Accommodation Restaurant Bar

(%) (%) (%)

Revenue 100 100 100
Wages 20 30 15
Cost of sales – 40 50
Direct costs 10 10 5
30 80 70
Gross margin 70 20 30

Fixed costs for the year are estimated to be £565 000.

Capital employed is £7 million.
As a means of improving the return on capital employed, two suggestions have been
made:
(i) to offer special two-night holidays at a reduced price of £25 per night. It is expected
that those accepting the offer would spend an amount equal to 40% of the
accommodation charge in the restaurant, and 20% in the bar.
(ii) to increase prices. Management is confident that there will be no drop in volume of
sales if restaurant prices are increased by 10% and bar prices by 5%.
Accommodation prices would also need to be increased.
You are required
(a) to calculate the budgeted return on capital employed before tax; (5 marks)
(b) to calculate
(i) how many two-night holidays would need to be sold each week in the three off-
peak quarters to improve the return on capital employed (ROCE) by a further 4%
above the percentage calculated in
(a) above; (5 marks)
(ii) by what percentage the prices of accommodation would need to be increased to
achieve the desired increase in ROCE shown in (b) (i) above; (5 marks)
(c) to explain briefly the major problems likely to be encountered with each of the two
suggestions and recommend which should be adopted, assuming that they are
mutually exclusive. (10 marks)
(Total 25 marks)
CIMA Stage 4 Management Accounting – Decision Making

Extra questions for Chapter 9 Measuring relevant costs and revenues

for decision-making

9.1 Intermediate: Deleting a segment

A company manufactures and sells a wide range of products. The products are
manufactured in various locations and sold in a number of quite separate markets. The
company’s operations are organised into five divisions which may supply each other as
well as selling on the open market.
The following financial information is available concerning the company for the year
just ended:
(£000)
Sales 8600
Production cost of sales 5332
Gross profit 3268
Other expenses 2532
Net profit 736
An offer to purchase Division 5, which has been performing poorly, has been received
by the company.
The gross profit percentage of sales, earned by Division 5 in the year, was half that
earned by the company as whole. Division 5 sales were 10% of total company sales. Of
the production expenses incurred by Division 5, fixed costs were £316 000. Other
expenses (i.e. other than production expenses) incurred by the division totalled £156
000, all of which can be regarded as fixed. These include £38 000 apportionment of
general company expenses which would not be affected by the decision concerning the
possible sale of Division 5.
In the year ahead, if Division 5 is not sold, fixed costs of the division would be expected
to increase by 5% and variable costs to remain at the same percentage of sales. Sales
would be expected to increase by 10%.
If the division is sold, it is expected that some sales of other divisions would be lost.
These would provide a contribution to profits of £20 000 in the year ahead. Also, if the
division is sold, the capital sum received could be invested so as to yield a return of £75
000 in the year ahead.

Required:
(a) Calculate whether it would be in the best interests of the company, based upon the
expected situation in the year ahead, to sell Division 5. (13 marks)
(b) Discuss other factors that you feel should influence the decision. (7 marks)
(c) Calculate the percentage increase in Division 5 sales required in the year ahead
(compared with the current year) for the financial viability of the two alternatives to
be the same. (You are to assume that all other factors in the above situation will
remain as forecast for the year ahead.) (5 marks)
(Total 25 marks)
ACCA Level 1 Costing

9.2 Intermediate: Contribution analysis and an outsourcing decision

AZ Transport Group plc comprises three divisions – AZ Buses; AZ Taxis; and
Maintenance.
AZ Buses operates a fleet of eight vehicles on four different routes in Ceetown. Each
vehicle has a capacity of 30 passengers. There are two vehicles assigned to each route,
and each vehicle completes five return journeys per day, for six days each week, for 52
weeks per year.
AZ Buses is considering its plans for year ending 31 December. Data in respect of each
route is as follows:

Route Route Route Route

W X Y Z
Return travel 42 36 44 38
distance (km)
Average number
of passengers:
Adults 15 10 25 20
Children 10 8 5 10
Return journey fares:
Adults £3.00 £6.00 £4.50 £2.20
Children £1.50 £3.00 £2.25 £1.10
The following cost estimates have been made:

Fuel and repairs per kilometre £0.1875

Drivers’ wages per vehicle £120
per work-day
Vehicle fixed cost per annum £2000
General fixed cost per annum £300 000

Requirements:
(a) Prepare a statement showing the planned contribution of each route and the total
contribution of each route and the total contribution and profit of the AZ Buses
division for the year ending 31 December. (6 marks)
(b) (i) Calculate the effect on the contribution of route W of increasing the adult fare to
£3.75 per return journey if this reduces the number of adult passengers using this
route by 20%, and assuming that the ratio of adult to child passengers remains the
same. (Assume no change in the child fare.)
(ii) Recommend whether or not AZ Buses should amend the adult fare on route W.
(4 marks)
(c) The Maintenance division comprises two fitters who are each paid an annual salary
of £15 808, and a transport supervisor who is paid an annual salary of £24,000.
The work of the Maintenance division is to repair and service the buses of the AZ Buses
division and the taxis of the AZ Taxis division. In total there are eight buses and six taxis
which need to be maintained. Each vehicle requires routine servicing on a regular basis
on completion of 4000 kilometres: every two months each vehicle is fully tested for
safety. The Maintenance division is also responsible for carrying out any breakdown
work, though the amount of regular servicing is only 10% of the Maintenance division’s
work.
The annual distance travelled by taxi fleet is 128 000 kilometres.
The projected material costs associated with each service and safety check are £100 and
£75 respectively, and the directors of AZ Transport Group plc are concerned over the
efficiency and cost of its own Maintenance division. The company invited its local
garage to tender for the maintenance contract for its fleet and the quotation received was
for £90 000 per annum including parts and labour.
If the maintenance contract is awarded to the local garage then the Maintenance division
will be closed down, and the two fitters made redundant with a redundancy payment
being made of 6 months’ salary to each fitter. The transport supervisor will be retained at
the same salary and will be redeployed elsewhere in the Group instead of recruiting a
new employee at an annual salary cost of £20 000.

Requirements:
(i) Calculate the cost of existing maintenance function. (6 marks)
(ii) Advise the directors of AZ Transport Group plc whether to award the maintenance
contract to the local garage on financial grounds. (4 marks)
(iii) State clearly the other factors which need to be considered before making such a
decision, commenting on any other solutions which you consider to be appropriate.
(5 marks)
(Total 25 marks)
CIMA Stage 2 Operational Cost Accounting
9.3 Intermediate: Limiting factor analysis
Triproduct Limited makes and sells three types of electronic security systems for which
the following information is available.
Standard cost and selling prices per unit

Product Day Night Omni

scan scan scan
(£) (£) (£)
Materials 70 110 155
Manufacturing labour 40 55 70
Installation labour 24 32 44
Variable overheads 16 20 28
Selling price 250 320 460

Fixed costs for the period are £450 000 and the installation labour, which is highly
skilled, is available for 25 000 hours only in a period and is paid £8 per hour.
Both manufacturing and installation labour are variable costs.
The maximum demand for the product is:

Day scan Night scan Omni scan

2000 units 3000 units 1800 units

Requirements:
(a) Calculate the shortfall (if any) in hours of installation labour. (2 marks)
(b) Determine the best production plan, assuming that Triproduct Limited wishes to
maximise profit. (5 marks)
(c) Calculate the maximum profit that could be achieved from the plan in part (b) above.
(3 marks)
(d) Having carried out an investigation of the availability of installation labour, the firm
thinks that by offering £12 per hour, additional labour would become available and
thus overcome the labour shortage.

Requirement:
Based on the results obtained above, advise the firm whether or not to implement the
proposal.
(5 marks)
(Total 15 marks)
CIMA Stage 1 Cost Accounting

9.4 Intermediate: Key/limiting factor decision-making

BVX Limited manufactures three garden furniture products – chairs, benches and tables.
The budgeted unit cost and resource requirements of each of these items is detailed
below:
 Chair Bench Table
(£) (£) (£)
Timber cost 5.00 15.00 10.00
Direct labour cost 4.00 10.00 8.00
Variable overhead cost 3.00 7.50 6.00
Fixed overhead cost 4.50 11.25 9.00
16.50 43.75 33.00
Budgeted volumes 4000 2000 1500
per annum

These volumes are believed to equal the market demand for these products.
The fixed overhead costs are attributed to the three products on the basis of direct labour
hours.
The labour rate is £4.00 per hour.
The cost of timber is £2.00 per square metre
The products are made from a specialist timber.
A memo from the purchasing manager advises you that because of a problem with the
supplier it is to be assumed that this specialist timber is limited in supply to 20 000
square metres per annum.
The sales director has already accepted an order for 500 chairs, 100 benches and 150
tables, which if not supplied would incur a financial penalty of £2000. These quantities
are included in the market demand estimates above.
The selling prices of the three products are
Chair £20.00
Bench £50.00
Table £40.00
Required:
(a) Determine the optimum production plan and state the net profit that this should yield
per annum. (10 marks)
(b) Calculate and explain the maximum prices which should be paid per sq. metre in
order to obtain extra supplies of the timber. (5 marks)
(c) The management team has accused the accountant of using too much jargon.
Prepare a statement which explains the following terms in a way that a multi-
disciplinary team of managers would understand.
The accountant will use this statement as a briefing paper at the next management
meeting. The terms to be explained are:
(i) variable costs;
(ii) relevant costs;
(iii) avoidable costs;
(iv) incremental costs;
(v) opportunity costs. (10 marks)
(Total 25 marks)
CIMA Operations Cost Accounting Stage 2

9.5 Intermediate: Allocation of scarce capacity

EX Limited is an established supplier of precision parts to a major aircraft manufacturer.
It has been offered the choice of making either Part A or Part B for the next period, but
not both.
Both parts use the same metal, a titanium alloy, of which 13 000 kilos only are available,
at £12.50 per kilo. The parts are made by passing each one through two fully-automatic
computer-controlled machine lines – S and T – whose capacities are limited. Target
prices have been set and the following data are available for the period:
Part details
Part A Part B
Maximum call-off (units) 7000 9000
Target price £145 £115
per unit per unit
Alloy usage 1.6 kilos 1.6 kilos
Machine times
Line S 0.6 hours 0.25 hours
Line T 0.5 hours 0.55 hours

Machine details
Line S Line T
Hours available 4000 4500
Variable overhead £80 £100
per machine hour

You are required:

(a) to calculate which part should be made during the next period to maximise
contribution; (9 marks)
(b) to calculate the contribution which EX Limited will earn and whether the company
will be able to meet the maximum call-off. (3 marks)
As an alternative to the target price shown above, the aircraft manufacturer has offered
the following alternative arrangement:
Target prices less 10% plus £60 per hour for each unused machine hour.
(c) You are required to decide whether your recommendation in (a) above will be altered
and, if so, to calculate the new contribution. (10 marks)
(Total 22 marks)
CIMA Stage 3 Management Accounting Techniques

9.6 Advanced: Identification of limiting factors and allocation of scarce capacity

where several production constraints exist
Timbcon Ltd has two fully automated machine groups X and Y through which lengths of
timber are passed in order to produce decorative lampstand centres. There are
production capacity constraints and Timbcon Ltd has decided to produce only one of the
two lampstand models, ‘Traditional’ or ‘Modern’, in the year to 31 March.
The following forecast information is available for the year to 31 March:
‘Traditional’ ‘Modern’
(i) Maximum sales 7400 10 000
potential (units)
(ii) Lampstand unit data:
Selling price £45 £40
Machine time:
group X (hours) 0.25 0.15
group Y (hours) 0.20 0.225
(iii) Machine groups X and Y have maximum operating hours of 1700 and 1920 hours
respectively. Lampstand production is the sole use available for production
capacity.
(iv) The maximum quantity of timber available is 17 000 metres. Each lampstand
requires a two metre length of timber. Timber may be purchased in lengths as
required at £2.50 per metre.
(v) Variable machine overhead for machine groups X and Y is estimated at £25 and £30
per machine hour respectively.
(vi) All units are sold in the year in which they are produced.

Required:
(a) Use the above information to determine which of the lampstand centres,
‘Traditional’ or ‘Modern’, should be produced and sold in the year to 31 March in
order to maximise profit. Your answer should state the number of units to be
produced and sold and the resulting contribution. (8 marks)
(b) Timbcon Ltd wish to consider additional sales outlets which would earn contribution
at the rate of £20 and £30 per machine hour for machine groups X and Y
respectively. Such additional sales outlets would be taken up only to utilise any
surplus hours not required for lampstand production.
Prepare figures which show whether ‘Traditional’ or ‘Modern’ lampstands should
now be produced in order to maximise total contribution in the year to 31 March and
state what the contribution would be. (7 marks)
(c) A linear programming model which incorporates the data given in parts (a) and (b)
of the question has shown that where Timbcon Ltd is willing to produce and sell
both ‘Traditional’ and ‘Modern’ lampstands and use any spare capacity for the
additional sales outlets detailed in (b) above, the profit maximising mix is the
production and sale of 4250 units of each type of lampstand in the year to 31 March.
Prepare a budget analysis showing the total machine hours and timber (metres)
required for each lampstand type and in total for the above production/sales mix, the
budgeted contribution for each type of lampstand and the total budgeted contribution
for Timbcon Ltd in the year to 31 March. (7 marks)
(d) Suggest ways in which Timbcon Ltd may overcome the capacity constraints which
limit the opportunities available to it in the year to 31 March, and indicate the types
of costs which may be incurred in overcoming each constraint. (8 marks)
(Total 30 marks)

9.7 Advanced: Allocation of scarce resources

A processing company, EF, is extremely busy. It has increased its output and sales from
12 900 kg in quarter 1 to 17 300 kg in quarter 2 but, though demand is still rising, it
cannot increase its output more than another 5% from its existing labour force which is
now at its maximum.
Data in quarter 2 for its four products were:
 Product Product Product Product
P Q R S
Output (kg) 4560 6960 3480 2300
Selling price (£ per kg) 16.20 11.64 9.92 13.68
Costs (£ per kg):
Direct labour 1.96 1.30 0.99 1.70
(at £6 per hour)
Direct materials 6.52 4.90 4.10 5.42
Direct packaging 0.84 0.74 0.56 0.70
Fixed overhead
(absorbed on basis of
labour cost) 3.92 2.60 1.98 3.40
Total 13.24 9.54 7.63 11.22

The XY Company has offered to supply 2000 kg of product Q at a delivered price of

90% of EF’s selling price. The company will then be able to produce extra product P in
its place up to the plant’s total capacity.
You are required to state, with supporting calculations:
(a) whether EF should accept the XY Company’s offer; (10 marks)
(b) which would be the most profitable combination of subcontracting 2000 kg of one
product at a price of 90% of its selling price and producing extra quantities of
another product up to the plant’s total capacity. Assume that the market can absorb
the extra output and that XY’s quality and delivery are acceptable. (15 marks)
CIMA P3 Management Accounting

Extra questions for Chapter 11 Pricing decisions and profitability analysis

11.1 Advanced: Calculation of cost-plus price and minimum short-run price plus a
discussion of cost-plus and relevant cost pricing
Wright is a builder. His business will have spare capacity over the coming six months
and he has been investigating two projects.

Project A
Wright is tendering for a school extension contract. Normally he prices a contract by
adding 100% to direct costs, to cover overheads and profit. He calculates direct costs as
the actual cost of materials valued on a first-in-first-out basis, plus the estimated wages
of direct labour. But for this contract he has prepared more detailed information.
Four types of material will be needed:

Quantity (units): Price per unit:

Purchase
price of Current Current
Needed for Already units purchase resale
Material contract in stock in stock price price
(£) (£) (£)
Z 1100 100 7.00 10.00 8.00
Y 150 200 40.00 44.00 38.00
X 600 300 35.00 33.00 25.00
W 200 400 20.00 21.00 10.00