ACCT 3039 Breakeven 0 Quality Costing 2

DO QUESTION 1 AND ANY OTHER 2 QUESTIONS
Question 1 (compulsory)
When only a single measure of performance is used, the measure tends to become an end
in itself, more important than the economic performance that it attempts to represent.
Discuss the problems which could arise in the context of the aforementioned statement
(30 marks)
Question 2
The Rocky Mountain Catering Company specializes in preparing Mexican dinners that it
freezes and ships to restaurants. When a restaurant orders an item, the restaurant heats
and serves it. The budget data for 20x5 are:
Chicken Tacos Beef Enchiladas

$ $
Selling Price to restaurants 5.00 7.00
Variable expenses 3.00 4.00
Contribution Margin 2.00 3.00
Number of units 250,000 125,000
The company prepares the items in the same kitchens and delivers them in the same
trucks. Therefore, decisions about the individual products do not affect the fixed costs of
$735,000.
Required:
(a) Compute the planned net income for 20x5. (2 marks)
(b) Compute the break-even point in units, assuming that the company maintains its
planned sales mix. (3 marks)
(c) How can profits be maximized through the use of sales mix? (5 marks)
(d) What are the benefits to be derived from achieving a lower break-even point?
(5 marks)
1
Question 3
Plata Limited uses two different types of direct labour in producing the solvent for
cleaning engines; mixing and drum filling labour. For each batch of 20,000 gallons of
direct material input, the following standards have been developed for direct labour.
Direct Labour type Mix SP Standard Cost

Mixing 2,000 hours $10.50 $21,000
Drum filling 1,000 hours $6.00 $ 6,000
Total 3,000 hours $27,000
Yield 18,000 gallons
The actual direct labour hours used for the output produced in March are also provided:
Labour Type Actual Mix

Mixing 18,000 hours
Drum-filling 12,000 hours
Total 30,000 hours
Yield 162,000 gallons

Required:
(a) Calculate the yield ratio (2 marks)
(b) Calculate the standard cost per unit of yield (2 marks)
©Explain the purpose of a standard cost sheet. (3 marks)
(d) What are ideal standards? What are currently attainable standards? Of the two,
which is usually adopted? Why? (8 marks)
2
Question 4
Rachel Boyce, President of a company that manufactures electronic components, has

a number of questions concerning quality and quality costs. She has heard a few
things about quality and has asked you to respond to the following:
(ai) What does it mean to have a quality product or service? Explain how product
quality and conformance are related. (3 marks)
(aii)Yesterday, my quality manager told me that we need to redefine what we mean
by a defective product. He said that conforming to specifications ignores the cost
of product variability and that further reduction of product variability is a
veritable gold mine- just waiting to be mined. What did he mean? (5 marks)
(b) Morrison Company had sales of $20,000,000 in 2000. In 2004 sales had
increased to $25,000,000. A quality-improvement program was implemented at
the beginning of 2000. Overall conformance quality was targeted for
improvement. The quality costs for 2000 and 2004 are shown below. Assume
any changes in quality costs are attributable to improvements in quality:
2000 2004
$ $
Internal failure costs 1,500,000 75,000
External failure costs 2,000,000 50,000
Appraisal costs 900,000 187,500
Prevention costs 600,000 312,500
Total Quality Costs 5,000,000 625,000
Required:
(i) Compute the quality cost- to- sales ratio for each year. (3 marks)
(ii) The quality manager for Morrison Company indicated that the external failure
costs reported are only the measured costs. He argued that the 2004 external
costs were much higher than those reported and that additional investment
ought to be made in control costs. Discuss the validity of his view point
(4 marks)
3
Question 5
St. John Hospital provides a wide range of health services in its community. St John’s
board of directors has authorized the following capital expenditures:
$
Intra- aortic balloon pump 1,400,000

Computed tomographic scanner 850,000
X-ray equipment 550,000
Laboratory equipment 1,200,000
Total 4,000,000
The expenditures are planned for October 1,2017, and the board wishes to know the
amount of borrowing if any, necessary on that date. Jill Todd Hospital Controller, has
gathered the following information to be used in preparing an analysis of future cash
flows.
Billings made in the month of service for the first six months of 2017 are
Month Actual Amount

$
January 5,300,000
February 5,300,000
March 5,400,000
April 5,400,000
May 6,000,000
June 6,000,000
Ninety percent of St. John’s billings are made to third parties such as Blue Cross, federal
or state governments and private insurance companies. The remaining 10% of the billings
are made directly to patients. Historical patterns of billing collections are
Third Party Billings Direct Patient

Billings
Month of service 20% 10%
Month following service 50% 40%
Second month following service 20% 40%
Uncollectible 10% 10%
Estimated billings for the last six months of 2017 are listed next. Todd expects the same
billing and collection patterns that have been experiencing during the first six months of
2017 to continue during the last six months of the year.
4
Month Estimated Amount
$
July 5,400,000
August 6,000,000
September 6,600,000
October 6,800,000
November 7,000,000
December 6,600,000
The following schedule presents the purchases that have been made during the past three
months and the planned purchases for the last six months of 2017.
Month Amount
$
April 1,300,000
May 1,450,000
June 1,450,000
July 1,500,000
August 1,800,000
September 2,200,000
October 2,350,000
November 2,700,000
December 2,100,000
All purchases are made on account and accounts payable are remitted in the month
following the purchase.
Salaries for each month during the remainder of 2017 are expected to be $1,800,000 per
month plus 20% of that month’s billings. Salaries are paid in the month of service.
St. John’s monthly depreciation charges are $150,000.
St. John incurs interest expenses of $180,000 per month and makes interest payments of
$540,000 on the last day of each calendar quarter.
Endowment fund income is expected to continue to total $210,000 per month.
St. John has a cash balance of $350,000 on July 1, 2017 and has a policy of maintaining a
minimum end of month cash balance of 10% of the current month’s purchases.
St. John Hospital employs a calendar –year reporting period
Required:
(i) Prepare a monthly cash budget for St. John’s Hospital for the third quarter of
2017 (10 marks)
(ii) Determine the amount of borrowing, if any necessary on October 1, 2017 to
acquire the capital items totaling $4,000,000. (1 marks)
(iii) Define budgeting and explain its role in the management cycle. (4 marks)
END OF QUESTION PAPER
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DO QUESTION 1 AND ANY OTHER 2 QUESTIONS

Chicken Tacos Beef Enchiladas

Direct Labour type Mix SP Standard Cost

Yield 18,000 gallons

Labour Type Actual Mix

Yield 162,000 gallons

Rachel Boyce, President of a company that manufactures electronic components, has

Intra- aortic balloon pump 1,400,000

Month Actual Amount

Third Party Billings Direct Patient

END OF QUESTION PAPER

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