When goods are made, the factory
effectively operates at the rate of the slowest process, and there will be unavoidable idle capacity in other operations.

Concept 3: Profitability is determined by the rate at which 'money comes in at the door' (that is, sales are made) and, in a JIT environment, this depends on how quickly goods can be produced to satisfy
customer orders. Since the goal of a profit-orientated organisation is to make money, inventory must be sold for that goal to be achieved. The bottleneck resource slows the process of making money. Making
money means maximising throughput.

Performance Measurement in Throughput Accounting

Throughput Accouting Ratio

TA Ratio= Throughput per unit of bottleneck resource

Factory cost per unit of bottleneck resource

Factory cost per unit of bottleneck resource= Total Factory Cost

Total units/Maximum availability of bottleneck resource

Througput per unit

Selling Price per unit xxxx
Less Material cost per unit (xxxx)
Throughput per unit xxxx

Throughput per unit of bottleneck resource Throughput per unit/Usafe of Bottleneck resource
Throughput per unit xxxx
Divide by usage of Bottleneck resource per unit xxxx
Throughput per unit of bottleneck resource xxxx

Total Factory cost = Total operating expenses = all other costs other than material cost

Interpreting the TA ratio

Total throughput should exceed total factory costs otherwise the organisation will make a loss. This means that the TA ratio should exceed 1.0.

A TA ratio that is not much higher than 1.0 is barely profitable. The aim should be to achieve as high a TA ratio as possible.

TA ratios can also be used to assess the relative earning capabilities of different products. Products can be ranked in order of priority for
manufacture and sale in order of their TA ratios. (Higher TA ratios should be given priority over lower TA ratios).

However, ranking products in order of priority according to their TA ratio will always give the same ranking as putting them in order of
throughput per unit of bottleneck resource.

Interpreting the TA ratio

Total throughput should exceed total factory costs otherwise the organisation will make a loss. This means that the TA ratio should exceed 1.0.

1,200=1
1=x

Hours required to make a unit

1,200 1
1x
1,200x=1
x=1/1,200
0.000833333333333

Demand
x 6,000
y 9,000
z 5,000

8 12,000

a
X Y Z Total
Output 6,000 4,500 1,200
Revenue(SP*Qty) 900,000 585,000 360,000 1,845,000
Material Cost 480,000 180,000 120,000 780,000
Operational expenses 720,000
Profit 345,000

X Y Z Total
Output 6,000 4,500 1,200
Throughput per unit 70 90 200
Total throughput 420,000 405,000 240,000 1,065,000
Operational expenses 720,000
Profit 345,000

Output 6000 4500 1200

Revenue(SP*Qty) 900,000 585,000 360,000 1,845,000
Material Cost 480,000 180,000 120,000 780,000
Total Throughput 420,000 405,000 240,000 1,065,000
Operational expenses 720,000
Profit 345,000

b X Y Z
Througput per unit 70 90 200
Consumption of bottleneck per unit/ 0.0008333 0.000667 0.001667
Hours required to make a unit
Throughput per unit of bottleneck
84,000 135,000 120,000
resource/Throughput per hour
Factory cost per unit of bottleneck resource 90,000 90,000 90,000
Throughput Accounting ratio 0.93 1.50 1.33
Ranking 3rd 1st 2nd
Throughput per unit of bottleneck resource
Total Factory cost = Total operating expenses = all other costs other than material cost Factory cost per unit of bottleneck resource
Operational expenses 720,000
Total units/Maximum availability of bottleneck resource 8
Factory cost per unit of bottleneck resource 90,000

Throuput Total Factory Cost

Factory cost Total units/Maximum availability of bottleneck resource
Assignment
How can a business improve a throughput accounting ratio?
Total revenue
Total cost

Profit

Total revenue

Total variable cost

Contribution

Total revenue 100

Total Raw material cost 30
Throughput 70
Factory expenses/Ope Expenses
Profit
The 'classical' life cycle of a product has five phases or stages

(a). Development. The product has a research or design and development stage. Costs are incurred but the product i
and there are no sales revenues.

(b) Introduction. The product is introduced to the market. Potential customers are initially unaware of the product or
organisation may have to spend heavily on advertising to bring the product or service to the attention of the market. In
expenditure costs may be incurred in order to increase the production capacity as sales demand grows.

(c) Growth. The product gains a bigger market as demand builds up. Sales revenues increase and the product begins

(d) Maturity. Eventually, the growth in demand for the product will slow down and it will enter a period of relative mat
reached a peak and are fairly stable. This should be the most profitable phase of the product's life. The product may be
a means of sustaining its demand and making this phase of the life cycle as long as possible.

(e) Decline. At some stage, the market will have bought enough of the product and it will therefore reach 'saturation p
to fall. Eventually it will become a loss-maker and this is the time when the organisation should decide to stop selling th

Life cycle costs

Life cycle costing estimates the costs and revenues attributable to a product over its entire expected life
cycle. The life cycle costs of a product are all the costs attributable to the product over its entire life, from
product concept and design to eventual withdrawal from the market.

The component elements of a product's cost over its life cycle could therefore include the following.

Research and development costs

Design costs
Cost of making a prototype
Testing costs
Production process and equipment: development and investment
The cost of purchasing any technical data required (for example purchasing the right from another organisation to use a
Training costs (including initial operator training and skills updating)
Production costs, when the product is eventually launched in the market
Distribution costs (including transportation and handling costs)
Marketing and advertising costs -
Customer service
Field maintenance
Brand promotion
Inventory costs (holding spare parts, warehousing, and so on)
Retirement and disposal costs, ie costs occurring at the end of a product's life, which may include the costs of cleaning u
Some of these costs, such as design costs, are 'once-only costs'. Others are incurred regularly throughout the product's
production and sales volumes. Production costs for example will vary each year with changes in annual production volum
product's life.

Traditional cost accumulation systems are based on the financial accounting year and tend to dissect a product's life cy
month periods. This means that traditional management accounting systems do not accumulate costs over a product's e
not therefore assess a product's profitability over its entire life. Instead they do it on a periodic basis.

Life cycle costing, on the other hand, tracks and accumulates actual costs and revenues attributable to each product ov
cycle. Hence the total profitability of any given product can be determined.

The benefits of life cycle costing

(a) It helps management to assess profitability over the full life of a product, which in turn helps management to decide
product, or to continue making the product.

(b) It can be very useful for organisations that continually develop products with a relatively short life, where it may be p
volumes and prices with reasonable accuracy.

(c) The life cycle concept results in earlier actions to generate more revenue or to lower costs than otherwise might be c

(d) Better decisions should follow from a more accurate and realistic assessment of revenues and costs, at least within a
stage.

(e) It encourages longer-term thinking and forward planning, and may provide more useful information than traditional r
and profits in each accounting period.

November 2016 Question 2

1 2 3 Total
Units Man and Sold 50,000 200,000 150,000 400,000
R&D Costs 1,700,000 180,000 - 1,880,000
Variable production Cost 15,000,000 50,000,000 37,500,000 ###
Fixed Production Cost 5,000,000 5,000,000 5,000,000 15,000,000
Variable marketing cost 2,500,000 8,000,000 4,500,000 15,000,000
Fixed Marketing Cost 3,000,000 2,000,000 2,000,000 7,000,000
Variable Distribution cost 500,000 2,000,000 1,500,000 4,000,000
Fixed Distribution cost 1,900,000 1,900,000 1,900,000 5,700,000
Customer Service cost 1,500,000 4,000,000 3,000,000 8,500,000
Total Cost 31,100,000 73,080,000 55,400,000 ###
Cost per unit 622 365 369 399
Price per unit 900 800 700 775
Total Revenue 45,000,000 ### ### ###
Profit per unit 278 435 331 376
urred but the product is not yet on the market

ware of the product or service, and the

ention of the market. In addition, capital
d grows.

nd the product begins to make a profit.

a period of relative maturity, when sales have

fe. The product may be modified or improved, as

fore reach 'saturation point'. Demand will start

decide to stop selling the product or service.

the following.

er organisation to use a patent)

 e the costs of cleaning up a contaminated site
hroughout the product's life, but vary with
annual production volumes throughout the

ssect a product's life cycle into a series of 12-

costs over a product's entire life cycle and do
asis.

able to each product over the entire product life

management to decide whether to develop the

rt life, where it may be possible to estimate sales

an otherwise might be considered.

d costs, at least within a particular life cycle

mation than traditional reports of historical costs

 Introduction
When a team of workers begins a skilled task for the first time, and the task then becomes repetitive, they will probably do the job more quickly as the workers
learn the task and so become more efficient

Steady state - When the average time to produce an additional unit becomes constant

An example of studying Performance Management Pack

Time taken
First Reading 60 days
Second Reading 42 days
Third reading 30 days
Fourth Reading 20 days
Fifth Reading 5 days
sixth Reading 2 days Steady state
Seventh Reading 2 days Steady state
Eight Reading 2 days Steady state
It was noted above that the number of days taken keeps reducing and it became constant from the sixth reading.

Where the learning effect is significant, it has implications for:

a costs of completing the task;
b budgeting/forecasting production requirements and production costs; and
c pricing the output so as to make a profit

Cummulative number Time taken

Cummulative Time taken Average time
Qty of units Hours
(C) (C/A)
(A) (B)
First unit 1 1 5 5 5
Second Unit 1 2 4 9 4.5
Third 1 3 3 12 4
Fourth 1 4 2 14 3.5

Learning curve model (Tabular format)

The learning curve is measured as a percentage learning effect
When there is a x% learning curve for the manufacture of a product, this means that when cumulative output of the product doubles, the average time to produce
all the units made so far (the cumulative total produced to date) is x% of what it was before
when there is an 80% learning curve, every time output doubles the cumulative average time to produce units falls to 80% of what it was before
Cummulative average time per unit

The time to make a new model of a sailing boat is 100 days. It has been established that in the boat-building industry, there is an 80% learning curve. Calculate:
(a) the cumulative average time per unit for the first 2 units, first 4 units, first 8 units and first 16 units of theboat
(b) the total time required to make the first 2 units, the first 4 units, the first 8 units and the first 16units
(c) the additional time required to make the second unit, the 3rd and 4th units, units 5 – 8 and units 9 – 16.

These can be found by constructing the following table

Individual/ Cummulativ
Cummulative Additional time Cummulative Total Time e Average
Description Qty number of units taken taken time
(A) Days (C)=D*B Days
(B) (D)
First unit 1 1 100 100 100
Second unit 1 2 60 160 80
Third and Fourth unit 2 4 96 256 64
Fifth, sixth, seventh and eight unit 4 8 153.6 409.6 51.2
Ninth to 16th 8 16 245.76 655.36 40.96

Assignemnt 1
Practice question

The first unit of a new model of machine took 1,600 hours to make. A 90% learning curve applies. How much time would it take to make the first 32 units of this
machine? Calculate:

(a) the cumulative average time per unit for the first 2 units, first 4 units, first 8 units and first 16units.
(b) the total time required to make the first 2 units, the first 4 units, the first 8 units and the first 16units
(c) the additional time required to make the second unit, the 3rd and 4th units, units 5 – 8 and units 9 – 16.
(d) the average time required to make the second unit, the 3rd and 4th units, units 5 – 8 and units 9 – 16.

Problem with the tabular approach

It is easy to construct a table to show the learning effect and it provides useful information. However, it can only be constructed to show doubling of the output.

The table can be used to calculate how many days it would take to construct units 3 and 4 and the average time for each of these. However, it cannot be used
to calculate how long unit 3 actually took and how long unit 4 actually took. (We know that boats 3 and 4 together took 96 days to make but not how long each
took as the learning effect means that boat 4 would have taken less time than boat 3).

Similarly, the table can be used to calculate how many days it would take to construct units 5 to 8 and the average time for each of these. However, it cannot
be used to calculate how long unit 5 actually took and how long unit 7 (say) actually took. (We know that boats 5 to 8 together took 153.6 days to make but
not how long each took as the learning effect means that boat 8 would have taken less time than boat 5 for example).
The way around this is to use the learning curve formular:
 The formula can be used for any number of units.
Using the same example of the sailing boat above, we have recalculated all the requirements using the formular approach below

Cummulative
Cummulative number of units
Additional Time Cummulative Average time
X
taken(days) Total time (Y)
1.00 100.00 100.00 100.00
2.00 60.00 160.00 80.00
3.00 50.63 210.63 70.21
4.00 45.37 256.00 64.00
8.00 51.20
14.00 598.63 42.76
15.00 28.67 627.30 41.82
16.00 28.06 655.36 40.96

The formular approach can be used to calculate the time taken to build any unit
Additional requirements
a Calculate the additional time taken to make the 3rd unit only
b Calculate the additional time taken to make the 4th unit only
c Calculate the additional time taken to make the 15th unit only

a what is the additional time taken by the 3rd Unit

Total time at 3 units xxxx 210.631110833568
Total time at 2 units xxxx 160
Time taken by the 3rd unit xxxx 50.631110833568

b what is the additional time taken by the 4th Unit

Total time at 4 units xxxx 256
Total time at 3 units xxxx 210.631110833568
Time taken by the 4th unit xxxx 45.368889166432

c what is the additional time taken by the 15th Unit

Total time at 15 unit xxxx 627.298776695578
Total time at 14 unit xxxx 598.628267614859
Time taken by the 15th unit 28.6705090807199

Workings note using the formular approach

At 2 units At 4 units At 8 units At 16 units At 3 units At 15 units
a 100 100 100 100 100 100
x 2 4 8 16 3 15
Learning rate (LR) 80% 80% 80% 80% 80% 80%
Log of LR -0.09691001300806 -0.096910013008056 -0.0969100130081 -0.0969100130080564 -0.09691001 -0.09691
Log 2 0.301029995663981 0.301029995663981 0.301029995664 0.301029995663981 0.301029996 0.30103
b (Log of LR/Log 2) -0.32192809488736 -0.321928094887362 -0.3219280948874 -0.321928094887362 -0.32192809 -0.321928
y
x^b 0.8 0.64 0.512 0.4096 0.702103703 0.4181992
ax^b 80 64 51.2 40.96 70.21037028 41.819918
At 14 units
100
14
80%
-0.096910013008056
0.301029995663981
-0.321928094887362

0.427591619724899
42.7591619724899
Periodic
2024 Jan 2024 -Dec 2024 Period 1
2025 Jan 2025 - Dec 2025 Period 2
2026 Jan 2026 - Dec 2026 Period 3

Rolling
2024 Jan 2024 -Dec 2024 12 months
Apr 2024 - Mar 2025 12 months
Jul 2024 - June 2025 12 months
Oct 2024 - Sep 2025 12 months
Jan 2026 - Dec 2026 12 months

Jan - Dec
Apr - Dec
July - Dec
Oct - Dec

Budget for 2024

Actual in 2023
Admin Cost xxx

Flexible
2024
Prepared in Dec 2023
Master Budget Flexible Budgets

Prepared in Dec 2023 Prepared in Dec 2023

LOA 10,000 units 12,000

Revenue
Mat Cost
Lab Cost
Other variable cost
Fixed

Jan- Dec 2024

Actual results 8,000 units
RM Cost

2024
Flexed
 Prepared in Dec 2024
Prepared in Dec 2023
Master Budget Flexed Budget
100 LOA 10,000 units 7,000 units
Revenue
Mat Cost
Lab Cost
Other variable cost
Fixed

Actual LOA 7,000 units

10 Minutes Break
Class resumes by 9:55am
Functional Budgets
Budgeted Income Statement
Master budget Budgeted Statement of financial position
Cash Budget
Flexible and Flexed budget

Practice Question 1
ICAN Study Pack
Page 161

i Sales budget
Prouct X Product Y
Volume 2,500 3,200
Price 410 400
Budgeted Revenue 1,025,000 1,280,000

ii Production Budget Prouct X Product Y

Sales 2,500 3,200
Closing Inventory 200 100
2,700 3,300
Opening Inventory (300) (150)
Production Budget 2,400 3,150

Product X
Opening Inventory xxx 300
Production for the period xxx ???
Sales (xxx) 2,500
Closing inventory xxx 200
 OI+P-S=CI
P=CI-OI+S
P=S+CI-OI

iii Material Usage Budget

A B
KG KG
Product X
Material A: (1*2,400) 2,400
Material B: (0.75*2,400) 1,800
Material C: (2*2,400)

Product Y
Material A: (1*3,150) 3,150
Material B: (0.5*3,150) 1,575
Material C: (3*3,150)
Material Usage Budget 5,550 3,375

iii Material Purchases Budget A B

Material Usage 5,550 3,375
Closing Inventory 380 400
5,930 3,775
Opening Inventory (400) (450)
Material Purchases (KG) 5,530 3,325
Cost per KG 30 80
Material Purchases (Naira) 165,900 266,000

A
Opening Inventory xxx 400
Purchase xxx ???
Usage/Consumption (xxx) 5,550
Closing inventory xxx 380

OI+P-U=CI
P=CI-OI+U
P=U+CI-OI

iv Labour Usage Grade I Grade II

Product X
Grade I: (1*2,400) 2,400
Grade II: (1.5*2,400) 3,600
 Product Y
Grade I: (0.8*3,150) 2,520
Grade II: (1*3,150) 3,150
Labour Usage (Hours) 4,920 6,750
Rate per hour 100 80
Labour Usage (Naira) 492,000 540,000
Total 1,032,000

b Budgeted profit or loss account for the period

Manufacturing account - Cost of production

Opening inventory of raw materials(A+B+C) 52,500

Raw material purchases 858,500
Cost of material available for consumption 911,000
Less Closing Inventory of raw Materials(A+B+C) (47,000)
Cost of raw materials consumed 864,000
Labour Cost 1,032,000
Cost of Production 1,896,000

Budgeted profit or loss account for the period

Sales (X+Y) 2,305,000
Less cost of sale:
Opening inventory of finished goods 159,000
Cost of production 1,896,000
Cost of goods available for sale 2,055,000
Less closing inventory of finished goods(X+Y) (106,000)
Cost of sale 1,949,000
Gross Profit 356,000

X y
OI(Units) 300 150
Cost/unit 370 320
Valuation 111,000 48,000

March/July 2020 Question 2

Actual Budget
Level of Activity (Units) 45,000 45,000
N'000 N'000
Sales Revenue 2,790 2,790
Direct Materials 907 900
Direct Labour 443 450
Variable Production Overhead 284 270
 Variable admin overhead 148 149.625
Total Variable Cost 1,782 1,770
Contribution 1,008 1,020
Fixed Production Overhead 212 187
Fixed Admin Overhead 180 160
Total Fixed Cost 392 347
Profit 615.6 673

Workings
1 Sales Revenue
Sp x
Quantities 40,000
2,480,000
Sp*40,000=2,480,000
SP=2,480,000/40,000
Selling Price 62

Revised Quantity 45,000

Revised Sales revenue 2,790,000

Direct Materials
Initial Budget 800,000
Quantities 40,000
Material Cost per unit 20
Revised unit 45,000
Revised Direct Material 900,000

Direct Labour
Initial Budget 400,000
Quantities 40,000
Labour cost per unit 10
Revised Quantities 45,000
Revised Direct Labour 450,000

Alternative
Initial Budget 400,000
Budgeted Units 40,000
Budgeted Hours/unit 3
Total Budgeted Labour hours 120,000
Labour cost per hour 3
Revised Quantities 45,000
Revised budgted hours 135,000
Revised Direct Labour 450,000
Variable Production Overhead(VPO)
Initial Budget 240,000
Quantities 40,000
VPO/Unit 6
Revised Quantities 45,000
Revised Variable Production O/H 270,000

Variable Admin Overhead (VAO)

Initial Budget 133,000.00
Quantities 40,000.00
VAO/Unit 3.33
Revised Quantities 45,000.00
Revised Variable Admin O/H 149,625.00

Main
40,000 30,000
N'000 N'000
Sales Revenue 2,790
Direct Materials 899
Direct Labour 400
Variable Production Overhead 240
Variable admin overhead 133
Total Variable Cost 1,672
Contribution 1,118
Fixed Production Overhead 187
Fixed Admin Overhead 160
Total Fixed Cost 347
Profit 771

Cash inflow
Receipt from customers Februrary
Proceeds from disposal of assets Cash and cash carry
Issue of shares
Inflow from borrowings
Dividend and interest income

Cash outflow
Payment to suppliers
Payment to employees and labour
Other expenses and overhead
Purchase of asset
Rent
etc

Assignment
 What are the benefits of cash budget

Question Review
May 2022 Question 2

Cash budget for the quarter ending 30th June 2021

Cash inflow April-June 2021
Receipt from customers 2,084,033
Total Inflow 2,084,033

Cash outflow
Payment to suppliers 398,833
Payment to labour 236,400
Other expense 200,000
Total Outflow 835,233

Net Cashflow 1,248,800

Opening Balance of Cash -
Closing balance 1,248,800

Workings
1 Receipt from customers

Revenue for the quarter

Sales quantities budget 25,000
Sales Price 95
Revenue 2,375,000
Month of collection
April Revenue 791,666.67 May
May Revenue 791,666.67 June
June Revenue 791,666.67 July

Collections between April-June 2021

Receivables as at March collected April 500,700
April Sales collected in May 791,667
May Sales collected in June 791,667
Receipt from customers 2,084,033

2 Production budget(April -June)

Sales budget 25,000
Expected closing inventory 15,000
Production Budget
Opening Inventory (20,300)
Production (Units) 19,700
Zithromix required per unit 10
Materials Usage
 Materials Usage
Materials usage budget(KG) 197,000
Closing inventory of zithromix 150,500
Opening Inventory of Zithromix (200,000)
Materials Purchase
Materials Purchase(KG) 147,500 budget
Materials cost per KG 5
Materials Purchase(Naira) 737,500
Payment Month
April Purchase 245,833.33 June
May Purchase 245,833.33 July
June Purchase 245,833.33 August

Payments to suppliers between April-June 2021

Payable from previous quarter paid in current quarter 153,000
April Purchase paid for in June 245,833
Payments to suppliers between April-June 2021 398,833

3 Labour budget
Hours per unit 2
Units to be produced 19,700
Budgeted hours 39,400
Rate per hour 6
Labour budget 236,400

Time Series
Time Series Revenue
January 100,000
February 120,000 20,000

Analyse historical information

Additive Model - YA=T+S+C+R
January 100,000=T+S+C+R
February 120,000=T+S+C+R

S=YA-T
Estimating the Trend Line
Calculating the amount of seasonal variation

Estimating the Trend Line

Moving averages
Linear regression analysis

Additive Y=T+S
S=Y-T
Week Day of the week Observation

Week 1 Monday 1
Week 1 Tuesday 2
Week 1 Wednesday 3
Week 1 Thursday 4
Week 1 Friday 5
Week 2 Monday 6
Week 2 Tuesday 7
Week 2 Wednesday 8
Week 2 Thursday 9
Week 2 Friday 10
Week 3 Monday 11
Week 3 Tuesday 12
Week 3 Wednesday 13
Week 3 Thursday 14
Week 3 Friday 15
Week 4 Monday
Week 4 Tuesday
Week 4 Wednesday
Week 4 Thursday
Week 4 Friday
Week 5 Monday
Week 5 Tuesday
Week 5 Wednesday
Week 5 Thursday
Week 5 Friday
Forecast Sales for Wednesday in Week 5
Step 1. - Forecast Trend
Step 2. - Adjust the trend using the appropriate seasonal variation
Forecasted Sales for Wednesday Week 5

Trend Equation Y=a+bx

a=84
b=2
x=20
Y=84+(2*20)
Y=84+40
Forecast Trend 124

Centred moving averages

Seasonal adjustment - Additive Model
Monday Tuesday
Week 1 0 0
Week 2 -2 1
Week 3 -2 1
Seasonal Variation -2 1
This model assumes that seasonal variations above and below the trend line in
each cycle adds up to zero

Years Quarter Observation

Year 1 Q1 1
Year 1 Q2 2
2.5
Year 1 Q3 3
3.5
Year 1 Q4 4
4.5
Year 2 Q1 5
5.5
Year 2 Q2 6
6.5
Year 2 Q3 7
7.5
Year 2 Q4 8
8.5
Year 3 Q1 9
9.5
Year 3 Q2 10
10.5
Year 3 Q3 11
Year 3 Q4 12

Years Quarter Observation

Year 1 Q1 1
Year 1 Q2 2
Year 1 Q3 3
Year 1 Q4 4
Year 2 Q1 5
Year 2 Q2 6
Year 2 Q3 7
Year 2 Q4 8
Year 3 Q1 9
Year 3 Q2 10
Year 3 Q3 11
Year 3 Q4 12
Year 4 Q1
Year 4 Q2
Year 4 Q3
Year 4 Q4
Year 5 Q1
Year 5 Q2
Year 5 Q3
Year 5 Q4

Step 1. - Forecast Trend

Step 2. - Adjust the trend using the appropriate seasonal variation
Forecasted Sales for Quarter 3 Year 5

Forecast sales for Quarter 3 Year 5

Y=a+bx
a=27.375
b=3.96
High and Low approach to estimating b

Hightes Trend 55.125

Lowest Trend 27.375
Movement 27.75
Number of periods 7
Quarterly Movement 3.96428571428571

Alternative calculation of forecasting trend

a 55.125
b 3.96428571428571
x 9
Y=a+bx Y=55.125+(3.96*9)
Y=55.125+35.68 35.6785714285714
Y=a+bx 90.8035714285714 Y=a+bx

Q2 Y3 2 Q3 Y1
Y4 4 Y2
Q3 Y5 3 Y3
x= 9 Y4
Q3 Y5
x=
Additive Model
Seasonal Adjustment Quarter 1 Quarter 2
Year 1 0 0
Year 2 -0.125 -0.25
Year 3 -2 0.875
Average -1.0625 0.3125
Adjustment 0.109375 0.109375
Seasonal Adjustment -0.953125 0.421875

Multiplicative/Proportional Model
Y=T*S*C*R Ignoring C and R
Seasonal variation S=Y/T

Week Day of the week Observation

Week 1 Monday 1
Week 1 Tuesday 2
Week 1 Wednesday 3
Week 1 Thursday 4
Week 1 Friday 5
Week 2 Monday 6
Week 2 Tuesday 7
Week 2 Wednesday 8
Week 2 Thursday 9
Week 2 Friday 10
Week 3 Monday 11
Week 3 Tuesday 12
Week 3 Wednesday 13
Week 3 Thursday 14
Week 3 Friday 15
Week 4 Monday
Week 4 Tuesday
Week 4 Wednesday
Week 4 Thursday
Week 4 Friday
Week 5 Monday
Week 5 Tuesday
Week 5 Wednesday
Week 5 Thursday
Week 5 Friday
Forecast Sales for Wednesday in Week 5
Step 1. - Forecast Trend
Step 2. - Adjust the trend using the appropriate seasonal variation
Forecasted Sales for Wednesday Week 5

Trend Equation Y=a+bx

a=84
b=2
x=20
 Y=84+(2*20)
Y=84+40
Forecast Trend 124

Seasonal adjustment - Multiplicative/Proportional

Monday Tuesday
Week 1 0 0
Week 2 0.977777777777778 1.01086956521739
Week 3 0.98 1.00980392156863
Seasonal Variation 0.978888888888889 1.01033674339301
Adjustment 0.00011016484268591 0.0001101648426859
Adjusted seasonal variation 0.978999053731575 1.0104469082357

Linear Regression

Explanatory/
Independent Variable

Observation
Years Quarter
X

Year 1 Q1 1
Year 1 Q2 2
Year 1 Q3 3
Year 1 Q4 4
Year 2 Q1 5
Year 2 Q2 6
Year 2 Q3 7
Year 2 Q4 8
Year 3 Q1 9
Year 3 Q2 10
Year 3 Q3 11
Year 3 Q4 12
78
Year 4 Q1 13
Year 4 Q2 14
Year 4 Q3 15
Year 4 Q4 16
year 5 Q1 17
year 5 Q2 18
year 5 Q3 19
year 5 Q4 20

n
∑x
 ∑y
∑xy
∑x^2
n∑xy
∑x∑y
n∑x^2
(∑x)^2

a
∑y/n
Minus

(b∑x)/n

b∑x

y=a+bx
y=15.38+3.99x
Forecast sales for Quarter 3 Year 5
Forecast Trend 91.2459207459208
Seasonal adjustment 0.336829836829833
Forecas for quarter 3 year 5 91.5827505827506

Additive Model
Seasonal Adjustment Quarter 1 Quarter 2
Year 1 0.628205128205124 0.635198135198131
Year 2 -0.343822843822849 -0.336829836829835
Year 3 -2.31585081585082 0.691142191142191
Seasonal Adjustment -0.67715617715618 0.329836829836829
Adjustment 0 0
Seasonal Adjustment -0.67715617715618 0.329836829836829

Read up on Coefficient of determination

 November 2021 - Question 4
Actual/Forecast sales Seasonal variation
Year 1 Quarter 1 420,000 25,000
Year 1 Quarter 2 450,000 15,000
Year 1 Quarter 3 475,000 -
Year 1 Quarter 4 475,000 (40,000)
Year 2 Quarter 1 580,000 25,000
Year 2 Quarter 2 610,000 15,000
Year 2 Quarter 3 635,000 -
Year 2 Quarter 4 635,000 (40,000)

Additive Mode Actual = Trend + Seasonal Variation

Seasonal variation = Actual - Trend
Trend = Actual - Seasonal Variation

Q1 Q2
Seasonal Variation 25,000 15,000
Average 25,000 15,000
Inflation Additions 2024 Budget
29.90% 5%

2024

Flexible Budgets

Prepared in
Prepared in Dec 2023 Prepared in Dec 2023
Dec 2023

11,000 units 9,000 units 8,000 units

Total

2,305,000
 C
KG

4,800

9,450
14,250

C Total
14,250
120
14,370
(150)
14,220
30
426,600 858,500

B C
450 150
??? ???
3,375 14,250
400 120
 159,000

Variances

N'000
-
(7)
7
(14)
 2
(12)
12
(25)
(20)
(45)
58

30,000
50,000
45,000
Flexible
45,000 50,000 55,000
N'000 N'000 N'000
 Actual result Trend Seasonal Variation
Y T Additive
78
83
89 84 5
85 86 -1
85 88 -3
88 90 -2
93 92 1
99 94 5
95 96 -1
95 98 -3
98 100 -2
103 102 1
109 104 5
105 106
105 108
110
112
114
116
118
120
122
124

124
5
129

Wednesday Thursday Friday

5 -1 -3
5 -1 -3
 5 0 0
5 -1 -3

Moving average of
Moving Seasonal
Sales N'000 moving average
Average variation
Trend
20
24
25.5
27 27.375
29.25
31 31.125
33
35 35.125
37.25
39 39.25
41.25
44 43
44.75
47 46.875
49
49 51
53
56 55.125
57.25
60
64

Moving average of
Moving Seasonal
Sales N'000 moving average
Average variation
Trend
20
24
27 27.375 -0.375
31 31.125 -0.125
35 35.125 -0.125
39 39.25 -0.25
44 43 1
47 46.875 0.125
49 51 -2
56 55.125 0.875
60 59.0892857142857
 64 63.0535714285714
67.0178571428571
70.9821428571429
74.9464285714286
78.9107142857143
82.875
86.8392857142857
90.8035714285714

90.8035714285714
0.421875
91.2254464285714

27.375
3.96428571428571
16
Y=27.375+(3.96*16)
Y=27.375+63.43 63.428571429
90.8035714285714

1
4
4
4
3
16

Quarter 3 Quarter 4 Total

-0.375 -0.125
1 0.125
 0 0
0.3125 0 -0.4375
0.109375 0.109375 0.4375
0.421875 0.109375 0

Actual result Trend Seasonal variation

Y T S
78
83
89 84 1.05952380952381
85 86 0.988372093023256
85 88 0.965909090909091
88 90 0.977777777777778
93 92 1.01086956521739
99 94 1.0531914893617
95 96 0.989583333333333
95 98 0.969387755102041
98 100 0.98
103 102 1.00980392156863
109 104 1.04807692307692
105 106
105 108
110
112
114
116
118
120
122
124

124
1.0537075722
130.659739
Wednesday Thursday Friday Total
1.05952380952381 0.98837209 0.965909090909091
1.0531914893617 0.98958333 0.969387755102041
1.04807692307692 0 0
1.05359740732081 0.98897771 0.967648423005566 4.99944917579 SUM of seasonal variation is expected to add up to 5
0.0001101648426859 0.00011016 0.0001101648426859 0.00055082421
1.0537075721635 0.98908788 0.967758587848252 5

Dependent Variable

Seasonal
Sales N'000 Seasonal
Trend variation
Actual Result XY X^2 variation
y=15.38+3.99x Mutitplicative
Y Additive Model
Model

20 20 1 19.3717948717949 0.62820512820512 1.03242885506287

24 48 4 23.3648018648019 0.63519813519813 1.02718611263531
27 81 9 27.3578088578089 -0.3578088578089 0.9869211434414
31 124 16 31.3508158508159 -0.3508158508159 0.98880999293654
35 175 25 35.3438228438229 -0.3438228438228 0.99027205276175
39 234 36 39.3368298368298 -0.3368298368298 0.99143729074694
44 308 49 43.3298368298368 0.67016317016316 1.01546655190037
47 376 64 47.3228438228438 -0.3228438228438 0.99317784400167
49 441 81 51.3158508158508 -2.3158508158508 0.95487065343296
56 560 100 55.3088578088578 0.69114219114219 1.01249604888842
60 660 121 59.3018648018648 0.6981351981352 1.01177256736306
64 768 144 63.2948717948718 0.7051282051282 1.01114036864493
496 3795 650

91.2459207459208

12

78 12
 496 Year 4 4
3795 Year 5 3
650

45540 Numerator Year 3 12

38688 Numerator Year 4 4 16
7800 Denominator Year 20 3
6084 Denominator

6852 Numerator
1716 Denominator

3.99300699300699 Slope

41.3333333333333

25.9545454545455

15.3787878787879

311.454545454545

38+3.99x

Quarter 3 Quarter 4 Total

-0.357808857808863 -0.3508159
0.670163170163164 -0.3228438
0.698135198135198 0.70512821
0.336829836829833 0.01048951 (0)
0 0 0
0.336829836829833 0.01048951 (0)
Trend
395,000
435,000 40,000
475,000 40,000
515,000 40,000
555,000
595,000
635,000
675,000

Q3 Q4
- (40,000)
- (40,000) -
s expected to add up to 5
12

64
3
79
 Divisional Performance and Transfer Pricing

Divisionalisation
Divisionalisation is a term for the division of an organisation into divisions. Each divisional manager is responsible for the performance of the division.

Large organisation can be structured in one of two ways: functionally (all activities of a similar type within a company, such as production, sales and research, are under the control of the
appropriate departmental head) or divisionally (split into divisions in accordance with the products or services made or provided).

Decentralisation

A divisional structure will lead to decentralisation of the decision-making process and divisional managers may have the freedom to set selling prices, choose suppliers, make product mix
and output decisions, and so on. Decentralisation is, however, a matter of degree, depending on how much freedom divisional managers are given.

Advantages
Divisionalisation can improve the quality of decisions made because divisional managers (those taking the decisions) know local conditions and are able to make more informed judgements
Decisions should be taken more quickly because information does not have to pass along the chain of command to and from top management.
The authority to act to improve performance should motivate divisional managers
Divisionalprovide
Divisions organisation frees
valuable top management
training grounds forfrom detailed
future involvement
members in day-to-day
of top management by operations
giving themand allows them
experience to devote more
of managerial skillstime to strategic
in a less complexplanning.
environment than that faced by top
management.

Disadvantages

Decisions might be taken by a divisional manager in the best interests of their own part of the business, but against the best interest of other divisions and possibly against the interests of
the
It isorganisation
claimed thatas
thea costs
whole.of activities that are common to all divisions, such as running the accounting department, may be greater for a divisionalised structure than for a centralised Division A
structure.
Top management, by delegating decision-making to divisional managers, may lose control since they are not aware of what is going on in the organisation as a whole

Responsibility Accounting
Responsibility accounting is the term used to describe decentralisation of authority, with the performance of the decentralised units measured in terms of accounting results.

Principal Performance
Responsibility Centre Management has control over
Measures
Variance analysis
Cost Centre _Controllable Cost
Weakest Efficiency measures
Revenue Centre _Revenue only Revenue
_Controllable costs
Profit Centre _Sales price (including transfer Profit
prices)
_As for profit centre except that
Contribution Centre expenditure is reported on a Contribution
marginal cost basis

_Controllable costs
_Sales prices (including transfer
prices) _Return on investment
Strongest Investment Centre _Output volumes _Residual income
_Investment in non-current assets _Other financial ratios
and
working capital

Return on Investment
Return on investment (ROI) shows how much profit has been made in relation to the amount of capital invested and is calculated as (profit/capital
employed) * 100%
It ties in directly with the accounting process and can be identified from the income statement and balance sheet

Example

A B
Profit 60,000 30,000
Capital Employed 400,000 120,000
ROI 15% 25%

Measuring ROI
A Profit after depreciation as a % of net assets employed Numerator Profit after depreciation
Non-current asset after considering depreciation Denominator Net Asset Employed
Net Asset employed Non-current asset after considering depreciation(NBV) + Investment in working capital
Example
The results of investment centre X, with a policy of straight-line depreciation of assets over a five-year period, might be as follows.
ROI for year 2023
Non-current asset after
considering depreciation
Net asset employed at the end
A
of the year 31 December
Net asset employed at the
B
beginning of the year 1 Janary
Net at asset the middle of the
C
year 30 June/1 July
Net asset employed at Investment with useful life of 5
the end of the year years
Net Asset
Depreciation for the
Year Non-Curret Asset at Cost Working Capital Profit after depreciation NBV at year end employed/Capita ROI%
year
l Employed
N'000 N'000 N'000
1 100 10 10 20 80 90 11%
2 100 10 10 20 60 70 14%
3 100 10 10 20 40 50 20%
4 100 10 10 20 20 30 33%
5 100 10 10 20 0 10 100%

Net asset employed at

the beginning of the year
NBV at the Net Asset
Depreciation for the
Year Non-Curret Asset at Cost Working Capital Profit after depreciation beginning of the employed/Capita ROI%
year
year l Employed
N'000 N'000 N'000
1 100 10 10 20 100 110 9%
2 100 10 10 20 80 90 11%
3 100 10 10 20 60 70 14%
4 100 10 10 20 40 50 20%
5 100 10 10 20 20 30 33%

NBV at the middle of the year

NBV at the NBV at the
Depreciation for the 6 months NBV at the Capital
Year Non-Curret Asset at Cost Working Capital Profit after depreciation middle of the end of the ROI%
year depreciation beginning Employed
year year
N'000 N'000 N'000
1 100 10 10 20 10 100 90 80 100 10%
2 100 10 10 20 10 80 70 60 80 13%
3 100 10 10 20 10 60 50 40 60 17%
4 100 10 10 20 10 40 30 20 40 25%
5 100 10 10 20 10 20 10 0 20 50%

Limitation
This can give a false impression of improving performance over
time.
There
It is easy
is not no generally acceptable
to compare fairly theway to measure
performance of investment
centres
B Profit after depreciation as a % of gross assets employed
Instead of measuring ROI as return on net assets, we could measure it as return on gross assets ie before depreciation. This
would remove the problem of ROI increasing over time as non-current assets get older.
Depreciation for the Gross Asset Capital
Year Non-Curret Asset at Cost Working Capital Profit after depreciation ROI%
year Employed Employed
N'000 N'000 N'000
1 100 10 10 20 100 110 9% 7.5%
2 100 10 10 20 100 110 9%
3 100 10 10 20 100 110 9%
4 100 10 10 20 100 110 9%
5 100 10 10 20 100 110 9%

If a company acquired a non-current asset costing $40,000, which it intends to depreciate by $10,000 pa for four years, and if
the asset earns a profit of $8,000 pa after depreciation, ROI might be calculated on net book values or gross values, as follows.
Middle
ROI based on Gross Annual 6 months Net ROI based on
Year Profit Gross Value Capital Employed
Value depreciation depreciation Asset(Middle) Net Asset
1 8000 40,000 40,000 20% 10,000 5,000 35,000 23%
2 8000 40,000 40,000 20% 10,000 5,000 25,000 32%
3 8000 40,000 40,000 20% 10,000 5,000 15,000 53%
4 8000 40,000 40,000 20% 10,000 5,000 5,000 160%

ROI and New Investments

If investment centre performance is judged by ROI, we should expect that the managers of investment centres will probably decide to undertake new
capital investments only if these new investments are likely to increase the ROI of their centre.

30%
25%

Belongs to a Company

With new New

Currently Investment
investment
alone
Profit 400,000 475,000 75,000
Capital Employed 1,000,000 1,250,000 250,000
ROI 40% 38% 30%

Residual Income

An alternative way of measuring the performance of an investment centre, instead of using ROI, is residual income (RI). Residual income is a measure
of the centre's profits after deducting a notional or imputed interest cost.
(a) The centre's profit is after deducting depreciation on capital equipment.
(b) The imputed cost of capital might be the organisation's cost of borrowing or its weighted average cost of capital.

Same profit referenced in ROI

Profit after depreciation xxxx
Computation
Same Capital
Capital Employed * Cost of
Notional/Imputed Interest (xxx) employed referenced
Capital
in ROI
Residual Income xxxx

Capital Employed * Cost of

Notional/Imputed Interest
Capital
Same capital employed
Capital Employed
reference in ROI computation

Residual income is a measure of the centre's profits after deducting a notional or imputed interest cost
Example 1

A division with capital employed of $400,000 currently earns an ROI of 22%. The division's cost of capital is 14%. What is the
residual income.
Residual Income Workback of profit after depreciation
Profit after depreciation xxxx 88,000 22=Profit/400,000
Notional/Imputed Interest (xxx) 56,000 Profit=22%*400,000
Residual Income xxxx 32,000

Notional/Imputed Interest Capital Employed * Cost of Capital Capital Employed 400,000

Same capital employed reference in
Capital Employed
ROI computation Cost of Capital 14%

Example 2
A division with capital employed of $400,000 currently earns an ROI of 22%. It can make an additional investment of $50,000 for a five year life with
nil residual value. The average net profit from this investment would be $12,000 after depreciation . The division's cost of capital is 14%. What are the
residual incomes before and after the investment?

Before the new investment After the new investment

ROI= Profit/CE *100%
Capital Employed 400,000 450,000
ROI 22% 22.22%
Cost of Capital 14% 14%
Profit after depreciation 88,000 100,000
Notional/Imputed Interest 56,000 63,000
Residual Income 32,000 37,000
Profit/CE=ROI

Profit= ROI*CE FCF

x=22%*400,000 ll
x=88,000

RI versus ROI: marginally profitable investments

With new
Currently New Investment
Investment
only
Profit 30,000 31,400 1,400
Capital Employed/Operating
100,000
Asset 110,000 10,000
Cost of Capital/Imputed interest 12% 12% 12%
ROI 30% 29% 14%
Notional/Imputed Interest 12,000 13,200 1,200
Residual Income 18,000 18,200 200
 Question 3 May 2015 - Pathfinder
Gross profit margin Gross Profit/Revenue * 100

Contribution to Sales Ratio Contribution/Revenue*100

ROI = Profit after depreciation/Capital Employed*100

RI=Profit after depreciation-Imputed interest
Imputed = Cost of Capital * Capital employed

Profit after depreciation

Capital employed
Cost of Capital

RoI/ROCE
Profit after depreciation
Capital Employed

Residual Income Cost of Capital

Imputed Interest Cost of Capital * Capital Employed

May 2015 Question 3

A

Profit after Capital Employed Imputed

Non current asset cost Revenue Contribution Annual Depreciation ROI Cost Of Capital Residual Income
depreciation at the beginning Interest

1 48,000,000 40,000,000 16,000,000 9,600,000 6,400,000 48,000,000 13% 16% 7,680,000 (1,280,000)
2 48,000,000 40,000,000 16,000,000 9,600,000 6,400,000 38,400,000 17% 16% 6,144,000 256,000
3 48,000,000 40,000,000 16,000,000 9,600,000 6,400,000 28,800,000 22% 16% 4,608,000 1,792,000
4 48,000,000 40,000,000 16,000,000 9,600,000 6,400,000 19,200,000 33% 16% 3,072,000 3,328,000
5 48,000,000 40,000,000 16,000,000 9,600,000 6,400,000 9,600,000 67% 16% 1,536,000 4,864,000

Contribution/Sales =CS Ratio

C/S 40%
C/40,000,000 40%
C= 16,000,000 40%* Sales

Profit after Capital Employed Imputed

Non current asset cost Revenue Contribution Annual Depreciation ROI Cost Of Capital Residual Income
depreciation at the beginning Interest

1 48,000,000 56,000,000 22,400,000 9,600,000 12,800,000 48,000,000 27% 16% 7,680,000 5,120,000

5-May-15
X Y
Revenue 46.4 28.1
Net profit margin 30% 35%
Profit 13.92 9.835
Investment/Capital Employe 88.2 46
ROI 16% 21%
Cost of Capital 15% 15%
Imputed Interest 13.23 6.90
Residual Income 0.69 2.93

May 2015 - Question 3

Imputed
NBV at the ROCE/ RI=Profit after
Annual Interest (CoC *
Revenue Contribution - 40% Annual depreciation Profit after depreciation Cost of Investment beginning/Capital ROI(Profit/capital dep-Imputed
depreciation Capital
employed employed) interest
Year emplpyed)
N'm N'm N'm N'm N'm N'm N'm N'm N'm
Year 1 40 16 9.6 6.4 48 9.6 48 13% 7.68 -1.28
Year 2 40 16 9.6 6.4 48 9.6 38.4 17% 6.144 0.256
Year 3 40 16 9.6 6.4 48 9.6 28.8 22% 4.608 1.792
Year 4 40 16 9.6 6.4 48 9.6 19.2 33% 3.072 3.328
Year 5 40 16 9.6 6.4 48 9.6 9.6 67% 1.536 4.864

Revenue xxxx
Variable cost (xxx)
Contribution xxxx
Fixed cost (xxx)
Profit xxxx

Imputed
NBV at the ROCE/ RI=Profit after
Annual Interest (CoC *
Revenue Contribution - 40% Annual depreciation Profit after depreciation Cost of Investment beginning/Capital ROI(Profit/capital dep-Imputed
depreciation Capital
employed employed) interest
emplpyed)
N'm N'm N'm N'm N'm N'm N'm N'm N'm
Year 1 56 22.4 9.6 12.8 48 9.6 48 27% 7.68 5.12
 Company
Division B Division C

Alternatively

90 nbV AT THE MIDDLE

70 (NBV at the beginning+NBV at the end)/2
50
30
10
 Organisation structured into divisions and the divisions are transacting with each other
Parent and Subsidiary
Subsidiary and subsidiary within a group

Division A Division B
Selling division Buying Division
Tranfer price between A and B should be zero
xxx (xxx)
100 -100
90 0

Division A sells to external market at 100 naira

The minimum
The sum of the supplying division's marginal cost and opportunity cost of the item
transferred.
The minimum
Marginal Cost
Opportunity cost
Minimum Transfer Price

Marginal Cost
Direct material
Direct Labour
Direct expenses
Incremnetal fixed cost
Marginal Cost

Opportunity cost
I Where there is an external market for the item being transferred. Opportunity cost in this case is measured as contributio
ii There is an alternative use for the facilities used in manufacturing the item being transferred

Opportunity cost
External selling/Market Price
Variable/Marginal cost of item
Contribution/Opportunity cost

Where there is no opportunity cost, Minimum transfer price is the sa

Where opportunity cost is as a result of not selling to the external ma

1,000

Division B
External Market
 Scenario 1
Division A is the supplying/Selling division
Division B is the Buying/Receiving division
Division A has the capacity to manufacture 10,000 units per period
Option 1 Divions B is willing to buy all the 10,000 units
Option 2 External Market is willing to buy all the 10,000 units
There is an opportunity on the 10,000 units transferred to division B

Scenario 2
Division A is the supplying division
Division B is the Buying division
Division A has the capacity to manufacture 20,000 units per period
Option 1 Divions B is willing to buy only 10,000 units
Option 2 External Market is willing to only 10,000 units
There is no opportunity cost on the 10,000 units transferred to divisio

Scenario 3
Division A is the supplying division
Division B is the Buying division
Division A has the capacity to manufacture 10,000 units per period
Option 1 Divions B is willing to buy all the 10,000 units
Option 2 External Market is willing to buy all the 0 units
There is no opportunity cost on the 10,000 units transferred to divisio

Scenario 4
Division A is the supplying division
Division B is the Buying division
Division A has the capacity to manufacture 10,000 units per period
Option 1 Divions B is willing to buy all the 10,000 units
Option 2 External Market is willing to buy all the 4,500 units
There is no opportunity cost on 5,500 units
There is opportunity cost on 4,500 units

Scenario 5
Division A is the supplying division
Division B is the Buying division
Division A has the capacity to manufacture 15,000 units per period
Option 1 Divions B is willing to buy all the 10,000 units
Option 2 External Market is willing to buy all the 4,500 units
There is no opportunity cost on the 10,000 units transferred to divisio

Scenario 6
Division A is the supplying division
Division B is the Buying division
 Division A has the capacity to manufacture 15,000 units per period
Option 1 Division B is willing to buy all the 10,000 units
Option 2 External Market is willing to buy all the 10,000 units
There is no opportunity cost on 5,000 units
There is opportunity cost on 5,000 units

Scenario 7
Division A is the supplying division
Division B is the Buying division
Division A has the capacity to manufacture 12,000 units per period
Option 1 Division B is willing to buy all the 10,000 units
Option 2 External Market is willing to buy all the 4,500 units
There is opportunity cost on 2,500 units
There is no opportunity cost on 7,500 units

Scenario 7
Division A is the supplying division
Division B is the Buying division
Division A has the capacity to manufacture 12,000 units per period
Division B is willing to buy all the 10,000 units
External Market is willing to buy all the 14,500 units
There is an opportunity on the 10,000 units transferred to division B
The maximum
The lowest market price at which the receiving division could purchase the goods
or services externally, less any internal cost savings in packaging and delivery.

Lowest market price for external suppliers

Less internal cost savings from Pack and deli
The Maximum Transfer Price

Tranfer Pricing Policies

Market Price
Full Cost
Full cost Plus
Variable Cost
Variable cost Plus
Based on opportunity cost/minimum transfer price

Minimum < Maximum

Maximum > Minimum

Minimum > Maximum

Maximum < Minimum
 November 2014
Question 1
Determine the transfer price per tyre that Division X should quote in
Ai order to meet its residual income target.
Revenue
Variable cost(22,000*150,000)
Contribution
Fixed cost
Profit
Imputed interest(12%*3,200,000,000)
Target residual income

Residual Income=Profit-Imputed Interest

Profit=Residual Income +Imputed interest

Profit=Contribution - Fixed cost

Contribution=Profit + Fixed cost

Contribution=Revenue-variable cost
Revenue=Contribution + variable cost

Analysis of revenue
Quantities
Capacity 150,000
Supplied to division Y 60,000
Sales to external market 90,000
Y if it becomes the group’s policy to quote transfer prices based on
Aii opportunity costs.
Price based on opportunity cost = Minimum transfer price

Minimum transfer price

Marginal cost/variable cost xxx
Opportunity cost xxx
Minimum transfer price xxx

Scenario 6
Division X is the supplying division
Division Y is the Buying division
Division X has the capacity to manufacture 150,000 units per period
Division B is willing to buy all the 60,000 units
External Market is willing to buy all the 110,000 units
There is opportunity cost on 20,000 units
There is no opportunity cost on 40,000 units
Prices to be quoted
40,000 Marginal cost/Variable cost
 20,000 Marginal cost + Opportunity cost
Evaluate the impact of the group’s current and proposed policies on the profits
b of Divisions X and Y and on group profit.
Current policy Divisions have the freedom to set transfer prices and choose their supp
Proposed policy Transfer price based on opportunity cost. It uses Residual Income (RI)

Minimum price acceptable by X

X
Capacity 150,000
External Sales 110,000
Variable cost 110,000
Fixed cost
Profit

Y
External revenue 60,000
Cost of tyres from external supplier(Adex Limite) 60,000
Profit

Group's profit

Proposed policy X
External sales 90,000
Internal sales 60,000
Total revenue
Variable 150,000
Fixed cost
Profit

Y
External revenue 60,000
Cost of tyres from divison X 60,000
Profit

Group profit

X
Profit based on current policy 2,510,000,000
Profit based on proposed policy 350,000,000
Impact 2,160,000,000

40,000 Marginal cost/Variable cost

 20,000 Marginal cost + Opportunity cost

60,000
60,000

Minimum transfer price 22,000

Maximum transfer price 28,000

Minimum transfer price 20,000

Maximum transfer price 20,000

X has quoted a price of 30,000 per tyre

A - Assume that Y is buying the 60,000 tyres from X at a price of 30,000 per tyre
X
Revenue
Variable cost
Contribution
Fixed cost
Profit before tax
Tax
Profit after tax

B- Assume that Y is buying the N60,000 tyres from Adex Limited at a price of 28,000 per tyre
X
Revenue
Variable cost
Contribution
Fixed cost
Profit before tax
Tax
Profit after tax

November 2018
Question 2

for Y to make a unit, 2 components is required

50,000 units of product

100,000 components will be required.
I External demand is 15,000 units
X
Internal Revenue (105*20,000) 2,100,000
External Revenue (200*15,000) 3,000,000
Total Revenue 5,100,000
Cost of component -
Variable cost (105*35,000) 3,675,000
Total variable cost 3,675,000
Contribution 1,425,000
Fixed cost 1,375,000
Profit 50,000

Capacity of division X 35,000

Demand from Y 20,000
Balance 15,000
External Market demand 15,000
Unsatisfied market demand =
No opportunity cost on the 20,000
units transferred to Y

II External demand is 19,000 units X

Internal Revenue (16,000*105)+(4,000 *200) 2,480,000
External Revenue (15,000*200) 3,000,000
Total Revenue 5,480,000
Cost of component -
Variable cost (35,000*105) 3,675,000
Total variable cost 3,675,000
Contribution 1,805,000
Fixed cost 1,375,000
Profit 430,000

Capacity of division X 35,000

Demand from Y 20,000
Balance 15,000
External Market demand 19,000
Unsatisfied market demand 4,000

No opportunity cost on 16,000 units

There is opportunity cost on 4,000 units

External demand is 35,000 units X

III Internal Revenue(20,000*200) 4,000,000
External Revenue(200*15000) 3,000,000
Total Revenue 7,000,000
Cost of component -
 Variable cost(105*35,000) 3,675,000
Total variable cost 3,675,000
Contribution 3,325,000
Fixed cost 1,375,000
Profit 1,950,000

Capacity of division X 35,000

Demand from Y 20,000
Balance 15,000
External Market demand 35,000
Unsatisfied market demand 20,000
There is an opportunity cost on the 20,000 units supplied to Y

b
I External demand is 15,000 units
X
External Revenue (200*15,000) 3,000,000
Total Revenue 3,000,000
Cost of component(170*20,000) -
Variable cost (105*15,000) 1,575,000
Total variable cost 1,575,000
Contribution 1,425,000
Fixed cost 1,375,000
Profit 50,000

II External demand is 19,000 units X

External Revenue (19,000*200) 3,800,000
Total Revenue 3,800,000
Cost of component -
Variable cost (19,000*105) 1,995,000
Total variable cost 1,995,000
Contribution 1,805,000
Fixed cost 1,375,000
Profit 430,000

III External demand is 35,000 units X

External Revenue (200*35000) 7,000,000
Total Revenue 7,000,000
Cost of component -
Variable cost(105*35,000) 3,675,000
Total variable cost 3,675,000
Contribution 3,325,000
Fixed cost 1,375,000
Profit 1,950,000

Group Policy
I 2,550,000
II 2,550,000
III 2,550,000

Alternative I
New cost of component(170*20,000) 3,400,000
Initial cost of component transferred 2,100,000
Change 1,300,000
 Company

0
0
90

xxx 100
xxx 80
xxx 180

Opportunity cost
xxx
xxx
xxx
xxxx
xxxx

ost in this case is measured as contribution

g transferred

xxxx 180
(xxx) 100
xxxx 80

ty cost, Minimum transfer price is the same as Marginal/Variable cost

a result of not selling to the external market, minimum transfer price will be the same as the external market price

1,000
Demand Demand
1,000 Division B 1,000
1,000 Alternative Forgone External Market -
 lling division
ving division
manufacture 10,000 units per period
he 10,000 units
buy all the 10,000 units
he 10,000 units transferred to division B

manufacture 20,000 units per period

y 10,000 units
only 10,000 units
on the 10,000 units transferred to division B

manufacture 10,000 units per period

he 10,000 units
buy all the 0 units
on the 10,000 units transferred to division B

manufacture 10,000 units per period

he 10,000 units
buy all the 4,500 units
on 5,500 units

manufacture 15,000 units per period

he 10,000 units
buy all the 4,500 units
on the 10,000 units transferred to division B
 manufacture 15,000 units per period
the 10,000 units
buy all the 10,000 units
on 5,000 units

manufacture 12,000 units per period

the 10,000 units
buy all the 4,500 units

on 7,500 units

manufacture 12,000 units per period

the 10,000 units
buy all the 14,500 units
he 10,000 units transferred to division B

nal suppliers xxxx

m Pack and deli (xxx)
xxxx

inimum transfer price

Transfer within division is recommended

Transfer within division is not recommended

 4,944,000,000
3,300,000,000
1,644,000,000
1,080,000,000
564,000,000
384,000,000
180,000,000

Price Revenue

29,900 1,794,000,000
35,000 3,150,000,000
4,944,000,000

40,000 units 20,000 units

22,000 22,000
0 13,000
22,000 35,000

manufacture 150,000 units per period

the 60,000 units
buy all the 110,000 units
20,000 units
on 40,000 units

22,000
 35,000

o set transfer prices and choose their suppliers..

rtunity cost. It uses Residual Income (RI) for performance appraisals.

29,900

35,000 3,850,000,000
22,000 2,420,000,000
1,080,000,000
2,510,000,000

35,000 2,100,000,000
28,000 1,680,000,000
420,000,000

2,930,000,000

35,000 3,150,000,000
26,333.33 1,580,000,000
4,730,000,000
22,000 3,300,000,000
1,080,000,000
350,000,000

35,000 2,100,000,000
1,580,000,000
520,000,000

870,000,000

Y Group
420,000,000 2,930,000,000
520,000,000 870,000,000
(100,000,000) 2,060,000,000

22,000 880,000,000
 35,000 700,000,000
Total cost 1,580,000,000

28,000.0 1,680,000,000
33,000 1,980,000,000

40,000
40,000

35,000
28,000

Y Group

000 per tyre

Y Group
Y Total - group
-
8,000,000
8,000,000
2,100,000
2,500,000
4,600,000
3,400,000
900,000
2,500,000 2,550,000

Y Total - group
-
8,000,000
8,000,000
2,480,000
2,500,000
4,980,000
3,020,000
900,000
2,120,000 2,550,000

Y Total - group
-
8,000,000
8,000,000
4,000,000
 2,500,000
6,500,000
1,500,000
900,000
600,000 2,550,000

on the 20,000 units supplied to Y

Y Total - group
8,000,000
8,000,000
3,400,000
2,500,000
5,900,000
2,100,000
900,000
1,200,000 1,250,000

Y Total - group
8,000,000
8,000,000
3,400,000
2,500,000
5,900,000
2,100,000
900,000
1,200,000 1,630,000

Y Total - group
8,000,000
8,000,000
3,400,000
2,500,000
5,900,000
2,100,000
900,000
 1,200,000 3,150,000

Ignore policy Impact

1,250,000 1,300,000 Decrease in profit
1,630,000 920,000 Decrease in profit
3,150,000 (600,000) Increase in profit

II III
3,400,000 3,400,000
2,480,000 4,000,000
920,000 (600,000)
market price

1,000
Demand
Division B 1,000
External Market 400
Capacity to make 10,000
Supplied to division B - priority (10,000)
Balance available -
External market demand 10,000
Unsatisfied external market demand (10,000)

Capacity to make 20,000

Supplied to division B - priority (10,000)
Balance available 10,000
External market demand 10,000
Unsatisfied external market demand -

Capacity to make 10,000

Supplied to division B - priority (10,000)
Balance available -
External market demand -
Unsatisfied external market demand -

Capacity to make 10,000

Supplied to division B - priority (10,000)
Balance available -
External market demand 4,500
Unsatisfied external market demand (4,500)

Capacity to make 15,000

Supplied to division B - priority (10,000)
Balance available 5,000
External market demand 4,500
Unsatisfied external market demand -

Capacity to make 15,000

Supplied to division B - priority (10,000)
Balance available 5,000
External market demand 10,000
Unsatisfied external market demand (5,000)

Capacity to make 12,000

Supplied to division B - priority (10,000)
Balance available 2,000
External market demand 4,500
Unsatisfied external market demand (2,500)

Capacity to make 12,000

Supplied to division B - priority (10,000)
Balance available 2,000
External market demand 14,500
Unsatisfied external market demand (12,500)
Capacity to make 150,000
Supplied to division Y - priority (60,000)
Balance available 90,000
External market demand 110,000
Unsatisfied external market demand (20,000)
1 Variable cost

Marginal cost

2
3 Relevant cost
Relevant cost of Material

1,000
4,000

5,000
 500
1,500

Relevant Cost of Labour

10 Minutes break
Class Resumes by 10:00am
Fixed Salary and there is spare capacity
Relevant cost of labour is zero
5 staffs paid a fixed monthly salary of 10,000 naira. For a standard 8 hours per day and 5 days a week
800
600 hours
50 hours required from new job

Fixed Salary and there is no spare capacity

800
800

Overtime
Divert from current job - opportunity cost
Employ temporary

Variable cost with spare capacity

Relevant cost will be based on normal rate

Overtime
Divert from current job - opportunity cost
Employ temporary

Department 1

Department 2
Normal rate (240*100)
Overtime premium (50%*240*100)
 Diversion - opportunity cost(80*100)
Lower option
Total relevant cost

Department 3
Normal rate (240*300)
Diversion - opportunity cost (200/2)*300
Total relevant cost

Contribution lost per unit of product Z

Hours required to make a unit
Contribution lost per hour
Hours of diversion
Total contribution lost

Overhead
Fixed
Variable

Past Question Review

May 2017
Question 3
Salary of production director
Materials
A(110*125)
B (40*90)
Components cost
Total relevant cost of material

Labour
75 hours - freely available
165 hours no freely available
Option 1 Overtime(165*140)
Temporary staff
Option 2 Temporary staff(165*120)
Cost of supervision (10*180)
Total cost of option 2
Total relevant cost of labour

Variable cost of running machine

Fixed overhead absorbtion

Total relevant cost

when it can be assumed that future fixed costs will be the
same, no matter what decision is taken, and that all variable
costs represent future cash flows that will be incurred as a
consequence of any decision that is taken.

Financial NPT XYZ

Lecture fee 1000 1500
Transportation cost 500 200
Data cost 200 200
1500 1700

Whethe to write ICAN or ACCA ICAN ACCA

One off registration fee
Annual subscription
Exemption fee
Exam fee
Lecture fee
Transportation cost

Incremental cost
1,000
Decision to make an extra unit of a product 500
Variable - DM, DL, DE
Old Machine New Machine
Differential cost 2,000 3,600
12,000 21,600

Avoidable 1
Unavoidable
Close down Do no close down
Rental cost 100,000 100,000
Local taxes - 16,000
Security - 40,000

Rental cost 100,000 Unavoidable

Local taxes 16000 Avoidable
Security 40000 Avoidable

Committed cost
Maintenace cost 20,000 per annum
Revenue 15,000 per annum
Sale of Machine 25,000
 1 2
Maintenace cost 20,000 20,000
Revenue 15,000
Sale of Machine 25,000

Keep
Sell the machine
Manufacturing

Maintenace cost -20,000 (20,000)

Revenue(15,000*2) 30,000 -
Sale of Machine 0 25,000

Keep
Sell the machine
Manufacturing

Revenue(15,000*2) 30,000 -
Sale of Machine 0 25,000
Total 30,000 25,000

Sunk cost Lunch Do not lunch

Opportunity cost

Future cost
cash flow
Direct consquent

Identifying relevant costs

Material
Labour
Overhead

Material
Material X - 5,000 required 5,000 required
Not in store 420,000
In store 1,680,000
Total relevant cost 2,100,000
Total relevant cost 2,100,000

Material Y
 Material Y - 2,000 required
Not in store 50,000
In store 36,000
Total relevant cost 86,000

Not in regular use

No scrap value
No alternative
Toxic - Cost will be incurrred to dispose it

by 10:00am

salary of 10,000 naira. For a standard 8 hours per day and 5 days a week
Hours 50,000

spare capacity

Overtime premium xxx

portunity cost xxx
xxx

on normal rate xxxx

xxx
portunity cost xxx
xxx

Relevant cost 0

24,000
12,000
 8,000
8,000
32,000

72,000
(200/2)*300 30,000
102,000

200
2
100
300
30,000

Only incremental/directly attributable fixed cost is relevant

Relevant

13,750
3,600
30,000
47,350

23,100

19,800
1,800
21,600
21,600

1,750

70,700
 200
200

1,600
9,600

Unavoidable Irrelevant
Avoidable Relevant
Avoidable Relevant

Irrelevant
Relevant
Relevant
 3
20,000 Committed
15,000

Committed Irrelevant
Relevant
Relevant

Relevant
Relevant
Based on opportunity cost=Minumum transfer price

variable cost xx
Opportunity cost xx
Based on opportunity cos x xxx

Tokas Tadex
Suppling division Buying division
Expected Value
Simulation
Maximax, Maximin and Minimax regret

Value of each outcome Probability of each outcome

Head 50%
Tail 50%

Probability of each
Value of each outcome (X) px
outcome(p)
1 17%
2 17%
3 17%
4 17%
5 17%
6 17%

Expected/Weighted average value

Project 1
Probability of each
Value of each outcome (X) px
outcome(p)
100 0.4 40
200 0.3 60
900 0.3 270
Expected value/weighted average value 370

Project 2
Probability of each
Value of each outcome (X) px
outcome(p)
0 0.4 0
500 0.3 150
600 0.3 180
Expected value/weighted average value 330

Project 3
Probability of each
Value of each outcome (X) px
outcome(p)
180 0.4 72
190 0.3 57
200 0.3 60
Expected value/weighted average value 189

Project 1 370
Project 2 330
Project 3 189

Project 1 370
Possible
100
200
900

Current policy
Number of defects
Possible outcomes (x) Probability px
0 0.99 0
1 0.07 0.07
2 0.02 0.04
3 0.01 0.03
0.14
Number of products 10,000
Expected number of defect 1,400

Cost of repairing defect

Possible outcomes (x) Probability px
20 0.2 4
30 0.5 15
40 0.3 12
Expected cost of each repair 31
Expected number of defect 1,400
Expected cost of all repairs per month 43,400

Proposed policy
Reduction in revenue (6*10,000) 60,000

Point C
Outcome outcome(x) probability(p)
Good 50,000 0.6
Poor (20,000) 0.4
Expected value at point C=22,000

Expected valut at point B

Outcome Outcome probability
successful 22,000 0.8
Unsuccessful - 0.2
Expected valut at point B

Decision point A

Do not develop 0
Expected profit 0

Develop
Cost (12,000)
Expected value of benefit 17,600
Expected profit 5,600

Original Plan
Sales 200,000
Variable costs:
Materials 120,000
Labour 20,000
140,000
Contribution 60,000
Fixed cost 50,000
Profit 10,000

What if material cost in 20% higher than expected

Original Plan
Sales 200,000
Variable costs:
Materials 144,000
Labour 20,000
164,000
Contribution 36,000
Fixed cost 50,000
Profit (14,000)

What if material cost in 10% higher than expected

Original Plan
Sales 200,000
Variable costs:
Materials 132,000
Labour 20,000
152,000
Contribution 48,000
Fixed cost 50,000
Profit (2,000)

What if material cost in 5% higher than expected

Original Plan
Sales 200,000
Variable costs:
Materials 126,000
Labour 20,000
146,000
Contribution 54,000
Fixed cost 50,000
Profit 4,000

Profit 10,000
Material cost 120,000
Maximum change 8.333%

What if material cost in 8.33% higher than expected

Original Plan
Sales 200,000
Variable costs:
Materials 130,000
Labour 20,000
150,000
Contribution 50,000
Fixed cost 50,000
Profit 0

What if labour cost in 5% higher than expected

Original Plan
Sales 200,000
Variable costs:
Materials 120,000
Labour 21,000
141,000
Contribution 59,000
Fixed cost 50,000
Profit 9,000

What if labour cost in 10% higher than expected

Original Plan
Sales 200,000
Variable costs:
Materials 120,000
Labour 22,000
 142,000
Contribution 58,000
Fixed cost 50,000
Profit 8,000

What if labour cost in 20% higher than expected

Original Plan
Sales 200,000
Variable costs:
Materials 120,000
Labour 24,000
144,000
Contribution 56,000
Fixed cost 50,000
Profit 6,000

What if labour cost in 30% higher than expected

Original Plan
Sales 200,000
Variable costs:
Materials 120,000
Labour 26,000
146,000
Contribution 54,000
Fixed cost 50,000
Profit 4,000

What if labour cost in 40% higher than expected

Original Plan
Sales 200,000
Variable costs:
Materials 120,000
Labour 28,000
148,000
Contribution 52,000
Fixed cost 50,000
Profit 2,000

Profit 10,000
Labour 20,000
Maximum change 50%

What if labour cost in 50% higher than expected

Original Plan
Sales 200,000
Variable costs:
Materials 120,000
Labour 30,000
150,000
Contribution 50,000
Fixed cost 50,000
Profit -

Investment appraisal
NPV

Cashflows NPV/PV of cash flows

Revenue NPV/PV of revenue
Cost NPV/PV of cost
Material cost NPV/PV of material cost
Labour NPV/PV of labour cost
Fixed cost NPV/PV of fixed
Sales volume NPV/PV of Contribution
Sales price NPV/PV revenue
Cost of Capital/Discount factor IRR-COC/COC or IRR- 5%

Project life (Project life-pay

period/BEP project
life)/Project life

10-5.7
=10-6

=IRR-COC/COC
CoC 20%
Increase by 25% 5.00%
25.00%

20%
5%

CoC 20%
IRR 25%

Worst possible Most likely

Declining Static
Demand
 Course of action 10 boxes 20 boxes
Buy 10 boxes 1,500 1,500
Buy 20 boxes (1,000) 3,000
Buy 30 boxes (3,500) 500

A Maximax Rule - Risk seeking

Decision: Buy 30 boxes

B Maximin Rule - Risk averse

Decision: Buy 10 boxes

C Minimax regret
Decision - Buy 20 boxes

Worst possible Most likely

Declining Static
Demand
Course of action 10 boxes 20 boxes
Buy 10 boxes - 1,500
Buy 20 boxes 2,500 -
Buy 30 boxes 5,000 2,500

Worst possible
Best option 1,500 Best option
Buy 10 boxes 1,500 Buy 20 boxes
Regret - Regret

Most Likely
Best option 3,000 Best option
Buy 10 boxes 1,500 Buy 20 boxes
Regret 1,500 Regret

Best possible
Best option 4,500 Best option
Buy 10 boxes 1,500 Buy 20 boxes
Regret 3,000 Regret

Pathfinder
November 2021
Question 5

A B
Regret
Poor 50 0
Average 85 75
Good 0 290
Maximum regret 85 290

Best - Poor 230

Best - Average 275
Best - Good 550

Maximin
Maximax
Minimax regret
Expected value

Decisions
Probabilities
1,100
1,200
1,300
1,400

Expected Profit
Decision 1 - Purcha
Outcome

Sales price
Purchase price
Holding cost
Profit

Stock out cost

Diposal value
Ordering cost

Purchase
Demand
 1,100
1,200
1,300
1,400

Purchase
Demand
1,100
1,200
1,300
1,400

Purchase
Demand
1,100
1,200
1,300
1,400

Purchase
Demand
1,100
1,200
1,300
1,400
px
30,000
(8,000)
22,000

px
17,600
-
17,600
Profit 10,000
Material cost 120,000 8.333%
 25.00%

25%
5%
30%

Best possible
Expanding
mand
 30 boxes
1,500
3,000
4,500

Best possible Maximum regret

Expanding 20 units
mand 10 units
30 boxes
3,000 3,000
1,500 2,500
- 5,000

ossible
1,500 Best option 1,500
(1,000) Buy 30 boxes (3,500)
2,500 Regret 5,000

ikely
3,000 Best option 3,000
3,000 Buy 30 boxes 500
- Regret 2,500

ssible
4,500 Best option 4,500
3,000 Buy 30 boxes 4,500
1,500 Regret -

C D

10 40
65 0
 340 50
340 50

Expected Expected
Outcome - Demand
Contribution profit
1,100 1,200 1,300 1,400
0.30 0.40 0.20 0.10
4,950,000 4,750,000 4,550,000 4,350,000 4,730,000 80000 4,650,000
4,600,000 5,400,000 5,200,000 5,000,000 5,080,000 80000 5,000,000
4,250,000 5,050,000 5,850,000 5,650,000 5,030,000 80000 4,950,000
3,900,000 4,700,000 5,500,000 6,300,000 4,780,000 80000 4,700,000

Outcome Probabilities Expected profit

4,950,000 0.30 1,485,000
4,750,000 0.40 1,900,000
4,550,000 0.20 910,000
4,350,000 0.10 435,000
4,730,000

Sold during the Not sold during

season the season
13,000 5,000
8,000 8,000
500 500
4,500 (3,500)

2,000
5,000
80,000 Irrelevant - one off and constant regardless of the number of purchase

1,100
4,950,000 =4,500*1,100
4,750,000 =(4500*1,100)-(100*2,000)
4,550,000 =(4500*1,100)-(200*2,000)
4,350,000 =(4500*1,100)-(300*2,000)

1,200

4,600,000 =(4,500*1,100)-(100*3,500)
5,400,000 =(4,500*1,200)
5,200,000 =(4,500*1,200)-(100*2,000)
5,000,000 =(4,500*1,200)-(200*2,000)

1,300

4,250,000 =(4,500*1,100)-(200*3,500)
5,050,000 =(4,500*1,200)-(100*3,500)
5,850,000 =(4,500*1,300)
5,650,000 =(4,500*1,300)-(100*2,000)

1,400

3,900,000 =(4,500*1,100)-(300*3,500)
4,700,000 =(4,500*1,200)-(200*3,500)
5,500,000 =(4,500*1,300)-(100*3,500)
6,300,000 =(4,500*1,400)
Make-or-buy decisions

Cost of manufacturing internally

Variable cost of Manufacturing 100
Number of units 1,000
Total variable cost 100,000
General overhead expenditure 48,000
Total Cost of manufacturing internally 148,000

Cost of purchasing externally 130

Number of units 1,000
Total Cost of purchasing externally 130,000

Cost savings if purchased externally 18,000

Alternatively
Cost of manufacturing internally
Variable cost of Manufacturing per unit 100
General overhead expenditure 48,000
No of units 1,000
General overhead expenditure per unit 48
Total Cost of manufacturing internally per unit 148

Cost of purchasing externally per unit 130

Cost savings if purchased externally 18,000

Alternatively
Cost of manufacturing internally
Variable cost of Manufacturing 100
Number of units 1,000
Total variable cost 100,000
Total Cost of manufacturing internally 100,000

Cost of purchasing externally 130

Number of units 1,000
Total Cost of purchasing externally 130,000
Cash savings from ending internal Prod -48000
82,000

Cost savings if purchased externally 18,000

Make-or-buy decisions with scarce resources

A 10,000 1st
B 5,000 2nd
C 3,000 3rd

Production Plan
A 10,000
B 4,000

Unsatisfied demand
B 1,000
C 3,000

Cost of doing work internally 100 Cheaper

Cost of purchasing externally 120

Units required 30,000

Capacity fo internal production 25,000
Outsource 5,000
Outsource 7,000

Time per job No of jobs Total hours required

Daily office cleaning 4 1,500 6,000
Intensive cleaning 6 400 2,400
Minor repairs 3 640 1,920
Total hours required 10,320

Daily office
cleaning
Variable cost of doing work internally 600
Cost of sub-contracting 800
Extra cost of sub-contracting per unit 200
Hours saved from subcontracting 4
Extra cost per labour hour 50
Order of oursourcing 1st
Order of doing work internally 3rd

Production plan
Job Hours Units Cost per unit
Minor repairs 1,920 640 560
Intensive Cleaning 2,400 400 1080
Daily office cleaning 3,680 920 600
Daily office cleaning - Outsourced 580 800
Total monthly variable cost
 10,000

Price offered by the customer xxxx 200,000

Relevant cost required to deliver the job xxxx
Gain/loss xxxx

Minimum price that should be charged/acceptable Relevant cost required to delive

Relevant Cost
Labour Cost -
Material X (100*180) 18,000
Material Y (24,000)
Storage unit - opportunity (11,000*3) 33,000
Overhead - variable (250*200) 50,000
Total relevant cost 77,000
Contract price 200,000
Extra benefit 123,000 Contract should be accepted

Shutdown decisions
P Q R S
Direct Material 300 500 400 700
Direct Labour 400 800 600 400
Variable overheads 100 200 100 100
Total variable cost 800 1,500 1,100 1,200
Sales 1,800 1,650 2,200 1,550
Contribution 1,000 150 1,100 350
Directly attributable fixed cost (400) (250) (300) (300)
Share of general fixed costs (200) (200) (300) (400)
Profit/Loss 400 (300) 500 (350)

Shutdown product Q
P Q R S
Direct Material 300 - 400 700
Direct Labour 400 - 600 400
Variable overheads 100 - 100 100
Total variable cost 800 - 1,100 1,200
Sales 1,800 - 2,200 1,550
Contribution 1,000 - 1,100 350
Directly attributable fixed cost (400) - (300) (300)
Share of general fixed costs (200) (200) (300) (400)
Profit/Loss 400 (200) 500 (350)

Increase in profit fro shutting down Q

Shutdown product S
P Q R S
Direct Material 300 500 400 -
Direct Labour 400 800 600 -
Variable overheads 100 200 100 -
Total variable cost 800 1,500 1,100 -
Sales 1,800 1,650 2,200 -
Contribution 1,000 150 1,100 -
Directly attributable fixed cost (400) (250) (300) -
Share of general fixed costs (200) (200) (300) (400)
Profit/Loss 400 (300) 500 (400)

Reduction in profit from shutting down S

P Q R S
Contribution forgone 1,000 150 1,100 350
Directly attributable fixed cost (400) (250) (300) (300)
Incremental benefit/cost 600 (100) 800 50

Joint product further processing decisions

Process A 4,000
X Y X Joint products
Further process
X+

Extra cost required for further processing

Incremental

Common Process
J1 J2
15,000
Further process
F1

Relevant cost of futher processing

Variable cost (60*15,000) 900,000
Directly attributable fixed cost 960,000
Relevant cost of futher processing 1,860,000

Revenue from selling F1(280*15,000) 4,200,000

Revenue from selling J1 (100*15,000) 1,500,000
Incremental revenue 2,700,000

Incremental benefit from further processing 840,000

Cheaper

Cheaper

Cheaper
tal hours required

Intensive Minor
cleaning repairs
1,080 560
1,500 1,000
420 440
6 3
70 146.66667
2nd 3rd
2nd 1st

Total cost
358,400
432,000
552,000
464,000
1,806,400
evant cost required to deliver the job

ntract should be accepted

Total
1,900
2,200
500
4,600
7,200
2,600
(1,250)
(1,100)
250

Total
1,400
1,400
300
3,100
5,550
2,450
(1,000)
(1,100)
350

100
Total
1,200
1,800
400
3,400
5,650
2,250
(950)
(1,100)
200

(50)

Total
2,600
(1,250)
1,350
 Product X Initial New Change Change %
Price 90 100 10 11%
Demand 2,000 1,600 400 20%
Elasticity 1.80

A
Full cost plus Unit Cost
Variable cost 60
Fixed cost((600,000+200,000)/40,000) 20
Full cost 80
Mark up at 20% 16
Full cost plus 20% mark up 96

Marginal cost plus Unit cost

Variable cost 60
Mark up at 40% 24
Marginal cost plus 40% 84

Pricing based on target ROI

Target ROI 10%
Investment(4,000,000+800,000) 4,800,000
Target ROI 480,000 12
Total cost 3,200,000 80
Targeted revenue 3,680,000 92
Pricing based on target ROI(3,680,000/40,000) 92 92

VC 2,400,000
Fixed production 600,000
Fixed Non product 200,000
3,200,000

B Price 96

Revenue(20,000) * 96) 1,920,000

Variable cost(60*20,000) (1,200,000)
Fixed production cost (600,000)
Fixed non production (200,000)
Profit (80,000)
 Change % Change
11% 11%
11% 3%
Elastic 1 0.273 Inelastic
C/S Ratio Contribution/Sales ratio

Variable per unit 9

Contribution per unit 7
Sales price per unit 16
C/S Ratio(C per unit/Sales price per unit) 0.4375

Total Contribution 490,000.00

Total sales revenue 1,120,000.00
C/S Ratio 0.4375

Total Contribution 490,000

Total sales revenue ????
C/S Ratio 0.4375
C/S ratio = Cont/Sales 0.4375=490,000/x 0.4375x=490,000

Contribution per unit ???

Sales price per unit 16
C/S Ratio 0.4375

Using contribution per unit

Fixed cost 600,000
Sales price 20
Variable cost 12
Contribution/unit 8
BeP(Units) (600,000/8) 75,000 Fixed cost/C per unit
BeP (Naira) 1,500,000

Using contribution to sales ratio

Fixed cost 600,000
Contribution/unit 8
Sales price/unit 20
C/S ratio (Contribution/Sales) 0.4
BeP(Naira) 1,500,000 Fixed/CS ratio
BeP(Units) 75,000

Units Naira
Budgeted sales quanity 80,000 1,600,000
BeP(Units) 75,000 1,500,000
Margin of safety (80,000-75,000) 5,000 100,000
Margin of safety ratio (5,000/80,000) 0.0625 0.0625
Margin of safety ratio(%) 6.25% 6.25%
 Units 5,000

Assuming that budgeted sales in 95,000 units

Budgeted sales quanity 95,000 1,900,000
BeP(Units) 75,000 1,500,000
Margin of safety 20,000 400,000
Margin of safety ratio 21.05% 21.05%

Target profit 250,000

Contribution 700,000
Fixed cost 700,000
Target profit

BEP(Units) 150,000 175,000

BEP(Naira) 1,350,000 1,575,000

Fixed cost 600,000

Sales price per unit 9
Varable cost per unit 5
Contribution per unit 4
BEP(Units) 150,000 Target Profit
BEP(Naira) 1,350,000

Target volume (units)

Target volume (Naira)
Using contribution per unit
Fixed cost 600,000
Target profit 100,000
Sales price per unit 9
Varable cost per unit 5
Contribution per unit 4
Target volume (units) 175,000 175,000
Target volume (Naira) 1,575,000 1,575,000

Using contribution to sales ratio

Fixed cost 600,000
Target profit 100,000
Sales price per unit 9
Varable cost per unit 5
Contribution per unit 4
Contribution to sales ratio 0.4444 4/9
Target volume (Naira) 1,575,000 (600,000+100,000)/0.44444
Target volume (units) 175,000
 Multi-Product CVP analysis
This assumption is that products are sold in a set ratio which does not change with volume
Period 2 Ratio
A 20 0.142857142857143 14.29%
B 40 0.285714285714286 28.57%
C 20 0.142857142857143 14.29%
D 60 0.428571428571429 42.86%
Total 140

A 1
B 1
C 1
D 1

A 1 X
B 2 3
C 2 15,000
D 1 30,000

A Weighted average contribution per unit

Total contribution/Total no of Units

X Y Total
Contribution per unit 25 9
Volume 15,000 5,000 20,000
Total contribution 375,000 45,000 420,000
Weighted average Contribution/unit 21
Fixed cost 315,000

Fixed cost/Weighted average contribution per unit 15,000

BeP(Units) 15,000/20,000 11,250
BeP(Units) 5,000/20,000 3,750

BeP (Naira) (11,250*100) 1,125,000

BeP (Naira) (3,750*120) 450,000
1,575,000
B Weighted average C/S ratio
Total contribution/Total revenue
X Y Total
Contribution per unit 25 9
Volume 15,000 5,000 20,000
Total contribution 375,000 45,000 420,000
Sales price 100 120
 Total revenue 1,500,000 600,000 2,100,000
Fixed cost 315,000

Weighted average C/S ratio 0.2

Fixed cost/weighted average contribution to sales ratio (315,000/0.2)

BEP(Naira) 1,575,000
BeP (Naira) =1,500,000/2,100,000 1,125,000
BeP (Naira) =600,000/2,100,000 450,000

BEP(Units) 11,250
3,750

C Weighted average C/S ratio for the batch

x y Total
Sales Mix 3 1
Contribution per unit 25 9
Contribution per batch 75 9 84
Revenue per unit 100 120
Revenue per batch 300 120 420
Weighted average C/S ratio for the batch 0.2
Fixed cost 315,000

BEP(Naira) 1,575,000
BEP(Naira) 300/420 1,125,000
BEP(Naira) 120/420 450,000

BEP(Units 11,250
BEP(Units 3,750

D Contribution per batch

x y Total
Sales Mix 3 1
Contribution per unit 25 9
Contribution per batch 75 9 84
Fixed cost 315,000
BEP (Batches) 3,750
x y
Sales Mix 3 1 1 Batch
6 2 2 batchces
9 3 3 batches
11,250 3,750 3,750 batches
 BEP (Unit) 11,250 3,750 3,750
SP 100 120
BEP (Naira) 1,125,000 450,000

Margin of safety using units

x y Combined
Budget 15,000 5,000 20,000
BEP (Unit) 11,250 3,750 15,000
MoS 3,750 1,250 5,000
Ratio 0.25 0.25 0.25
Percentage 25% 25% 25%

Margin of safety using naira

x y Combined
Budget 1,500,000 600,000 2,100,000
BEP (Naira) 1,125,000 450,000 1,575,000
MoS 375,000 150,000 525,000
Ratio 0.25 0.25 0.25
Percentage 25% 25% 25%

Weighted average contribution per unit

A Common Bag Executive Bag Total

Total contribution 18,000,000 12,000,000 30,000,000
No of units 300,000 100,000 400,000
Weighted average C/unit 75

BEP(Units)
Fixed cost 12,000,000
Weighted average C/unit 75
BEP(Units) 160,000
300,000/400000* 120,000 Common bag
100,000/400000* 40,000 Executive Bag

B Only common bag

Fixed cost 12,000,000
Contribution/unit 60
BEP(Units) 200,000

Only Executive bags

Fixed cost 12,000,000
Contribution/unit 120
BEP(Units) 100,000
C Operating profit Common bags Executive bags Total
Quantities 180,000 20,000 200,000
Revenue 36,000,000 6,000,000 42,000,000
Variable cost 25,200,000 3,600,000 28,800,000
Contribution 10,800,000 2,400,000 13,200,000
Fixed cost 12,000,000
Profit 1,200,000

Contribution 10,800,000 2,400,000 13,200,000

Fixed cost 12,000,000
Profit 1,200,000

Break even point

Contribution 10,800,000 2,400,000 13,200,000
Quantities 180,000 20,000 200,000
Weighted average contribution/unit 66
Fixed cost 12,000,000
BEP(Units) 181,818.18
180,000/200,000 163,636.36
20,000/200,000 18,181.82

a C/Unit divide by SP/Unit C/unit and SP/Unit

C/Unit 8
SP/Unit x Total contribution and Total sales reve

C/Unit 40%
SP/Unit
0.4x 8
SP/Unit x 20

b Quantities xxx
Sales xxx
Variable cost xx
Contribution 32,000 8 4,000
Fixed cost 10,000
Profit 22,000

Total contribution 32,000

Contribution per unit 8
Sales in units 4,000
Sales in value 80,000

c BEP(Units) and BEP(Naira)

Fixed cost 10,000
C/unit 8
BEP(Units) 1,250
BEP(Naira) 25,000

Fixed cost 10,000

C/S ratio 40%
BEP(Naira) 25,000
BEP(Units) 1,250

A B C
C/S ration 40% 40% 40%
Current selling price 20 20 20
Current sales volume 4,000 4,000 4,000
Reductio is SP 2% 5% 7%
Increase in sales volume 10% 18% 25%
Reduction in SP 0.4 1 1.4
New selling 19.6 19 18.6
Increase in sales volume 400 720 1,000
New sales volume 4,400 4,720 5,000
Sales revenue 86,240 89,680 93,000
Contribution 34,496 35,872 37,200
Fixed cost 10,000 10,000 10,000
Profit 24,496 25,872 27,200

A B
Revenue 8,400,000 25,200,000
SP 120 180
Quantities 70,000 140,000

Material 2,240 5,040

Labour 1,120 3,360
Variable overhead 1,120 2,240
4,480 10,640
Quantities 70 140
Variable cost/unit 64 76

Revenue
Variable cost
Contribution
Fixed cost
Profit before tax
Tax rate 40% of profit before tax 0.6x
PAT 12% of Revenue

Fixed + Target Profit

C/S ratio 2240
8320
10560
CS ratio 0.88 456
11,016
 560,000.00
1,280,000.00
0.4375

490,000
1,120,000
0.4375

7
16
0.4375

Contribution 500,000
Fixed cost 500,000
Profit or loss 0

cost/C per unit

 100,000

Fixed cost/C/unit

(Fixed cost + Target profit)/contribution per unit

1 unit
A 1
B 2
Period 3 Ratio %
40 0.14285714 14.29%
80 0.28571429 28.57%
40 0.14285714 14.29%
120 0.42857143 42.86%
280

Airpod
1 batch 2 batches
Pod 2 4
Case 1 2

Y
1
5,000
10,000

(x+y)
x
y

x
y
(x+y)
x
y

x
y

(x+y)
x
y

x
y
Batches
5,000 5,000
3,750
1,250 Unit
0.25
25%

Batches
5,000
3,750
1,250
0.25
25%
 Common bag
Executive bag

and SP/Unit

contribution and Total sales revenue