Section B – ALL FIVE questions are compulsory and MUST be attempted

Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet.

1 Beckley Hill (BH) is a private hospital carrying out two types of procedures on patients. Each type of procedure incurs
the following direct costs:
Procedure A B
$ $
Surgical time and materials 1,200 2,640
Anaesthesia time and materials 800 1,620
BH currently calculates the overhead cost per procedure by taking the total overhead cost and simply dividing it by
the number of procedures, then rounding the cost to the nearest 2 decimal places. Using this method, the total cost
is $2,475·85 for Procedure A and $4,735·85 for Procedure B.
Recently, another local hospital has implemented activity-based costing (ABC). This has led the finance director at BH
to consider whether this alternative costing technique would bring any benefits to BH. He has obtained an analysis
of BH’s total overheads for the last year and some additional data, all of which is shown below:
Cost Cost driver $
Administrative costs Administrative time per procedure 1,870,160
Nursing costs Length of patient stay 6,215,616
Catering costs Number of meals 966,976
General facility costs Length of patient stay 8,553,600
–––––––––––
Total overhead costs 17,606,352
–––––––––––
Procedure A B
No. of procedures 14,600 22,400
Administrative time per procedure (hours) 1 1·5
Length of patient stay per procedure (hours) 24 48
Average no. of meals required per patient 1 4

Required:
(a) Calculate the full cost per procedure using activity-based costing. (6 marks)

(b) Making reference to your findings in part (a), advise the finance director as to whether activity-based costing
should be implemented at BH. (4 marks)

(10 marks)

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2 Mobe Co manufactures electronic mobility scooters. The company is split into two divisions: the scooter division
(Division S) and the motor division (Division M). Division M supplies electronic motors to both Division S and to
external customers. The two divisions run as autonomously as possible, subject to the group’s current policy that
Division M must make internal sales first before selling outside the group; and that Division S must always buy its
motors from Division M. However, this company policy, together with the transfer price which Division M charges
Division S, is currently under review.
Details of the two divisions are given below.
Division S
Division S’s budget for the coming year shows that 35,000 electronic motors will be needed. An external supplier
could supply these to Division S for $800 each.
Division M
Division M has the capacity to produce a total of 60,000 electronic motors per year. Details of Division M’s budget,
which has just been prepared for the forthcoming year, are as follows:
Budgeted sales volume (units) 60,000
Selling price per unit for external sales of motors $850
Variable costs per unit for external sales of motors $770
The variable cost per unit for motors sold to Division S is $30 per unit lower due to cost savings on distribution and
packaging.
Maximum external demand for the motors is 30,000 units per year.

Required:
Assuming that the group’s current policy could be changed, advise, using suitable calculations, the number of
motors which Division M should supply to Division S in order to maximise group profits. Recommend the transfer
price or prices at which these internal sales should take place.
Note: All relevant workings must be shown.

(10 marks)

9 [P.T.O.
3 Bokco is a manufacturing company. It has a small permanent workforce but it is also reliant on temporary workers,
whom it hires on three-month contracts whenever production requirements increase. All buying of materials is the
responsibility of the company’s purchasing department and the company’s policy is to hold low levels of raw materials
in order to minimise inventory holding costs. Bokco uses cost plus pricing to set the selling prices for its products once
an initial cost card has been drawn up. Prices are then reviewed on a quarterly basis. Detailed variance reports are
produced each month for sales, material costs and labour costs. Departmental managers are then paid a monthly
bonus depending on the performance of their department.
One month ago, Bokco began production of a new product. The standard cost card for one unit was drawn up to
include a cost of $84 for labour, based on seven hours of labour at $12 per hour. Actual output of the product during
the first month of production was 460 units and the actual time taken to manufacture the product totalled 1,860
hours at a total cost of $26,040.
After being presented with some initial variance calculations, the production manager has realised that the standard
time per unit of seven hours was the time taken to produce the first unit and that a learning rate of 90% should have
been anticipated for the first 1,000 units of production. He has consequently been criticised by other departmental
managers who have said that, ‘He has no idea of all the problems this has caused.’

Required:
(a) Calculate the labour efficiency planning variance and the labour efficiency operational variance AFTER taking
account of the learning effect.
Note: The learning index for a 90% learning curve is –0·1520 (5 marks)

(b) Discuss the likely consequences arising from the production manager’s failure to take into account the
learning effect before production commenced. (5 marks)

(10 marks)

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4 ALG Co is launching a new, innovative product onto the market and is trying to decide on the right launch price for
the product. The product’s expected life is three years. Given the high level of costs which have been incurred in
developing the product, ALG Co wants to ensure that it sets its price at the right level and has therefore consulted a
market research company to help it do this. The research, which relates to similar but not identical products launched
by other companies, has revealed that at a price of $60, annual demand would be expected to be 250,000 units.
However, for every $2 increase in selling price, demand would be expected to fall by 2,000 units and for every $2
decrease in selling price, demand would be expected to increase by 2,000 units.
A forecast of the annual production costs which would be incurred by ALG Co in relation to the new product are as
follows:
Annual production (units) 200,000 250,000 300,000 350,000
$ $ $ $
Direct material 2,400,000 3,000,000 3,600,000 4,200,000
Direct labour 1,200,000 1,500,000 1,800,000 2,100,000
Overheads 1,400,000 1,550,000 1,700,000 1,850,000

Required:
(a) Calculate the total variable cost per unit and total fixed overheads. (3 marks)

(b) Calculate the optimum (profit maximising) selling price for the new product AND calculate the resulting profit
for the period.
Note: If P = a – bx then MR = a – 2bx. (7 marks)

(c) The sales director is unconvinced that the sales price calculated in (b) above is the right one to charge on the
initial launch of the product. He believes that a high price should be charged at launch so that those customers
prepared to pay a higher price for the product can be ‘skimmed off’ first.

Required:
Discuss the conditions which would make market skimming a more suitable pricing strategy for ALG, and
recommend whether ALG should adopt this approach instead. (5 marks)

(15 marks)

11 [P.T.O.
5 Lesting Regional Authority (LRA) is responsible for the provision of a wide range of services in the Lesting region,
which is based in the south of the country ‘Alaia’. These services include, amongst other things, responsibility for
residents’ welfare, schools, housing, hospitals, roads and waste management.
Over recent months the Lesting region experienced the hottest temperatures on record, resulting in several forest fires,
which caused damage to several schools and some local roads. Unfortunately, these hot temperatures were then
followed by flooding, which left a number of residents without homes and saw higher than usual numbers of
admissions to hospitals due to the outbreak of disease. These hospitals were full and some patients were treated in
tents. Residents have been complaining for some years that a new hospital is needed in the area.
Prior to these events, the LRA was proudly leading the way in a new approach to waste management, with the
introduction of its new ‘Waste Recycling Scheme.’ Two years ago, it began phase 1 of the scheme and half of its
residents were issued with different coloured waste bins for different types of waste. The final phase was due to begin
in one month’s time. The cost of providing the new waste bins is significant but LRA’s focus has always been on the
long-term savings both to the environment and in terms of reduced waste disposal costs.
The LRA is about to begin preparing its budget for the coming financial year, which starts in one month’s time. Over
recent years, zero-based budgeting (ZBB) has been introduced at a number of regional authorities in Alaia and, given
the demand on resources which LRA faces this year, it is considering whether now would be a good time to introduce
it.

Required:
(a) Describe the main steps involved in preparing a zero-based budget. (3 marks)

(b) Discuss the problems which the Lesting Regional Authority (LRA) may encounter if it decides to introduce
and use ZBB to prepare its budget for the coming financial year. (9 marks)

(c) Outline THREE potential benefits of introducing zero-based budgeting at the LRA. (3 marks)

(15 marks)

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