Financial Management: Cost Calculation, Sensitivity Analysis, and Variances

Financial
Management
(online exam)

Table of Contents
QUESTION 1...................................................................................................................................1
A) Calculate the cost (and hence the profit) per unit, absorbing all the overheads on the basis
of labour hours.............................................................................................................................1
B) Calculate the cost (and hence profit) per unit, absorbing the overheads using an Activity
Based Costing approach. .............................................................................................................1
c) Critically evaluate the results obtained from 1a and 1b above and discuss why you think one
technique is better than the other.................................................................................................3
d) Discuss how sensitivity analysis help managers to cope with uncertainties...........................4
QUESTION 2...................................................................................................................................4
A) Calculate the following variances for the last month:............................................................4
II) The total material Mix variance..............................................................................................5
III) The total material yield variance...........................................................................................5
B) Discuss the problems with the current system of calculating and reporting variances for
assessing the performance of the production manager................................................................5
QUESTION 3...................................................................................................................................6
Critically discussed why neither ZBB nor the IB provides the perfect toll for planning
coordination and control..............................................................................................................6

QUESTION 1
A) Calculate the cost (and hence the profit) per unit, absorbing all the overheads on the basis of
labour hours
Total Overhead cost
Setup costs 120000
Receiving 30000
Despatch 15000
Machining 65000
TOTAL 230000
Overhead absorption
rate:
Lipstick Lip-balm Lip-gloss
Production Volume 30000 35000 3000
Labour hour per unit 3 2 2
total labour hours 90000 70000 6000
Total labour cost =90000+70000+6000 =166000
Total overhead rate= 230000/166000=1.3855
Cost per unit: Lipstick Lipstick Lip-gloss
Sales 22 26 24
Raw material 5 10 10
Labour cost 5 5 5
Overheads rate 4.16 2.77 2.77
Cost 14.16 17.77 17.77
Profit per unit 7.84 8.23 6.23

Units 30000 35000 3000
Profit 235301.20 288012.05 18686.75
B) Calculate the cost (and hence profit) per unit, absorbing the overheads using an Activity
Based Costing approach.
Cost Driver
Setup costs 120000 25 setups
Receiving 30000 22 deliveries
Despatch 15000 50 despatched
Machining 65000 12 machining
Cost driver data:
Machine hours per
unit
4 4 4
Number of setups 10 14 1
Number of deliveries
received
10 10 2
Number of orders
despatched
20 20 10
Cost per setup= 120000/25=4800
Cost per receiving activity= 30000/22=1363.63
Cost per despatch=15000/50=300
Cost per machining activity =65000/12=5416.66
Allocation of
overheads to
Lipstick Lip-balm Lip-gloss