Question

QUESTION THREE
A cellular phone manufacturer situated in Kalabo district of western province (katondo cellular phones limited) produces three types of cellphones: Basic, Super and Delux. For the current year the company has a total of 10,000 direct labour hours and 7,500 machine hours available for production.
Here below, are the sales and production parameters relating to the three types of cellphones:
4
Basic Super Delux
Direct material @ K24/kg 0.75 kgs 0.625 kg 1.25 kg
Direct labour @ k24 per hour 0.125 hour 0,125 hour 0.25 hour
Variable overhead 150% of direct
Labour cost - - -
Machine hours required 0.15 hours 0.1 hours 0.125 hours
Sales demand for one year (units) 30,000 18,000 15,000
Selling price per unit K68 K120 K170
Budgeted fixed production overhead is estimated to be K182,280 per month and the company has also budgeted for selling and administration expenses of K378,988 per quarter.
Required
(a) Compute for Katondo limited the optimal production plan and the expected profit.( 12 marks)
(b) Discuss any four purposes of a system of standard costing
(c) Discuss any three different levels of performance which may be included as part of system of standard costing and comment on how these may relate to the purposes set out in (b) above. ( 3 marks)

Answer 1

Part (a)

Step-1 Calculation of contribution per unit
Particulars	Basic	Super	Delux
Direct material requirement	0.75kg	0.625kg	1.25kg
Direct labour hour taken	0.125hour	0.125hour	0.25hour
Direct material cost (K24/kg)	18	15	30
Direct labour cost(K24/hour)	3	3	6
Variable overhead (charged 150% of direct labour cost)	4.5	4.5	9
Total cost per unit	K 25.5	K 22.5	K 45
Selling price per unit	K 68	K 120	K 170
Contribution per unit               (selling price - total cost)	K 42.5	K 97.5	K 125

Step-2 Calculation of labour hours required for the units
Particulars	Basic	Super	Delux	Total hours
Sales demand	30000	18000	15000
Labour hour required per unit	0.125hour	0.125hour	0.25hour
Total hours required for the sales unit	3750	2250	3750	9750
Direct labour hours available during the year		10000
Since the avaliable labour hours is more than the required hours,it is not considered as a limiting factor

Step-3 Calculation of Machine hours required for the units
Particulars	Basic	Super	Delux	Total hours
Sales demand	30000	18000	15000
Machine hours required per unit	0.15 hours	0.1 hour	0.125 hour
Total hours required for the sales unit	4500	1800	1875	8175
Machine hours available for production		7500
Machine hours is limiting factor since the required hours are 8175 hours but the company has only 7500 hours available

Step-4 Calculation of contribution per Machine hours(limiting factor) required for the units
Particulars	Basic	Super	Delux
Contribution per unit                       (A)	K 42.5	K 97.5	K 125
Machine hours required per unit   (B)	0.15 hours	0.1 hour	0.125 hour
Contribution per machine hours(A/B)	283	975	1000
Rank based on Contribution per machine hours	3rd	2nd	1st

Note : Step-4 says that company should produce highest contribution giving unit first and and the rest should be produced if balance machine hours are available

Step -5 Calculation of optimal production plan
Products	Rank	Number of units	machine hour per unit	Total machine hours required	Balance machine hours available
Delux	1st	15000	0.125	1875	(7500-1875 )=5625
Super	2nd	18000	0.1	1800	(5625-1800)=3825
Basic	3rd	25500**	0.15	3825	(3825-3825) = 0

Explanation**

Product basics should be produced only 25500 unit,since the balance machine hours available after producing highest ranking product is only 3825.Machine hours required per unit of basic is 0.15,therefore number of units can be produced with this availbale hours are (3825/0.15)=25500

Step-6 Calculation of expected profit from the optimal production
Products	Total units	Contribution per unit	Total contribution
Delux	15000	K 125	1875000
Super	18000	K 97.5	1755000
Basic	25500	K 42.5	1083750
	K 4713750
Less:Fixed production overhead( K 182280)x 12 months	K 2187360
Less:selling and administation expense( K 378988*4 Qarter)	K 1515952
PROFIT EXPECTED	K 1010438

Part (b)

Purpose of system of standard costing
1	Decision making
Standard costing system is used to calculate profitability from a project or activity proposed to be undertaken.Based on these calculations organizations can take decisions
2	Targets to achieve
Standard costing can be said that a target cost which should not be crossed.Management of the responsibility centres can monitor the performance countinously to findout the devaitions occurred and correct accordingly
3	Budgeting and performance evaluation
Standard costing is used to set budget and based on the budget managerial performnace can be evaluated
4	Inventory valuation and profit measurement
Standard costing can be used to figure out the profitability and inventory value for the interim periods asper the requirement of the management

Part(c)

Three different levels included ion standrad costing
1	Setting of standards which are to be achieved
2	Comparing the actual cost incurrecd with the standard cost already determimed to findout the variances
3	Finding out the reason for variances for further action to be taken