Page 4 - CIMA OCS August 2018 Day 1 Suggested Solutions

CIMA AUGUST 2018 – OPERATIONAL CASE STUDY

CHAPTER FOUR – P1

EXERCISE 1: COSTING

Exercise 1 (a) - Costing Methods

Question Response

What is Thomas Fine Told on page 23 that production OH are
Teas’ approach to • Ascertained for each production line and then
overhead • Absorbed on the basis of direct labour hours
absorption?

How useful do you Arguments for
think ABC would be • Thomas Fine Teas has 8 main product ranges (p19 and 20) and
to Thomas Fine different size boxes within these.
Teas? • Accurate costs are important for inventory valuation.
• More accurate costing may help decision making when offering
discounts to major retailers for promotions.
• Most production OH are fixed (fixed OH rate per hour is > 2× that
for variable OH for black teas and > 3× for green teas, according to
standards on pp21 and 22)
• Much of the production process is automated suggesting that there
may be better bases than labour hours
Arguments against
• Each production line is already effectively a cost pool
• Little evidence that cost control is an issue for Thomas Fine Teas
• ABC is particularly useful when a company uses cost plus pricing –
Thomas Fine Teas’ prices are dictated by market forces, perceived
quality and market positioning, so ABC would be less relevant.

Summary - ABC would be beneficial to Thomas Fine Teas.

Suggest some cost • Tea leaves sourced – buyers time linked to leaves bought
pools/drivers that • Blend recipe created – blenders’ time
could be used by • Tea leaves blended – number of batches
Thomas Fine Teas for
ABC. • Tea bag production – per unit (tea bag)
• Quality control – number of tastings

46 KAPLAN PUBLISHING