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Audit and Assurance Study Videos – 50% OFF – Promo Code : 50FIFTY – Quick Purchase

PPM 4-2

Question 01 (Lemon Co)
Question 02 (Lily Co)
Question 03 (HEZ Co)
Question 04 (TIN Co)
Question 05 (Dheep Co)
Question 06 (Shine co)
Question 07 (ARA)
Question 08 (Star Co)
Question 09 (Neco Co)
Question 10 (King Co)
Question 11 (Sugar Field Bakery)
Question 12 (Zila Co)
Question 13 (Tape Co)
Question 14 (Kolly Co)
Question 15 (Super Co)
Question 16 (Ink Hotels Co)
Question 17 (FEZ Co)
Question 01 (Lemon Co)

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1 / 6

1. LEMON CO

Lemon Co has developed a new product. The first batch of 100 units will take 1,500 labour hours to produce. Lemon Co has estimated that there will be an 85% learning curve that will continue until 6,400 units have been produced. Batches after this level will each take the same amount of time as the 64th batch. The batch size will always be 100 units.

Note. The learning index for an 85% learning curve is –0.2345

Ignore the time value of money.

 

I. Are the following statements about the learning curve true or false?

A. The learning curve must assume a certain degree of motivation among employees of Lemon Co.

2 / 6

B. The learning curve phenomenon is not always present.

3 / 6

II. What is the cumulative average time per batch for the first 64 batches?

4 / 6

III. Which of the following conditions, if present in Lemon Co, would allow the learning curve to flourish?

5 / 6

IV. The total time for the first 16 batches of 100 units was 9,000 hours.

What was the actual learning rate closest to (to the nearest %)?

                                     %

6 / 6

5. The following statements have been made about Lemon Co and the learning curve:

(1) Decisions about allocating resources and costing the new product should be based on the time taken to produce the 64th batch.

(2) The learning process does not start until the second batch comes off the production line.

Which of the above statements is/are true?

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Question 02 (Lily Co)

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1 / 5

2. LILY CO

Lily Co runs a cafeteria situated on the ground floor of a large corporate office block. Each of the five floors of the building are occupied and there are in total 1,240 employees.

Lily Co sells lunches and snacks in the cafeteria. The lunch menu is freshly prepared each morning and Lily Co has to decide how many meals to make each day. As the office block is located in the city centre, there are several other places situated around the building where staff can buy their lunch, so the level of demand for lunches in the cafeteria is uncertain.

Lily Co has analysed daily sales over the previous six months and established four possible demand levels and their associated probabilities. Lily Co has produced the following payoff table to show the daily profits which could be earned from the lunch sales in the cafeteria:

 

Demand level              Probability                                                  Supply level

450                    620                 775                  960

$                         $                     $                       $

450                                     0.15                        1,170                  980                 810                  740

620                                     0.30                        1,170                1,612              1,395              1,290

775                                     0.40                        1,170                1,612              2,015              1,785

960                                     0.15                        1,170                1,612              2,015              2,496

I. If Lily Co adopts a minimax regret approach to decision-making, which daily supply level will it choose?

2 / 5

II. If Lily Co adopts a maximin approach to decision-making, which daily supply level will it choose?

3 / 5

III. The human resources department has offered to undertake some research to help Lily Co to predict the number of employees who will require lunch in the cafeteria each day. This information will allow Lily Co to prepare an accurate number of lunches each day. What is the maximum amount which Lily Co would be willing to pay for this information (to the nearest whole $)?

4 / 5

IV. Which of the following statements is/are true if Lily Co chooses to use expected values to assist in his decision-making regarding the number of lunches to be provided?

(1) Lily Co would be considered to be taking a defensive and conservative approach to his decision.

(2) Expected values will ignore any variability which could occur across the range of possible outcomes.

(3) Expected values will not take into account the likelihood of the different outcomes occurring.

(4) Expected values can be applied by Lily Co as it is evaluating a decision which occurs many times over.

5 / 5

V. Lily Co is now considering investing in a speciality coffee machine. It has estimated the following daily results for the new machine:

$

Sales (650 units)                                 1,300

Variable costs                                      (845)

–––––

Contribution                                         455

Incremental fixed costs                      (70)

–––––

Profit                                                      385

–––––

Which of the following statements are true regarding the sensitivity of this investment? (1) The investment is more sensitive to a change in sales volume than sales price.

(2) If variable costs increase by 44% the investment will make a loss.

(3) The investment’s sensitivity to incremental fixed costs is 550%.

(4) The margin of safety is 84.6%

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Question 03 (HEZ Co)

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1 / 7

3. HEZ CO

Hez Co is a company which operates in Zealand. Hez Co budgeted to sell 25,000 units of a new product during the year. The budgeted sales price was $8 per unit, and the variable cost $4 per unit.

Actual sales during the year were 22,000 units and variable costs of sales were $88,000. Sales revenue was only $9 per unit. With the benefit of hindsight, it is realised that the budgeted sales price of $8 was too low, and a price of $10 per unit would have been much more realistic.

 

I. What is the adverse sales price operational variance?

$                                

2 / 7

II. What is the favourable sales price planning variance?

$                                

3 / 7

III. Are the following statements about Hez Co true or false?

A. The sales manager of Hez Co should be held responsible if an unfavourable planning sales price variance is found.

4 / 7

B. It is possible for the revised price to be manipulated and revised to a level whereby a favourable operational sales price could be found.

5 / 7

IV. In a subsequent year, the cost of labour was $73,000. 4,000 hours were worked. The budgeted cost of labour was $15 per labour hour.

What is the adverse labour rate variance for this subsequent year?

$                                

6 / 7

V. Are the following statements about Hez Co true or false?

A. The operational manager of Hez Co should examine each variance in isolation only.

7 / 7

B. A change in economic conditions in Zealand will result in operational variances.

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Question 04 (TIN Co)

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1 / 5

4. TIN CO

Tin co is a manufacturing company. It has a small permanent workforce, but it is also reliant on temporary workers, whom it hires on three-month contracts whenever production requirements increase. All buying of materials is the responsibility of the company’s purchasing department and the company’s policy is to hold low levels of raw materials in order to minimise inventory holding costs.

Budgeting is done on spreadsheets and detailed variance reports are produced each month for sales, material costs and labour costs. Departmental managers are then paid a monthly bonus depending on the performance of their department.

Tin Co is operating in a fast changing environment and its finance manager thinks the original standard costs are unrealistic. He is considering revising the budget by analysing existing variances into a planning and operational element would help to improve performance.

One month ago, Tin Co began production of a new product. The standard cost card for one unit was drawn up to include a cost of $84 for labour, based on seven hours of labour at $12 per hour.

Actual output of the product during the first month of production was 460 units and the actual time taken to manufacture the product totalled 1,860 hours at a total cost of $26,040.

After being presented with some initial variance calculations, the production manager has realised that the standard time per unit of seven hours was the time taken to produce the first unit and that a learning rate of 90% should have been anticipated for the first 1,000 units of production.

The production manager has consequently been criticised by other departmental managers who have said that ‘He has no idea of all the problems this (i.e., the failure to anticipate the learning effect) has caused.’

Tin Co uses cost plus pricing to set the selling prices for its products once an initial cost card has been drawn up. Prices are then reviewed on a quarterly basis.

 

 

I. What is the labour efficiency planning variance AFTER taking account of the learning effect?

Note: The learning index for a 90% learning curve is –0.1520.

2 / 5

II. Which TWO of the following statements about using spreadsheets in budgeting are true?

(1) Spreadsheets enable managers to consider many different budget options and also carry out sensitivity analysis on the budget figures.

(2) Minor errors in the spreadsheet cannot affect the validity of the data.

(3) Spreadsheets are able to take qualitative factors into account.

(4) The possibility of experimentation with data is so great that it is possible to lose sight of the original intention of the spreadsheet.

3 / 5

III. What is the labour efficiency operational variance AFTER taking account of the learning effect?

Note: The learning index for a 90% learning curve is –0.1520

4 / 5

IV. Which TWO of the following sentences about the manipulation issues involved in revising budgets are true?

(1) The establishment of ex-post budgets is very difficult. Managers whose performance is reported to be poor using such a budget are unlikely to accept them as performance measures because of the subjectivity in setting such budgets.

(2) Frequent demands for budget revisions may result in bias.

(3) The operational variances do not give a fair reflection of the actual results achieved in the actual conditions that existed.

(4) The analysis does not help in the standard-setting learning process.

5 / 5

V. Which ONE of the following statements about the production manager’s failure to anticipate the learning effect is true?

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Question 05 (Dheep Co)

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1 / 5

5. DHEEP CO

Dheep Co has developed a new product. The first batch of 50 units will take 750 labour hours to produce. There will be an 90% learning curve that will continue until 3,550 units have been produced. Batches after this level will each take the same amount of time as the 71st batch. The batch size will always be 50 units.

Note. The learning index for a 90% learning curve is –0.152

Ignore the time value of money.

 

I. The total time for the first 16 batches of units was 8,500 hours.

What was the actual learning rate closest to (to the nearest %)?

                                %

2 / 5

II. The following statements have been made about Dheep Co and the learning curve:

(1) The learning effect comes to an end in Dheep Co after the 71st unit; however, some learning effects can continue indefinitely.

(2) The learning curve is restricted to the manufacturing industry.

Which of the above statements is/are true?

3 / 5

III. What is the time taken for the 71st batch?

4 / 5

IV. The learning curve effect in Dheep Co could be extended by which of the following?

5 / 5

V. The costs of producing more units in Dheep Co has been reduced due to the following factors.

Which factor from those below is due to the learning curve effect?

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Question 06 (Shine co)

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1 / 6

6. SHINE CO

Shine Co makes a single product. At the beginning of the budget year, the standard labour cost was established as $45 per unit, and each unit should take three hours to make.

However, during the year, the standard labour cost was revised. The labour rate was reduced to $14 per hour, and the revised labour time was 4.5 hours per unit.

In the first month after revision of the standard cost, budgeted production was 10,000 units but only 8,000 units were actually produced. These took 24,300 hours of labour time, which cost $352,350.

 

I. What is the adverse labour efficiency planning variance?

$                                

2 / 6

II. What is the favourable labour efficiency operational variance?

$                                

3 / 6

III. What is the favourable labour rate planning variance?

$                                

4 / 6

IV. What is the adverse labour rate operational variance?

$                                 

5 / 6

V. Are the following statements about labour variances in Shine Co true or false?

A. Production management’s motivation is likely to increase if they know they will not be held responsible for poor planning and faulty standard setting.

6 / 6

B. Planning variances will provide a more realistic and fair reflection of actual performance.

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Question 07 (ARA)

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7. ARA

Angola Regional Authority (LRA) is responsible for the provision of a wide range of services in the Angola region, which is based in the south of the country ‘Africa’. These services include, amongst other things, responsibility for residents’ welfare, schools, housing, hospitals, roads and waste management. Over recent months the Angola region experienced the hottest temperatures on record, resulting in several forest fires, which caused damage to several schools and some local roads. Unfortunately, these hot temperatures were then followed by flooding, which left a number of residents without homes and saw higher than usual numbers of admissions to hospitals due to the outbreak of disease. These hospitals were full and some patients were treated in tents. Residents have been complaining for some years that a new hospital is needed in the area.

Prior to these events, the ARA was proudly leading the way in a new approach to waste management, with the introduction of its new ‘Waste Recycling Scheme.’ Two years ago, it began phase 1 of the scheme and half of its residents were issued with different coloured waste bins for different types of waste. The final phase was due to begin in one month’s time. The cost of providing the new waste bins is significant but ARA’s focus has always been on the long-term savings both to the environment and in terms of reduced waste disposal costs.

The ARA is about to begin preparing its budget for the coming financial year, which starts in one month’s time. Over recent years, zero-based budgeting (ZBB) has been introduced at a number of regional authorities in Africa and, given the demand on resources which ARA faces this year, it is considering whether now would be a good time to introduce it.

 

I. Which TWO of the following statements are true?

(1) Now is a good time to introduce ZBB in ARA.

(2) The introduction of ZBB in any organisation is relatively straightforward.

(3) The introduction of ZBB in ARA would be lengthy and costly.

(4) A conflict situation may arise if ZBB is introduced in ARA.

2 / 5

II. What are the main steps involved in preparing a zero-based budget?

3 / 5

III. Which ONE of the following statements is true?

4 / 5

IV. Which of the following correctly describes a ‘decision package’ within the context of zero-based budgeting?

5 / 5

V. Which of the following describe difficulties in assessing performance in not-for-profit organisations?

(i) Benefits and costs are not always easy to quantify.

(ii) These organisations often have multiple stakeholders and therefore multiple objectives.

(iii) These organisations often have unlimited funds and are therefore not motivated to measure performance.

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Question 08 (Star Co)

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1 / 7

8. STAR CO

Star Co currently prepares an annual fixed budget using incremental budgeting but is considering changing to a quarterly rolling budget. The accounts department consists of one part-qualified accountant who is always very busy. However, management want to improve the budget forecasts and improve performance over the year. There is some degree of uncertainty in Star Co’s industry, but the level of uncertainty is quantifiable.

The sales and cost of sales budgets for the year to 30 June 20X9 were as follows:

Q1                   Q2                 Q3                 Q4

$                       $                    $                    $

Sales                                           80,000            81,600          83,232          84,897

Cost of sales                              56,000            57,120          58,262          59,428

However, at the end of Quarter 1, actual sales were $110,000 because a competitor went out of business. Senior management suggested that the revised assumption for sales growth should be 3% per quarter.

 

I. Based on the actual sales for Quarter 1, what should the budget for Quarter 1 cost of sales be?

2 / 7

II. Which THREE of the following are advantages for Star Co of implementing rolling budgets?

3 / 7

III. Using a rolling budget, what should the budget for Quarter 3 sales be?

$                                 

4 / 7

IV. Which TWO of the following methods could Star Co use to reduce the element of uncertainty in its budgets?

5 / 7

V. Are the following statements about incremental budgeting for Star Co true or false?

A. It discourages efforts to improve performance.

6 / 7

B. It compounds budgetary slack

7 / 7

C. It involves more time and effort than other methods.

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Question 09 (Neco Co)

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1 / 5

9. NECO CO

Neco Co is a business which manufactures computer laptop batteries, and it has developed a new battery which has a longer usage time than batteries currently available in laptops. The selling price of the battery is forecast to be $45.

The maximum production capacity of Neco Co is 262,500 units. The company’s management accountant is currently preparing an annual flexible budget and has collected the following information so far:

Production (units)                       185,000                         200,000                         225,000

$                                     $                                     $

Material costs                              740,000                          800,000                        900,000

Labour costs                               1,017,500                       1,100,000                    1,237,500

Fixed costs                                    750,000                          750,000                        750,000

In addition to the above costs, the management accountant estimates that for each increment of 50,000 units produced, one supervisor will need to be employed. A supervisor’s annual salary is $35,000.

The production manager does not understand why the flexible budgets have been produced as he has always used a fixed budget previously.

 

I. Assuming the budgeted figures are correct, what would the flexed total production cost be if production is 80% of maximum capacity?

2 / 5

II. In the first month of production of the new battery, actual sales were 18,000 units and the sales revenue achieved was $702,000. The budgeted sales units were 17,300.

Based on this information, which of the following statements is true?

3 / 5

III. The management accountant has said that a machine maintenance cost was not included in the flexible budget but needs to be taken into account.

The new battery will be manufactured on a machine currently owned by Neco Co which was previously used for a product which has now been discontinued. The management accountant estimates that every 1,000 units will take 14 hours to produce. The annual machine hours and maintenance costs for the machine for the last four years have been as follows:

Machine time                     Maintenance costs

(hours)                                      ($000)

Year 1                                              5,000                                          850

Year 2                                              4,400                                          735

Year 3                                              4,850                                          815

Year 4                                              1,800                                          450

What is the estimated maintenance cost if production of the battery is 80% of maximum capacity (to the nearest $000)?

4 / 5

IV. The management accountant intends to use a spreadsheet for the flexible budget in order to analyse performance of the new battery.

Which of the following statements are benefits regarding the use of spreadsheets for budgeting?

(1) The user can change input variables and a new version of the budget can be quickly produced.

(2) Errors in a formula can be easily traced and data can be difficult to corrupt in a spreadsheet.

(3) A spreadsheet can take account of qualitative factors to allow decisions to be fully evaluated.

(4) Managers can carry out sensitivity analysis more easily on a budget model which is held in a spreadsheet.

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V. Which of the following statements relating to the preparation of a flexible budget for the new battery are true?

(1) The budget could be time-consuming to produce as splitting out semi-variable costs may not be straightforward.

(2) The range of output over which assumptions about how costs will behave could be difficult to determine.

(3) The flexible budget will give managers more opportunity to include budgetary slack than a fixed budget.

(4) The budget will encourage all activities and their value to the organisation to be reviewed and assessed.

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Question 10 (King Co)

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10. KING CO

A company made a product called Harrow. Harrow had a standard direct material cost in the budget of:

2.5 kg of Material X at $4 per kg = $10 per unit.

The average market price for Material X during the period was $5 per kg, and it was decided to revise the material standard cost to allow for this.

During the period, 8,000 units of Harrow were manufactured. They required 22,000 kg of Material X, which cost $123,000.

 

I. What is the adverse material price operational variance?

$                                

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II. What is the adverse material price planning variance?

$                                

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III. What is the adverse material usage operational variance?

$                                

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IV. Are the following statements about variances in King Co true or false?

A. Any operational variances arising should be a realistic measure of what the causes of the variances have cost King Co.

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B. The causes of the planning variances should not be investigated immediately by the operational manager in King Co.

6 / 7

V. Are the following possible reasons for a material price planning variance valid or invalid?

A. There was a disruption to the supply of Material X to the market.

7 / 7

B. King Co failed to order a sufficient amount of Material X for production from the main supplier. They sourced the rest of the material from another supplier at a higher price to make up for this.

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Question 11 (Sugar Field Bakery)

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11. SUGAR FIELD BAKERY

The Sugar Field Bakery (SFB) makes a range of breads for sale direct to the public. The production process begins with workers weighing out ingredients on electronic scales and then placing them in a machine for mixing. A worker then manually removes the dough from the machine and shapes it into loaves by hand, after which the bread is then placed into the oven for baking. All baked loaves are then inspected by SFB’s quality inspector before they are packaged up and made ready for sale. Any loaves which fail the inspection are donated to a local food bank. The standard cost card for SFB’s ‘Eve Delight’, one of its most popular loaves, is as follows:

White flour                             450 grams at $1.80 per kg                          $0.81

Wholegrain flour                   150 grams at $2.20 per kg                          $0.33

Yeast                                        10 grams at $20 per kg                               $0.20

Total                                         610 grams                                                     $1.34

Budgeted production of Eve Delights was 1,000 units for the quarter, although actual production was only 950 units. The total actual quantities used, and their actual costs were:

kgs                                $ per kg

White flour                                          408.5                                  1.90

Wholegrain flour                                152.0                                  2.10

Yeast                                                      10.0                                  20.00

Total                                                     570.5

 

I. What is the total material mix variance for SFB for the last quarter?

2 / 5

II. What is the total material usage variance for SFB for the last quarter?

3 / 5

III. What is the total material yield variance for SFB for the last quarter?

4 / 5

IV. Which of the following statement(s) below is/are true?

(1) Errors or changes in the mix may cause some loaves to be sub-standard and therefore rejected by the quality inspector.

(2) The loaves might be baked at the wrong temperature and therefore be rejected by the quality inspector.

5 / 5

V. Which of the following statements below is/are false?

(1) An adverse material mix variance may arise because the dough may not be removed completely out of the machine, leaving some mix behind.

(2) An adverse material yield variance may arise because since the loaves are made by hand, they may be made slightly too large, meaning that fewer loaves can be baked.

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Question 12 (Zila Co)

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12. ZILA CO

Zila Co budgeted to make and sell 20,000 units of Product L in a four-week period, as follows:

$

Budgeted sales ($4 per unit per week)                                                  80,000

Variable costs ($2.50 per unit)                                                                50,000

Contribution                                                                                               30,000

Fixed costs                                                                                                   3,000

Profit                                                                                                            27,000

The actual results for the period were as follows.

$

Budgeted sales ($4 per unit)                                                                   64,000

Variable costs ($2.50 per unit)                                                               40,000

Contribution                                                                                              24,000

Fixed costs                                                                                                  3,000

Profit                                                                                                          21,000

In retrospect, it is decided that the optimum budget would have been to sell only 17,500 units in the period.

 

I. Select two boxes to indicate the sales volume planning variance and whether it is favourable or adverse.

A. Value ($)

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B. Sign

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II. Select two boxes to indicate the sales volume operational variance and whether it is favourable or adverse.

A. Value ($)

4 / 8

B. Sign

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III. In a subsequent 4-week period, Zila Co decided to adopt absorption costing and actual fixed costs were $3,500. There were 18,000 units produced. The budgeted fixed costs were $3,000 based on budgeted production of 17,500 units.

Select two boxes to indicate the fixed production overhead total variance and whether it is favourable or adverse.

A. Value ($)

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B. Sign

7 / 8

IV. A manager in Zila Co asked for the market share variance. Which of the following variances was she looking for?

8 / 8

V. Which of the following factors would contribute to a planning variance in Zila Co?

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Question 13 (Tape Co)

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13. TAPE CO

Matthew manages production and sales of product Q at Tape Co. Matthew has been asked to attend a meeting with Tape Co’s finance director to explain the results for product Q in the last quarter.

Budgeted and actual results for product Q were as follows:

Budget                       Actual

Sales volume (units)                                                       40,000                       38,000

$000                          $000

Revenue ($65 per unit)                                                   2,600                         2,394

Material (5.2 kg at $4 per kg)                                         (832)                         (836)

Labour (2 hours at $8 per hour)                                    (640)                          (798)

Variable overheads (2 hours at $4 per hour)              (320)                          (399)

Fixed overheads                                                               (220)                          (220)

–––––                         –––––

Profit                                                                                   588                              141

–––––                         –––––

There was no opening and closing inventory in the last quarter. Tape Co operates a marginal costing system.

Matthew is angry about having to attend the meeting as he has no involvement in setting the original budget and he believes that the adverse results are due to the following circumstances which were beyond his control:

(1) A decision by Tape Co’s board to increase wages meant that the actual labour rate per hour was 25% higher than budgeted. This decision was made in response to a request by the production department to enable it to meet a large, one-off customer order in the last quarter. (2) Due to the closure of a key supplier, Tape Co agreed to a contract with an alternative supplier to pay 6% more per kg than the budgeted price for material. The actual cost per kg of material was $4.40.

(3) Difficult economic conditions meant that market demand for the Q was lower by 10%.

At present Tape Co does not operate a system of planning and operational variances and Matthew believes it should do so.

 

I. What was the adverse materials price planning variance for product Q for the last quarter?

2 / 5

II. What was the market share variance for product Q for the last quarter?

3 / 5

III. What was the labour rate operational variance for product Q for the last quarter?

4 / 5

IV. Which of the following statements regarding the problems of introducing a system of planning and operational variances is/are true?

(1) Operational managers may argue that variances are due to the original budget being unrealistic.

(2) Operational managers may seek to blame uncontrollable external factors for the variances.

5 / 5

V. Which of the following would explain a labour efficiency planning variance?

(1) A change in employment legislation requiring staff to take longer rest periods.

(2) Customers demanding higher quality products leading to a change in product design. (3) The learning effect for labour being estimated incorrectly in the production budget.

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Question 14 (Kolly Co)

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14. KOLLY CO

Kolly Co has developed a new product. The first batch of 200 units will take 3,500 labour hours to produce. There will be a 75% learning curve that will continue until 4,800 units have been produced. Batches after this level will each take the same amount of time as the 24th batch. The batch size will always be 200 units.

Note. The learning index for a 75% learning curve is –0.415

Ignore the time value of money.

 

I.The total time for the first 16 batches of units was 22,000 hours.

What was the actual learning rate, to the nearest %?

    %

2 / 6

II. What is the time taken for the 24th batch (to the nearest hour)?

                         hours

3 / 6

III. Kolly Co makes another product, the Coral. The learning effect stopped after the 16th batch of product, and a ‘steady state’ was reached. Workers in Kolly Co received $15 per hour. The first batch of Coral took 0.75 hours to produce. The 16th batch of Coral took 0.5 hours, and the standard cost was revised to this figure once the ‘steady state’ was reached. Kolly Co produced 10,000 batches of Coral during the year.

What is the favourable labour efficiency planning variance?

$                                

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IV. Are the following statements about Kolly Co true or false?

A. A standard labour cost should only be established when a ‘steady state’ is reached.