Question 1 (5 marks)
At a recent professional conference, two accountants discussed product costing problems in their
respective companies. Both accountants are familiar with ABC systems, but neither of their firms
utilise this method.
Accountant A reported that part of the problem in product costing in his firm is major
differences between product lines as to volume of units, utilisation of various activities, quality
assurance requirements established by customers and size of the products.
Accountant B noted that in her firm, which produces consumer products, all products undergo
the same basic production processes and in the same sequence, but in an increasing variety of
colours and packaging modes.
Both accountants are worried about the potential distortion of product costs under their
conventional product costing systems.
Required: Which accountant should be more concerned about the potential distortion?
Question 2 (5 marks)
1) Explain the fundamental characteristics of a balanced scorecard. 2.5 marks
2) Explain the different ways in which benchmarking may be achieved and the limitations
of each. (2.5 marks)
Question 3 (5 marks)
In the not too distant future XYZ enterprises will introduce a new printer for desktop computers.
This printer is expected to compete successfully with other models that are anticipated to sell for
$300. Hampton’s printer has several unique features and management believes that a slightly
(10 per cent) is justified. The company’s normal profit margin is 25 per cent of selling price.
1. What is the printer’s target selling price, target cost and target profit? ( 2.5 marks)
2. Suppose that XYZ engineers and cost accountants conclude that the present design of the
printer will result in a unit cost of $260. Explain the concept of value engineering and how it
may assist XYZ to achieve its goals. (2.5 marks)
Question 4 (5 marks)
Bath Products Ltd manufactures a variety of bath and beauty products for specialty stores.
The company has recently introduced the concept of identifying cost of quality and has identified
the following costs for the month:
Training of quality control supervisors $10,800
Customer complaints $5,500
Inspection of purchased ingredients $3,600
Rework time $7,000
Cost of defective products that cannot be reused $6,000
Laboratory testing for safety $9,000
Product liability $500
Required: Prepare a cost of quality report.
Question 5 10 marks
Pizza Company delivers pizzas to the residential halls and units near a major university.
The company’s annual fixed expenses are $20,000. The sales price of a pizza is $8, and it costs
the company $4 to make and deliver each pizza. (ignore income taxes.)
1. Using the contribution margin approach, calculate the company’s break-even point in
2. What is the contribution margin ratio?
3. Calculate the break-even sales revenue. Use the contribution margin ratio in your
4. How many pizzas must the company sell to earn a target net profit of $50,000? Use the
Question 6 (10 marks)
The accountant for Photographic Company has established the following overhead cost pools
and activity drivers.
Overhead Cost Pool Budgeted Overhead Cost Activity Driver
Machine set-ups $100,000 Number of setups
Material handling $50,000 Weight of raw material
Control $25,000 Weight of hazardous chemicals used
Inspection $37,500 Number of inspections
Other overhead costs $100,000 Machine hours
Overhead Cost Pool Budgeted Level for Activity OVERHEAD RATE
Machine set-ups 100 $1,000 per setup
Material handling 50,000 kilos $1 per kilo
Control 10,000 kilos $2.50 per kilo
Inspection 1,000 $37.50 per inspection
Other overhead costs 20,000 $5 per machine hour
An order for 1,000 boxes of film development chemicals has the following production
Machine set-ups 4 Set-ups
Raw material l0,000 kilos
Hazardous materials 2,000 kilos
Inspections 10 inspections
Machine hours 500 machine hours
1. Calculate the total overhead that should be assigned to the development chemical order.
2. What is the overhead cost per box of chemicals?
3. Suppose Photographic Company was to use a single, predetermined overhead rate based
on machine hours. Calculate the rate per hour.
4. Using the single plantwide rate, what is the total overhead assigned and the overhead cost
per box of chemicals?
5. Discuss the merits of an activity-based overhead costing system.