Question 1 (30 Marks)
Cost accounting is an accounting process that measures all of the costs associated with production, including both fixed and variable costs. The purpose of cost accounting is to assist management in decision-making processes that optimize operations based on efficient cost management.
Required:
Identify and clearly explain 5 different types of costs that are used in managerial decision making. In addition, provide a clear and relevant example for each of these costs for Aston Martin car manufacturing company.
Question 2: (30 Marks)
A. Company Alpha is using a two-year-old machine costing $24,000. The company uses straight-line depreciation, while the machine has a useful life of 10 years.
Company A is considering buying another machine costing $45,000 with a useful life of 9 years. The new machine won’t have any effect on the number of units that a company produces. Company A, however, expects the variable cost to come down from $34,000 to $22,000. Fixed costs will also be the same at $20,000. Using the above information, determine which are relevant and which are irrelevant and the cost implication for the company. Provide a justification for your choice. (15 Marks)
B. The company also has a new project which requires the following three types of labor.
Hours Required
Additional Information
Unskilled
12,000
Paid at $8 per hour and existing staff are fully utilized. The company will hire new staff to meet this additional demand.
Semi-Skilled
2,000
Paid at $12 per hour. These employees are difficult to recruit, and the company retains a number of permanently employed staff, even if there is no work to do. There is currently 800 hours of idle time available, and any additional hours would be fulfilled by temporary staff that would be paid at $14/hour.
Skilled
8,000
Paid at $15 per hour. There is a severe shortage of employees with these skills and the only way that this labor can be provided for the new project would be for the company to move employees away from making Product X. A unit of Product X takes 4 hours to make and makes a contribution of $24/unit.
Required: What is the relevant cost of the labor hours required for the new project? Students should analyze each type of labor involved and calculate the total relevant cost. (15 Marks)
PART B (40 Marks)
O’Donovan Constructions is a company based in London actively involved in the construction and refurbishment business. Assume that Michael, the owner, tasks his team to make a comparison between two potential real estate development projects. He also reminds them that the company’s financial health is on the decline, so he must select one of them.
The team works through the parameters and lists below the potential income and costs of each project.
Project 1
– 500 housing units will be constructed.
– 400 of them will be sold and 100 of them will be rented for 20 years.
– Rental Price of each unit is 4,000 USD per year
– Rented 100 units will be sold 70,000 USD after 20 years.
– Construction Cost of each unit is 100,000 USD.
– The sale price of each unit is 120,000 USD.
– The project needs a luxury sales office with a price of 2,000,000 USD.
– The sales personnel cost is 300,000 USD per year.
– The project duration is 3 years.
– Project financing cost is 3,000,000 USD per year
Project 2
– 400 housing units will be constructed.
– 350 of them will be sold and 50 of them will be rented for 15 years.
– Rented 50 units will be sold 80,000 USD after 15 years.
– Rental Price of each unit is 4,500 USD per year
– Construction Cost of each unit is 90,000 USD.
– The sale price of each unit is 135,000 USD.
– The project needs a luxury sales office with a price of 3,000,000 USD.
– The sales personnel cost is 250,000 USD per year.
– The project duration is 2 years.
– Project financing cost is 2,500,000 USD per year
Required:
Using the above available information by applying cost-benefit analysis, advise the owner of O’Donovan Constructions company which of the two potential real estate projects would be more beneficial. Students are required to perform the necessary calculations and based upon this provide a discussion supporting their decision on the chosen project.