Page 4 - OCS Workbook - Day 1 Suggested Solutions (May 2018)

CIMA MAY 2018 – OPERATIONAL CASE STUDY

CHAPTER FOUR – P1

EXERCISE 1: COSTING

Exercise 1 (a) - Costing Methods

Question Response

What is Mansako’s Told on page 12 that the company uses a “standard absorption costing
approach to system”. However, we are NOT told the basis upon which the OHs are
overhead absorbed.
absorption? Looking at the budgeted figures on p22 it seems that the fixed OH is
typically 3× the variable OH, suggesting that they are both absorbed on
the same basis, such as direct labour hours (but we are not told this
explicitly)

How useful do you Arguments for
think ABC would be • Mansako has 12 main product ranges (p22) and presumably many
to Mansako? different models, colours, etc, within these.
• Accurate costs are important for inventory valuation.
• More accurate costing may help decision making when offering
discounts to major retailers.
• Most production OH are fixed (fixed OH are 3× variable OH,
according to forecasts)
Arguments against
• The products are very similar and the production process is very
labour intensive (note: while page 9 might suggest that hand
finishing or stitching is only required in limited cases, page 22 shows
that overall direct labour costs are significantly higher than material
costs) so it is unclear how ABC would help apportion costs better
than the current system (assuming it is based on direct labour
hours).
• Little evidence that cost control is an issue for Mansako
• ABC is particularly useful when a company uses cost plus pricing –
Mansako’s prices are dictated by market forces, perceived quality
and market positioning, so ABC would be less relevant.

Summary - debatable how ABC would add much to Mansako.

Suggest some cost • Each stage in production could be a cost pool, although presumably
pools/drivers that there are a significant amount of QC checks throughout, so one
could be used by pool could be quality control using number of inspections as the
Mansako for ABC.
driver
• Design – could argue that each designer’s time can be directly
linked to specific ranges so their labour costs would be direct. Any
design OH could then be absorbed based on designer hours
• Cutting – number of dies required
• Sewing – sewing machine time
• Finishing – labour hours

46 KAPLAN PUBLISHING