Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: THEend8_
ACCT20001 Cost Management
Department of Accounting
Authorised Materials: Candidates are permitted to use non-programmable calculators
Instructions to Invigilators:
Candidates ARE permitted to use pen, pencil or highlighter to annotate the questions in the
exam paper during reading time but MUST NOT commence writing in the answer space.
Dictionaries ARE NOT permitted to be used.
This examination booklet IS NOT to be removed from the examination venue.
This paper IS NOT to be released to the Baillieu Library
Instructions to Students:
This paper consists of six (6) questions, worth 100 marks in total.
This paper represents seventy (70) % of the total assessment for this subject.
Clearly label the front page of this examination booklet with your student number.
You ARE permitted to use pen, pencil or highlighter to annotate the questions in the exam
paper during reading time but MUST NOT commence writing in the answer space.
This examination paper is not to be removed from the examination venue and must be
submitted intact.
Failure to submit this examination booklet intact with your student number clearly indicated
may result in an examination mark of ZERO (0).
Do not open this examination booklet until you are instructed to do so.
QUESTION One Two Three Four Five Six Total
MARKS 24 18 14 19 13 12 100
ACTUAL
Page 1 of 57
The following information on The Berkeley Watch Company is relevant for Questions
One, Two and Three. Where relevant, use facts on the company to justify your answers.
The Berkeley Watch Company (the company) designs, manufactures and sells highly
fashionable low-priced ladies watches via various retailers in the Australian market.
It started operations on 1 January 2013 and launched 10 different watch models during the
year. As a result of rapidly changing customer tastes, its strategy is to revamp its product line
every year. In other words, the 10 models it produced in 2013 would no longer be made
available in 2014.
The company uses process costing, the weighted average costing method and adjusted
allocation rate approach (for the end of period indirect cost adjustment). Its financial
statements are prepared in accordance with the Australian accounting standards.
Question One (24 marks)
The following contains details of its actual costs in 2013 (i.e., from 1 January 2013 – 31
December 2013) which was its first year of operation. Its top selling watch during this period
was the Professional Rockstar (PR) model.
Table 1: 2013 (Actual)
Total direct manufacturing costs for the Professional Rockstar (PR) model
Notes for 2013
Direct materials $500,000 Variable cost
Direct labour $100,000 Variable cost
Total indirect costs for the company’s overall operations
Design $ 250,000 For 2013 models
Manufacturing overhead $200,000 Fixed with respect to the
units of watches produced
Other non-manufacturing $500,000
Other information
Total PR watches produced 10,000 units
Total watches produced excluding PR watches 30,000 units
Total PR watches sold 10,000 units
Total watches sold excluding PR watches sold 30,000 units
Direct labour hours to manufacture a PR watch 0.2 hours Per unit
Weighted average direct labour hours to
manufacture a non-PR watch (i.e., a watch
from one of its other 9 models)
0.1 hours Per unit.
Weighted by the number
of units produced.
Work in progress closing inventory 0
Page 2 of 57
a) (i) The company is trying to calculate the cost of producing its different watches and
wants to ensure that indirect costs are accurately allocated to its watches for this purpose.
Briefly explain what is needed to ensure ‘an accurate allocation of indirect costs’.
(ii) Using direct labour hours to allocate all indirect costs, what is the full product cost
(also sometimes referred to as the ‘full value chain product cost’) of making a unit of the
PR watch?
[3+3marks]
Page 3 of 57
Page 4 of 57
b) When it first started operations, the company had to decide between using FIFO or
weighted average costing method. What are the factors that would affect the size of the
difference in terms of the costs assigned to inventory units under the two methods?
Explain how these factors would affect this difference. [6 marks]
Page 5 of 57
Page 6 of 57
c) In the company’s final production scheduling meeting for 2013, an executive suggested
that they ramp up production of PR watches during the month of December to bring the
total production to 15,000 watches in 2013. The production of the other watch models
would remain unchanged. This increased production was possible with the existing
factory capacity. The executive explained that an increase in production of PR watches
would lead to higher profits even without higher levels of sales. In the end, this
suggestion was not implemented by the company and the total units of PR watches
produced in 2013 were 10,000 units.
(i) Explain why an increase in production without a corresponding increase in sales
would generally lead to higher profits for an entity that uses absorption costing.
(ii) What would be the likely impact of the suggestion to increase the production of PR
watches be on the profit from non-PR watches? Explain. Calculations are not
necessary.
(iii)What are TWO potential adverse consequences for the company if this suggestion
was implemented? [2+2+2 = 6 marks]
Page 7 of 57
Page 8 of 57
Page 9 of 57
d) The following information about one of the company’s indirect cost has just been made
available to you at the end of 2013: Each of the 10 models produced in 2013 costs an
equivalent amount to design. Would this information affect the calculation of the full
product cost of each PR unit produced? Explain. [3 marks]
Page 10 of 57
Page 11 of 57
e) You are told (at the end of 2013) that the company has decided to produce the same PR model which
was designed and sold in 2013 for another year, before retiring it at the end of 2014. Would this
information affect the full product cost calculation of the PR units produced in 2013? Explain.
[3 marks]
Question Two (18 marks)
The Berkeley Watch Company (the company) is now planning for 2015. In 2015, it plans to
only make 2 models of watches: W1 and W2. Forecasts for its operations for the whole of
2015 are as follows:
Table 2: 2015 Forecasts
Information on W1 and W2
W1 W2 Notes for 2015
Total direct materials
cost
$1,200,000 $350,000 Variable cost
Total direct labour cost $240,000 $100,000 Variable cost
Total sales dollars $6,000,000 $1,000,000
Total units sold 30,000 units 10,000 units
Total units produced 30,000 units 10,000 units
Direct labour hours to
manufacture each watch
0.2 hours 0.1 hours
Total indirect costs for the company’s overall operations
Design $60,000 W1 and W2’s design
cost are $40,000 and
$20,000 respectively
Manufacturing overhead $220,000 Fixed with respect to
volume produced.
Other non-
manufacturing
$560,000 30% is driven by the
number of watches
sold. The remaining
70% is fixed with
respect to volume
sold/produced.
Other information:
For the purposes of the following analyses, the company assumes that the proportion of units
sold between W1 and W2 remains constant in all possible scenarios.
Page 14 of 57
a) What is the weighted average contribution margin of W1 and W2? [3 marks]
b) What is the number of W1 and W2 watches that must be sold in order for the company to
break even? [3 marks]
c) The manufacturing overhead cost was initially classified as a fixed cost with respect to
the number of units produced in Table 2. Upon further investigation, the company
realised that although the $220,000 manufacturing overhead cost was correctly forecasted
for 2015, a significant portion of this overhead cost is actually batch-related. In other
words, a large portion of the manufacturing overhead cost would increase if the number
of batches produced increases. Explain the implication of this information on the units of
W1 and W2 that need to be sold to break even. Do you expect the break even units to be
higher, lower or remain the same? No calculations are necessary. [3 marks]