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

1 Chair Co has developed a new type of luxury car seat. The estimated labour time for the first unit is 12 hours but a
learning curve of 75% is expected to apply for the first eight units produced. The cost of labour is $15 per hour. The
cost of materials and other variable overheads is expected to total $230 per unit.
Chair Co plans on pricing the seat by adding a 50% mark-up to the total variable cost per seat, with the labour cost
being based on the incremental time taken to produce the 8th unit.

Required:
(a) Calculate the price which Chair Co expects to charge for the new seat.
Note: The learning index for a 75% learning curve is –0·415. (5 marks)

(b) The first phase of production has now been completed for the new car seat. The first unit actually took
12·5 hours to make and the total time for the first eight units was 34·3 hours, at which point the learning effect
came to an end. Chair Co are planning on adjusting the price to reflect the actual time it took to complete the
8th unit.

Required:
(i) Calculate the actual rate of learning and state whether this means that the labour force actually learnt
more quickly or less quickly than expected. (3 marks)
(ii) Briefly explain whether the adjusted price charged by Chair Co will be higher or lower than the price you
calculated in part (a) above. You are NOT required to calculate the adjusted price. (2 marks)

(10 marks)

9 [P.T.O.
The following scenario relates to questions 21–25.
Chair Co has in development several new products. One of them is a new type of luxury car seat. The estimated labour
time for the first unit is 12 hours but a learning curve of 75% is expected to apply for the first eight units produced. The
cost of labour is $15 per hour.
The cost of materials and other variable overheads is expected to total $230 per unit. Chair Co plans on pricing the seat
by adding a 50% mark-up to the total variable cost per seat, with the labour cost being based on the incremental time
taken to produce the 8th unit.

21 What is the labour cost of the 8th unit?

22 The first phase of production has now been completed for the new car seat. The first unit actually took 12·5 hours to
make and the total time for the first eight units was 34·3 hours, at which point the learning effect came to an end.
Chair Co are planning on adjusting the price to reflect the actual time it took to complete the 8th unit.

What was the actual rate of learning which occurred?

23 Another product which Chair Co has in development is a new design of high chair for feeding young children. Based
on previous experience of producing similar products, Chair Co had assumed that a learning rate of 85% would apply
to the manufacture of this new design but after the first phase of production had been completed, management
realised that a learning rate of 80% had been achieved.

Which of the following statements could explain why the actual rate of learning differed from the rate which was
expected?
(1) Staffing levels were stable during the first manufacturing phase
(2) There were machine breakdowns during production
(3) Assembly of the chairs was manual and very repetitive
(4) There was high staff turnover during this period
(5) There were minimal stoppages in the production process
(6) The design of the chair was changed several times at this early phase
A (2), (3) and (4)
B (1), (3) and (5)
C (1), (5) and (6)
D (2), (4) and (6)

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24 Chair Co uses cost-plus pricing.

Which of the following statements regarding cost-plus pricing strategies are correct?
(1) Marginal cost-plus pricing is easier where there is a readily identifiable variable cost
(2) Full cost-plus pricing requires the budgeted level of output to be determined at the outset
(3) Cost-plus pricing is a strategically focused approach as it accounts for external factors
(4) Cost-plus pricing requires that the profit mark-up applied by an organisation is fixed
A (1), (2) and (4)
B (1) and (2) only
C (3) and (4)
D (1) and (3)

25 Chair Co has also developed a new type of office chair and management is trying to formulate a budget for this
product. They have decided to match the production level to demand, however, demand for this chair is uncertain.
Management have collected the following information:
Demand Probability
(units)
Worst possible outcome 10,000 0·3
Most likely outcome 22,000 0·5
Best possible outcome 35,000 0·2
The selling price per unit is $25. The variable cost per unit is $8 for any production level up to 25,000 units. If the
production level is higher than 25,000 units, then the variable cost per unit will decrease by 10% and this reduction
will apply to all the units produced at that level.
Total fixed costs are estimated to be $75,000.

Using probabilistic budgeting, what is the expected budgeted contribution of the product?
A $282,000
B $357,000
C $287,600
D $362,600

11 [P.T.O.
3 Mic Co produces microphones for mobile phones and operates a standard costing system. Before production
commenced, the standard labour time per batch for its latest microphone was estimated to be 200 hours. The
standard labour cost per hour is $12 and resource allocation and cost data were therefore initially prepared on this
basis.
Production of the microphone started in July and the number of batches assembled and sold each month was as
follows:
Month No of batches assembled and sold
July 1
August 1
September 2
October 4
November 8
The first batch took 200 hours to make, as anticipated, but, during the first four months of production, a learning
effect of 88% was observed, although this finished at the end of October. The learning formula is shown on the
formula sheet and at the 88% learning rate the value of b is –0·1844245.
Mic Co uses ‘cost plus’ pricing to establish selling prices for all its products. Sales of its new microphone in the first
five months have been disappointing. The sales manager has blamed the production department for getting the labour
cost so wrong, as this, in turn, caused the price to be too high. The production manager has disclaimed all
responsibility, saying that, ‘as usual, the managing director prepared the budgets alone and didn’t consult me and,
had he bothered to do so, I would have told him that a learning curve was expected.’

Required:
(a) Calculate the actual total monthly labour costs for producing the microphones for each of the five months
from July to November. (9 marks)

(b) Discuss the implications of the learning effect coming to an end for Mic Co, with regard to costing, budgeting
and production. (4 marks)

(c) Discuss the potential advantages and disadvantages of involving senior staff at Mic Co in the budget setting
process, rather than the managing director simply imposing the budgets on them. (7 marks)

(20 marks)

4
3 Henry Company (HC) provides skilled labour to the building trade. They have recently been asked by a builder to bid
for a kitchen fitting contract for a new development of 600 identical apartments. HC has not worked for this builder
before. Cost information for the new contract is as follows:
Labour for the contract is available. HC expects that the first kitchen will take 24 man-hours to fit but thereafter the
time taken will be subject to a 95% learning rate. After 200 kitchens are fitted the learning rate will stop and the time
taken for the 200th kitchen will be the time taken for all the remaining kitchens. Labour costs $15 per hour.
Overheads are absorbed on a labour hour basis. HC has collected overhead information for the last four months and
this is shown below:
Hours worked Overhead cost $
Month 1 9,300 115,000
Month 2 9,200 113,600
Month 3 9,400 116,000
Month 4 9,600 116,800
HC normally works around 120,000 labour hours in a year.
HC uses the high low method to analyse overheads.
LogLR
The learning curve equation is y = axb, where b = = –0.074
Log2
Required:
(a) Describe FIVE factors, other than the cost of labour and overheads mentioned above, that HC should take
into consideration in calculating its bid. (10 marks)

(b) Calculate the total cost including all overheads for HC that it can use as a basis of the bid for the new
apartment contract. (13 marks)

(c) If the second kitchen alone is expected to take 21·6 man-hours to fit demonstrate how the learning rate of
95% has been calculated. (2 marks)

(25 marks)

4
3 BFG Limited is investigating the financial viability of a new product the S-pro. The S-pro is a short-life product for which
a market has been identified at an agreed design specification. The product will only have a life of 12 months.
The following estimated information is available in respect of S-pro:
1. Sales should be 120,000 in the year in batches of 100 units. An average selling price of $1,050 per batch of 100
units is expected. All sales are for cash.
2. An 80% learning curve will apply for the first 700 batches after which a steady state production time will apply,
with the labour time per batch after the first 700 batches being equal to the time for the 700th batch. The cost of
the first batch was measured at $2,500. This was for 500 hours at $5 per hour.
3. Variable overhead is estimated at $2 per labour hour.
4. Direct material will be $500 per batch of S-pro for the first 200 batches produced. The second 200 batches will
cost 90% of the cost per batch of the first 200 batches. All batches from then on will cost 90% of the batch cost
for each of the second 200 batches. All purchases are made for cash
5. S-pro will require additional space to be rented. These directly attributable fixed costs will be $15,000 per
month.
A target net cash flow of $130,000 is required in order for this project to be acceptable.
Note: The learning curve formula is given on the formulae sheet. At the learning rate of 0.8 (80%), the learning
factor (b) is equal to -0.3219.

Required:
(a) Prepare detailed calculations to show whether product S-pro will provide the target net cash flow. (12 marks)
(b) Calculate what length of time then second batch will take if the actual rate of learning is:
(i) 80%;
(ii) 90%.
Explain which rate shows the faster learning. (5 marks)
(c) Suggest specific actions that BFG could take to improve the net cash flow calculated above. (8 marks)

(25 marks)

4
2 Big Cheese Chairs (BCC) manufactures and sells executive leather chairs. They are considering a new design of
massaging chair to launch into the competitive market in which they operate.
They have carried out an investigation in the market and using a target costing system have targeted a competitive
selling price of $120 for the chair. BCC wants a margin on selling price of 20% (ignoring any overheads).
The frame and massage mechanism will be bought in for $51 per chair and BCC will upholster it in leather and
assemble it ready for despatch.
Leather costs $10 per metre and two metres are needed for a complete chair although 20% of all leather is wasted
in the upholstery process.
The upholstery and assembly process will be subject to a learning effect as the workers get used to the new design.
BCC estimates that the first chair will take two hours to prepare but this will be subject to a learning rate (LR) of 95%.
The learning improvement will stop once 128 chairs have been made and the time for the 128th chair will be the
time for all subsequent chairs. The cost of labour is $15 per hour.
The learning formula is shown on the formula sheet and at the 95% learning rate the value of b is –0·074000581.

Required:
(a) Calculate the average cost for the first 128 chairs made and identify any cost gap that may be present at
that stage. (8 marks)

(b) Assuming that a cost gap for the chair exists suggest four ways in which it could be closed. (6 marks)

The production manager denies any claims that a cost gap exists and has stated that the cost of the 128th chair will
be low enough to yield the required margin.

(c) Calculate the cost of the 128th chair made and state whether the target cost is being achieved on the 128th
chair. (6 marks)

(20 marks)

3 [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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