Page 8 - CIMA MCS Workbook May 2019 - Day 2

CIMA MAY 2019 – MANAGEMENT CASE STUDY

TASK 2 – RELEVANT COSTING AND CAPACITY

Trigger and Task

The Finance Director has emailed you:

To: Finance Manager

Date: Today

Subject: Relevant costing and capacity

Hi,

Linus Maas has been chatting to me about our production capacity levels. We are currently in the
position where we are starting to have to turn down business because we are operating at full
capacity.

We are looking at a number of projects to enable us to increase our capacity, but none of these
would feasibly give us a capacity increase for at least another year.

In the meantime, I’d like to consider how best to use our existing capacity. In other words, how
can we determine which contracts will give us the best use of our factory? It’s been a long time
since my accounting studies, but I do vaguely remember that relevant costing can be used in this
type of situation. Please produce some notes for me that cover the following:

‐ How can we decide whether to switch planned production between contracts using relevant
costing principles?

‐ For instance, how would we determine whether to switch production from five houses to one
hotel? Please go into detail about the different types of cash flows we would need to consider
(e.g. materials, labour, etc.).

‐ Briefly cover other considerations that we should take into account if we adopt this approach.

Regards,

Carla Holm

Prepare the work that Carla has requested. (Time 45 minutes)

28 KAPLAN PUBLISHING