# Cost Accounting Exercises

Essay by   •  February 11, 2019  •  Course Note  •  2,022 Words (9 Pages)  •  13 Views

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M19 – tutorial questions, relevant costs, solutions

Note: the more numerical tutorial questions are intended as learning aids. Questions which are mainly numerical are not typical examination style questions

E 13.3: New customer order

Spare capacity in U Division = (27,000 – 15,000 – 10,000) = 2,000 units.

Spare capacity in D Division = (13,500 – 10,000) = 3,500 units.

Effect on profits of accepting the new order:

Price paid by customer 3,000 * £185 =                                 £555,000

Lost external sales in U (3,000 – 2,000 = 1,000 units) * £100 =         (£100,000)

Incremental variable costs in U 2,000 * £70 =                         (£140,000)

Incremental variable costs in D 3,000 * £90 =                         (£270,000)

Incremental profit                                                             £45,000

E13.4: Corporate Incentive Company, relevant costs

 Note Type of Cost £ (i) Trainer fees (labour cost + contribution foregone ) 6,500 (ii) Hotel accommodation costs (future outlay cost) 3,500 (iii) Coach running costs(variable fuel + specific fixed costs) 620 (iv) Driver costs(salary and bonus to be paid as this is the cheaper alternative than paying £1300) 1,100 (v) Training brochures (£1500 sunk, opportunity saving by avoiding scrapping is relevant) (500) (vi) General overheads (incurred cost only- absorbed fixed overhead is for product costing and is not the relevant cost) 600 Total costs 11,820 10% Profit mark-up 1,182 Selling price quote 13,002

E13.8: Stay Clean – discontinuation

The relevant costs of the decision to cease the manufacture of TD need to be ascertained:

Cost or Revenue                         Working reference                        Amount (£)

Lost revenue                                    Note 1                                  (96,000)

Labour cost saved                            Note 2                                    48,000

Lost contribution of other products       Note 3                                 (71,000)

Redundancy and recruitment costs        Note 4                                     (3,700)

Supplier payments saved                    Note 5                                     88,500

Sublet income                                                                     12,000

Supervisor cost                           Note 6                                         0

Net cash flow                                                                         (22,200)

Answer: No, it is not worthwhile ceasing to produce the TD now.

Note 1: All sales of TD will be lost for the next 12 months, this will mean lost revenue of 1,200 units x £80 = £96,000

Note 2: All normal labour costs are saved at 1,200 units x £40 = £48,000

Note 3: Other product sales will be lost.

This will cost the business 5% x ((5,000 units x £80) + (6,000 units x £170)) = £71,000 in contribution.

Note 4: If TD is ceased now, then the following costs will be incurred

Redundancy cost         (£6,000)

Retraining saved         £3,500

Recruitment cost         (£1,200)

Total                          (£3,700)

Note 5: Supplier payments:

DW (£)     WM (£)    TD (£)      Net cost (£)    Discount   Gross cost (£)

Current buying cost   350,000     600,000     60,000     1,010,000            5%        1,063,158

Loss of TD                                                          (60,000)     (60,000)              5%          (63,158)

Loss of related sales  (17,500)     (30,000)                       (47,500)               5%          (50,000)

New buying cost                                                                    921,500              3%          950,000

Difference in net cost                                                         88,500

Note 6: There will be no saving or cost as the supervisor will continue to be employed on a full time basis.

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