Page 4 - CIMA OCS Workbook February 2019 - Day 1 Suggested Solutions

CIMA FEBRUARY 2019 – OPERATIONAL CASE STUDY

CHAPTER FOUR – P1

EXERCISE 1 (A) - COSTING METHODS

Question Response

Does Trigg Adventure operate a • Marginal costing (p20)
marginal costing system or
absorption costing?

Is labour considered to be a • Production labour is treated as a variable cost (p21)
variable cost or a fixed cost?

How are overheads absorbed? • Overheads are not “absorbed”.as the company uses MC
not TAC.
• However, variable production OH are charged to jobs on
the basis of direct labour hours (p22)
• Fixed OH are left as a lump sum.

How useful would it be for Trigg Arguments for
to switch to absorption costing • Full costs are needed for inventory valuation
(TAC)? • Trigg seems to use cost-plus pricing (at least on
commercial jobs – p22). TAC would ensure all production
costs are covered and a profit made (assuming actual
volume is at least the volume used to set fixed costs per
unit)
Arguments against
• A focus on MC and contribution is more useful for
decision making – such as setting a minimum tender
price to win new commercial contracts
• MC is simpler

Suppose Trigg Adventure did Arguments for
decide to switch to absorption • ABC is particularly useful when a company uses cost plus
costing. How useful do you think pricing – Trigg’s prices for commercial customers are set
ABC would be compared to using cost-plus pricing. (Note: we don’t know how
extending the current approach domestic prices are set but are likely to be a mixture of
of calculating rates per labour market forces and negotiations with major retailers, so
hour? ABC would be less relevant.)
• Labour is a small part of the overall production cost
(p20), so relying on a rate per direct labour hour will be
less useful than having a range of cost drivers
Arguments against
• Most production OH are variable (forecasts for 2019 are
variable production OH F$14.3m v fixed production OH
of F$3.2m). ABC is more useful when fixed OH are more
significant
• Trigg only makes 5 basic products (p20) – ABC is more
useful where there are many product lines
• Little evidence that cost control is an issue for Trigg.

46 KAPLAN PUBLISHING