Tutorial 4

Question 1(E14.28)
A mobile phone accessories manufacturer is about to implement a balanced
scorecard.
It has adopted the following as its objectives:
• Achieve 10% increase in sales and a 20% market share
• Achieve a return on investment of 15%
• Design innovative accessories to suit the latest models of mobile phones and
launch these on the market as soon as new phones are realized
• Have a flexible manufacturing processes and employee skills to produce the right
products.

Required:

(a) State the FOUR perspectives of a balanced scorecard

(b) Recommend ONE performance measure that would be appropriate in the
context of the company and state clearly the reason for this measure.

Question 2 (14.20)
Describe the advantages and limitations of four types of benchmarking?

Question 3 (E16.27)
Eyecare Ltd manufactures plastic lenses for sunglasses. One of its top selling lines
is the UPV Lens, which has a scratch-resistant polarised surface. Earlier this year, a
Chinese company entered the market offering a similar lens at a price of 20% below
UPV price of $1.50 per unit. Eyecare’s parent company has a target profit margin of
40% (on sales) on each of its products.
Required:
(a) What target cost would have to be set for UPV to remain competitive and meet
the requirements of Eyecare’s parent company?
(b) Explain how Eyecare could apply the principles of life cycle management to
achieve this cost.
(c) Explain how value engineering could help in this process?

Question 4
The marketing department of Felix Electronics Ltd has recommended that the
company introduce a new camcorder, to be called Eazyshot. To compete effectively
with existing models offered by other companies, Eazyshot should be priced at $960.
The company requires a target profit margin on sales revenue for all new products of
at least 30 per cent of sales revenue. The technology in the digital imaging technology
is developing rapidly, and therefore Eazyshot is expected to be obsolete within three
years of entering the market. Initial estimates of the Eazyshot’s cost of manufacture
per unit are:
Direct materials $300
Direct labour 150
Manufacturing overhead* 150
$600
*Manufacturing overhead is applied at 100 per cent of direct labour cost.
The marketing department is keen to introduce the Eazyshot as soon as possible.
However, the controller is concerned about the non-manufacturing costs likely to be
associated with the new product. He asks the departments the departments that are
upstream and downstream of manufacturing to estimate the costs in their departments
associated with the development, production and sale of the Eazyshot. He receives
the following information:

Estimated costs associated with the proposed Eazyshot (in $’000)

Department Year 1 Year 2 Year 3 Year 3 Year 5
Research and Development 1,800
Product and Process design 3,600 840
Marketing 1,200 960 600 480
Customer Support 300 960 900 240
The forecast sales of Eazyshot are as follows:
Year 2 10,000 units
Year 3 15,000 units
Year 4 5,000 units

Required:
(a) Calculate the target cost for the Eazyshot that will meet the target selling price of
$960 and the target profit margin of 30 per cent on sales. Compare this with the
estimated manufacturing cost. On this basis, would you recommend the
development and introduction of the Eazyshot model?
(b) Prepare a life cycle budget for Eazyshot that covers each year from Year 1 to Year
5.

What is the estimated average unit cost of the Eazyshot model over its entire
lifecycle? On this basis, would you recommend the development and introduction of
Eazyshot model?

Question 5 (E16.33)
Edison Electrics manufactures electrical instruments for a variety of purposes. The
following costs, related to maintaining product quality, were incurred in December:
Inspection of electrical components purchased from outside suppliers $24,000
Cost of rework on faulty instruments $38,000
Replacement of instruments sold under warranty $85,000
Costs of defective parts that cannot be salvaged $12,200
Training of quality control inspectors $10,000
Tests of instruments before sales $20,000

Required:
(a) Prepare a cost of quality report
(b) How do you think the management should react to the relative size of the four
categories of quality costs?
(c) Do you think that Edison Electrics has identified all of its external failure costs?
Explain.
Question 6
Crazy plc is a unicorn based in Singapore. It is considering a new high-tech product
which would take one year to develop, with sales then commencing at the beginning
of the second year. The product is expected to have a life cycle of two years, before it
is replaced. The following cost estimates have been made.
Costs for the new product as below:
Year 1 Year 2 Year 3
Units manufactured and sold 200,000 280,000
Research and development costs (£) 120,000
Product design costs (£) 680,000
Marketing costs (£) 1,360,000 800,000 800,000

Manufacturing costs:
Variable cost per unit (£) 48.00 35.00
Fixed production costs (£) 680,000 712,000

Distribution costs:
Variable cost per unit (£) 2.00 2.40
Fixed distribution costs (£) 96,000 96,000

Selling costs:
Variable cost per unit (£) 2.40 2.80
Fixed selling costs (£) 144,000 144,000

Administration costs (£) 160,000 640,000 1,280,000

Required:
(a) Calculate the life cycle cost per unit.
(b) Advise Crazy plc of the required selling price if they adopt a cost plus 50%
pricing policy for this product using life cycle costing as the base.
(c) The Finance director of Crazy plc reviews this data and points out that it does
not take into account the effect of the learning curve on the production process.
The variable manufacturing cost per unit above, of £48 in year 2 and £35 in
year 3, includes a cost for 1 hour of labour. The remainder of the variable
manufacturing cost is not driven by labour hours. The year 2 cost per hour for
labour is £20 and the year 3 cost is £25 per hour. Subsequently, it has now
been estimated that, although the first unit is expected to take 1 hours, a
learning curve of 95% is expected to occur until the 100th unit has been
completed. A 95% learning curve gives the value of the learning co-efficient, b,
as -0.0740006.
Calculate the revised life cycle cost per unit, and the resulting potential selling
price taking into account the effect of the learning curve.
Question 7

Life is simple at the Sleepy Time Company. The business produces a single product
in a straightforward production process involving machines A, B and C, each run by a
separate department. The process begins at machine A, where raw materials is
converted into a single component. The component passes through machine B where
it is converted into finished product. The completed product passes to machine C
where it is tested and packaged. It is then shipped to the customer. The demand for
this product is unlimited. Aware of the potential market, the manager of Department B
has just begun on efficiency drive to increase the rate of output of his department by
50 per cent.
Required:
Assess the effectiveness of the Department B manager’s proposal for each of the
following situations. In each case, identify the current rate of output for the company,
and the effect of the proposed efficiency drive on this rate; where appropriate, suggest
an alternative approach to increase Sleepy Time rate of output.
(a) Machine A completes 120 units per hour, machine B completes 70 units per hour,
machine C completes 110 units per hour.
(b) Machine A completes 120 units per hour, machine B completes 140 units per hour,
machine C completes 130 units per hour.
(c) Machine A completes 120 units per hour, machine B completes 140 units per hour,
machine C completes 100 units per hour.

Question 8
Teskor Pte Ltd manufactures paintbrushes. The management accountant has
developed an activity-based costing system for the company. The activities in the
timber handles areas are as follows:
Activity Description
Set up saw Saw machine set up to proper specifications for production
Operate saw Timber cut into lengths
Set up lathe Lathe set up to produce a designated handle shape
Operate lathe Timber lengths shaped into handles
Inspect handles Handles inspected to identify faults
Rework handles Faulty handles reworked
Move handles Handles moved to assembly area
Based on the activity-based costing, the management accountant knows that the
activities “Inspect handles” and “Rework handles” are costly. He considers both to be
non-value added and therefore candidates for elimination.
Required:
(a) Explain why activities “Inspect handles” and “Rework handles” can be classified as
non-value-added activities.
(b) Suggest possible root cause cost drivers for these two activities.
(c) Suggest possible performance measures for the activity “Operate lathe” which
might help to eliminate the activities “Inspect handles” and “Rework handles”.
Question 9
The following costs were incurred by Sam Communication Electronics Ltd to
maintain the quality of its products during June:
• Operating a stress test machine to detect faulty products, £5,400.
• Repairs to defective products returned by customers, £6,000.
• Cost of rework discovered during processing, £3,800.
• Cost of sending operators to a three-week quality training program, £5,800.
• Cost of recalling faulty products , £10,000.
• Legal cost related to product recall, £1,800.
• Product inspection into finished goods warehouse, £3,400.
• Cost to confirm a supplier’s quality accreditation, £600.
• Cost of defective goods that were scrapped, £8,400.

Required:
(a) Prepare a cost of quality report in the format shown below:
Current Percentage
month’s of total
cost ($) costs
Internal failure
External failure
Appraisal (inspection)
Prevention
Total cost of quality

(b) Comment on the relative proportions of each of the four categories of quality
costs.

Question 10
Luv_U.com sells gifts and cards over the internet. A recent benchmarking exercise
conducted by the Ministry of Trade has caught the attention of the management, given
that the company has experienced soaring inventory handling costs. The
benchmarking exercise noted that similar firms have purchasing warehousing, and
distribution costs that average 5 per cent of sales, when compared with Luv_U.com’s
results for the past year.
The following information is available:
Percentage Percentage
of cost of cost
Cost driver
Activity (cost) Cost driver driver driver
quantity
activity for activity for
gifts card
Incoming receipt Number of purchasing 1,000 80% 20%
£15,000 orders
Warehousing Number of inventory 4,500 90% 10%
£22,500 moves
Outgoing shipments 7,500 40% 60%
Number of shipments
£7,500
Gift sales totalled £697,500 and card sales totalled £132,500. A review of the
company’s activities found various inefficiencies with respect to the warehousing of
gifts and outgoing shipments of card. These inefficiencies resulted in an extra 275
inventory moves and 125 shipments respectively.
Required
(a) How much did non-value activities cost Luv_U.com this past year?
(b) Will the elimination of non-value-added activities allow Luv_U.com to achieve
purchasing warehousing and distribution costs that average 5 per cent of sales for
each of the product lines? Show calculations.
(c) Do either of the two product lines require additional cost cutting to achieve the
target percentage? If so how much additional cost cutting is needed, and what tools
(methods) might the company use to achieve the cuts?