A7.1 — Broad averaging means dividing total indirect costs by total units (or a single cost driver), so every product absorbs overhead at the same rate. When products consume overhead differently — some require more setups, more inspections, more complex processes — this single rate spreads overhead based on volume rather than actual consumption. High-volume, simple-to-make products absorb too much overhead (over-costed); low-volume, complex products absorb too little (under-costed). One distortion mirrors the other — this is called cross-subsidisation.

A7.2 — (1) An increase in product diversity — different products use different resources, so one rate can't capture them all. (2) An increase in indirect costs — as automation grows, overhead dominates direct cost and a single driver explains too little of cost behaviour. (3) More competition in the market — wrong cost leads to wrong price, which leads to lost share or eroded margin.

A7.3 — Unit-level (e.g., direct power per unit machined); Batch-level (e.g., machine setup cost incurred each time a batch is run); Product-sustaining (e.g., engineering and design specific to a product line); Facility-sustaining (e.g., factory rent or plant manager's salary).

A7.4 — The junior accountant is wrong. The case cost is incurred only when a batch of 24 is packaged — not when each individual bottle is produced. You can mathematically divide the cost by 24 to get a per-unit figure, but that doesn't change when the cost is incurred. The cost remains batch-level; classification depends on what triggers the cost, not on whether arithmetic produces a per-unit number.

A7.5 —

(a) Pool rates:

• Machining: 240,000 ÷ (30,000 + 10,000) = 240,000 ÷ 40,000 = $6 per machine hour
• Setups: 90,000 ÷ (20 + 40) = 90,000 ÷ 60 = $1,500 per setup
• Inspection: 60,000 ÷ (800 + 1,200) = 60,000 ÷ 2,000 = $30 per inspection hour

(b) Overhead allocated:

• Basic: (6 × 30,000) + (1,500 × 20) + (30 × 800) = 180,000 + 30,000 + 24,000 = $234,000
• Premium: (6 × 10,000) + (1,500 × 40) + (30 × 1,200) = 60,000 + 60,000 + 36,000 = $156,000

(c) Manufacturing cost per unit:

• Basic: overhead per unit = 234,000 ÷ 40,000 = $5.85. Total = DM 12 + DL 5 + OH 5.85 = $22.85 per unit
• Premium: overhead per unit = 156,000 ÷ 10,000 = $15.60. Total = DM 30 + DL 9 + OH 15.60 = $54.60 per unit

A7.6 — Any three of: (1) Costly and time-consuming to set up and maintain. (2) ABC depends on the quality of cost-driver choices and accurate driver measurement — wrong drivers mean no real accuracy gain. (3) Firms often have to use second-best drivers because the ideal driver has no available data, undermining accuracy. (4) ABC is not GAAP-compliant for financial reporting, forcing firms to run two costing systems. (5) The precision gain may not be worth the cost — a less-detailed ABC is often "good enough."

A7.7 — ABC is a costing method — it assigns indirect costs to products via multiple activity cost pools to produce more accurate product costs. ABM uses the activity information produced by ABC to manage the activities: identifying which are value-adding vs non-value-adding, eliminating waste, redeploying unused capacity, and supporting process and product redesign for cost reduction.

A7.8 — A value-adding activity is one the customer is willing to pay for. A non-value-adding activity is one the customer is unwilling to pay for — its cost is borne by the firm. Yes, a non-value-adding activity can still be necessary (e.g., regulatory inspections, internal handoffs). When that's the case, the goal of ABM is to redesign the activity to be done more efficiently, not to eliminate it outright.

A7.9 — ABC only re-allocates overhead — it doesn't touch direct material or direct labour, which are traced directly. If you stop at the overhead allocation, you've only computed the overhead portion of product cost, not the full manufacturing cost. Forgetting to add DM + DL means understating product cost (often substantially) and could cause you to lose marks on the exam.

A7.10 — An under-costed product looks more profitable than it really is. Managers see large reported margins and push the product (more advertising, more production, lower prices to "leverage" the margin). In reality the product may be barely profitable or actually loss-making once true costs are known — so the more they sell, the worse the firm's results get. This is the danger of acting on distorted cost data.

A7.11 — False. ABC is more accurate only if the activities are correctly identified, costs are correctly grouped into homogeneous pools, and the chosen drivers genuinely cause the costs in those pools. A poorly designed ABC system (wrong drivers, miss-grouped activities) can be just as inaccurate as simple costing — with the added disadvantage of being expensive to run.

A8.1 — The three influences are customers (set the ceiling — the maximum they'll pay), competitors (also constrain the ceiling — rivals' prices and quality offer substitutes), and costs (set the floor — price can't be sustainably below cost).

A8.2 — Target costing starts with the price (given by the market) and works backward: Target Cost = Target Price − Target Operating Income. The firm then redesigns the product through value engineering to hit the target cost. Cost-plus pricing starts with the cost, adds a desired markup, and produces the price the firm hopes customers will accept. Target costing is used in competitive markets; cost-plus in non-competitive markets.

A8.3 — Cost incurrence is when a cost is actually paid — once incurred, it's very hard to change. Locked-in cost is a future cost that has been committed by today's decisions, typically at the design stage; it hasn't been paid yet, but will be. The firm has the most leverage to reduce costs at the design / R&D stage, before costs are locked in. Once production starts, the structure is fixed and the room to cut shrinks dramatically.

A8.4 — Any two of: (1) Simpler — one cost figure to apply. (2) Provides price stability for the long run because all costs (including fixed and period) are recovered. (3) Customers find it more acceptable — a small markup over full cost looks fairer than a large markup over variable cost. (4) Ensures the firm doesn't accidentally under-price by ignoring fixed or period costs.

A8.5 —

(a) Target cost = 180 − 36 = $144 per unit.
(b) Current cost = 50 + 25 + 20 + 70 = $165. Target is $144, so the firm must cut $21 per unit. (Currently NOT achievable.)
(c) Two ways: value engineering (redesign the product or processes to use less material/labour/overhead), and renegotiate with suppliers for lower DM cost. Other valid options: reduce material waste, automate to lower DL hours, improve facility efficiency to reduce overhead absorption per unit.

A8.6 —

(a) Price = 400 × 1.15 = $460 per unit. (Markup $ = $60 per unit.)
(b) Target OI per unit = 1,500,000 ÷ 25,000 = $60 per unit. Markup % = 60 ÷ 400 = 15%. Yes — the 15% markup is consistent with the $1.5M target operating income at 25,000 units.

A8.7 — Predatory pricing: setting prices below cost to drive competitors out, then raising prices once the market is cleared. Illegal (anti-competitive). Collusive pricing: competitors agree on a price together. Illegal (price-fixing). Australian service stations must display individually-set prices precisely to prevent collusion.

A8.8 — Price discrimination is legal only if it is cost-justified — i.e., the higher price reflects genuinely higher cost to serve. Example: business-class vs economy on a flight. Business class costs more to deliver (wider seats, lounge access, fewer passengers per crew, more food), so the price difference is permitted. If the price difference cannot be cost-justified or is used to lessen competition, it becomes illegal.

A8.9 — Any two of:

• Targets too aggressive → employees give up. Fix: break the target into small steps; celebrate small wins.
• Cross-functional team adds too many features → the product gets bloated and cost rises. Fix: focus on what customers want, not what departments want to include.
• Endless redesign → product never launches. Fix: enforce deadlines and schedules.
• Departmental conflict over who absorbs the cuts. Fix: set targets across all functions and emphasise teamwork.

A8.10 — A product incurs costs throughout its life: R&D, design, production, marketing, distribution, customer service, warranty. R&D and design costs are typically the largest and are locked in early, but financial accounting expenses them as period costs and never assigns them to product cost. Life-cycle costing spreads these costs across the product's expected sales life so the price is set high enough to recover all costs over the whole life, not just current-period manufacturing.

A8.11 — The minimum acceptable price should be based on variable cost ($30 per chair), not full cost. Fixed costs are sunk — they will be incurred whether or not the special order is accepted — so they're irrelevant to the decision. Any price above $30 contributes positively to covering fixed costs and improving operating income. Realistically the firm would price somewhat above $30 (e.g., $35–$40) to ensure positive contribution; pricing at exactly $30 contributes nothing. Never include fixed cost in a special-order short-run pricing decision.

A9.1 — (1) Coordinates and forces communication across departments (e.g., sales can't promise 1M units if production can only make 500K). (2) Provides a performance framework — concrete targets make actual results meaningful, enabling variance analysis and learning. (3) Motivates managers and employees — numerical targets are far more motivating than vague "do your best."

A9.2 — Operating budget — focuses on best use of limited resources; outputs include revenue, production, materials, labour, MOH, COGS, operating expenses, and the budgeted income statement. Financial budget — focuses on how to acquire the resources; outputs include capital expenditure budget, cash budget, budgeted balance sheet, and budgeted statement of cash flows. (Only the operating budget and the cash budget are examinable in this unit.)

A9.3 — The first line of any sub-budget = the last line of the previous sub-budget. For example, the first line of the production budget is the sales units (last line of the revenue budget); the first line of the materials usage budget is units to produce (last line of the production budget).

A9.4 —

(a) Production budget (loaves):
Sales: 90,000
+ Ending FG inventory: 7,500
− Beginning FG inventory: 6,000
= Production required: 91,500 loaves

(b) Materials purchases budget (flour):
Flour needed for production: 91,500 × 0.4 = 36,600 kg
+ Ending raw-material inventory: 8,000 kg
− Beginning raw-material inventory: 5,500 kg
= Flour to purchase: 39,100 kg
× Cost per kg: $1.20
= Total purchase cost: $46,920

A9.5 —

Receipts schedule for May:

• From March sales (5%): 80,000 × 0.05 = $4,000
• From April sales (25%): 100,000 × 0.25 = $25,000
• From May sales (70%): 120,000 × 0.70 = $84,000
• Total May receipts = $113,000

Disbursements schedule for May:

• From April purchases (20%): 60,000 × 0.20 = $12,000
• From May purchases (80%): 72,000 × 0.80 = $57,600
• Wages: $15,000
• Cash overheads: $18,000
• Total May disbursements = $102,600

May cash budget:

• Opening cash balance: $10,000
• + Total receipts: $113,000
• = Cash available: $123,000
• − Total disbursements: $102,600
• = Ending cash balance: $20,400

A9.6 — Depreciation is a non-cash expense. It's recorded in the income statement to spread the cost of an asset over its useful life, but no cash actually leaves the business when depreciation is recognised. A cash budget tracks only the actual movement of cash, so depreciation must be removed from the overhead figure before treating overhead as a cash outflow. Failing to remove it would double-count: the cash was already paid when the asset was purchased.

A9.7 — Because each month's opening cash balance equals the previous month's ending balance. You cannot know May's opening balance until you have finished computing April's ending balance, and so on. Receipts and disbursements schedules can be done in parallel because they don't depend on each other across months — but the cash budget itself must roll forward sequentially.

A9.8 —

• Cost centre — manager responsible for costs only (e.g., HR, IT, Finance department).
• Revenue centre — manager responsible for revenues only.
• Profit centre — manager responsible for revenues AND costs (e.g., a product division or store).
• Investment centre — manager responsible for revenues, costs, AND investment decisions (e.g., an entire business unit).

The revenue centre is theoretical only. A manager judged purely on revenue could "sell" a $1M product for $1 to inflate units sold, looking great on revenue while destroying the firm's profit. In practice, revenue responsibility always has to be paired with cost responsibility — so a pure revenue centre cannot really exist.

A9.9 — Budgetary slack is when managers deliberately under-estimate revenue and/or over-estimate costs when preparing their budgets, to give themselves a built-in cushion. It happens because (i) managers want to look like high performers when they "beat" the budget, and (ii) it provides a buffer against unforeseen problems. Some slack is inevitable. Too much slack makes the budget useless — targets become trivially easy, comparison with actuals tells you nothing about real performance, and the budget no longer serves coordination, motivation, or evaluation purposes.

A9.10 — A stretch target is one that is difficult but achievable — demanding enough to force effort and improvement, but not so unrealistic that staff give up. Kaizen budgeting takes the opposite philosophy: rather than one large stretch, the budget builds in continuous small improvements period after period (e.g., gradual 1–2% cost reductions). Both methods aim at improvement — stretch via a single ambitious leap, Kaizen via many small ones.

A9.11 — A static annual budget is set once for 12 months. Once managers have hit (or clearly missed) the annual target, they tend to disengage. A rolling budget maintains a 12-month forward horizon at all times — as one month closes, a new month is added at the end, so managers always have 12 months ahead to plan against. Advantage: it keeps planning fresh (you're never planning a period 10+ months in the future based on stale information), prevents end-of-year coasting/disengagement, and forces continuous attention.

A9.12 — Conditions vary enormously across countries — different economies, exchange rates, regulations, taxation, labour markets, and competitive conditions. A budget calibrated to one country's conditions doesn't fairly evaluate performance in another. Multinationals can still use budgets for planning across geographies, but performance evaluation should be done locally with country-specific benchmarks. Additionally, transfer pricing rules and other legal practices differ by jurisdiction.

A10.1 — Any five of: (1) Changes in sales volume are the only driver of cost and revenue changes. (2) Total cost is divisible into fixed and variable components. (3) Cost and revenue functions are linear within the relevant range. (4) Selling price, variable cost per unit, and total fixed cost are known and constant. (5) Single product, or if multiple products, the sales mix is known and constant. (6) All units produced are sold (no inventory build). (7) Time value of money is ignored — CVP is short-term.

A10.2 —

• Contribution margin per unit (CMU) = Selling price − Variable cost per unit. It is what each unit contributes to covering fixed costs and then operating income.
• Contribution margin ratio (CMR) = Contribution margin ÷ Revenue (per unit or total — same answer). It expresses CM as a percentage of revenue, used to find break-even or target revenue in dollars.

A10.3 —

(a) CMU = 80 − 50 = $30 per unit.
(b) Break-even units = 180,000 ÷ 30 = 6,000 vases.
(c) Break-even revenue = 6,000 × $80 = $480,000 (or fixed cost ÷ CMR = 180,000 ÷ (30/80) = 180,000 ÷ 0.375 = $480,000). Same answer.
(d) Units for target OI = (180,000 + 90,000) ÷ 30 = 270,000 ÷ 30 = 9,000 vases.

A10.4 —

(a) Pre-tax OI = 60,000 ÷ (1 − 0.25) = 60,000 ÷ 0.75 = $80,000.
(b) CMU = 40 − 25 = $15. Units = (200,000 + 80,000) ÷ 15 = 280,000 ÷ 15 = 18,667 → round UP to 18,667 units (the formula gives 18,666.67, so 18,667).
(c) Break-even point is unchanged. At break-even, operating income is zero, so there is no profit to tax — the tax rate doesn't enter the calculation. Only the target-income calculation moves when the tax rate changes; break-even remains 200,000 ÷ 15 = 13,334 units (after rounding up).

A10.5 — The CVP formula uses pre-tax operating income. Break-even is defined as the point where operating income equals zero. Since there is no profit, no tax is paid — the tax rate is therefore irrelevant. Tax only matters when computing the units needed to achieve a non-zero target, because there you must "gross up" the after-tax target to the pre-tax amount before plugging it into the formula.

A10.6 —

Break-even from Q10.3 = 6,000 units / $480,000.
Budgeted sales = 8,000 units × $80 = $640,000.

(a) Margin of safety:

• Units: 8,000 − 6,000 = 2,000 units
• Dollars: 640,000 − 480,000 = $160,000
• Percentage: 160,000 ÷ 640,000 = 25%

(b) At 8,000 units: Total CM = 8,000 × 30 = $240,000. Operating income = 240,000 − 180,000 = $60,000. DOL = 240,000 ÷ 60,000 = 4.0.
(c) % change in operating income = DOL × % change in sales = 4.0 × 12% = 48% increase.

A10.7 —

Total units = 25,000 + 50,000 + 25,000 = 100,000.
Sales mix: X = 0.25, Y = 0.50, Z = 0.25.

(a) WAUCM = (10 × 0.25) + (6 × 0.50) + (4 × 0.25) = 2.50 + 3.00 + 1.00 = $6.50.
(b) Total break-even units = 440,000 ÷ 6.50 = 67,693 (formula gives 67,692.3; round UP to 67,693 units).
(c) Split by mix:

• X: 67,693 × 0.25 = 16,924 units (rounded up)
• Y: 67,693 × 0.50 = 33,847 units (rounded up)
• Z: 67,693 × 0.25 = 16,924 units (rounded up)

(Small rounding differences are fine — just be consistent with round-up.)

A10.8 — Total break-even units will rise. If the sales mix shifts toward the lower-CM product (Z), the weighted-average unit contribution margin falls — each "average" unit now contributes less toward fixed costs. With a smaller WAUCM dividing the same fixed cost, the firm needs more total units to break even. Strategic lesson: selling more low-CM products lowers profitability per unit, even though it may grow revenue.

A10.9 — Report 413 units. CVP requires you to always round UP, because at 412 units the firm has not actually reached break-even — it's still 0.3 units short, and therefore still losing money. Normal mathematical rounding (round to nearest) would say 412, but CVP ignores normal rounding because of what the number represents: the minimum activity needed to reach a target.

A10.10 — Yes — CVP works for service and not-for-profit organisations. The formula is unchanged; you simply replace "units sold" with an appropriate output measure (here, billable engagements). Break-even engagements = 500,000 ÷ 2,500 = 200 engagements per year.

A10.11 — DOL = Contribution margin ÷ Operating income. A high DOL indicates the firm has high fixed costs relative to variable costs. A small % change in sales translates into a large % change in operating income (in either direction). This means greater upside in a boom but greater downside in a downturn — so high DOL = higher risk, more sensitivity to sales volume.

A10.12 —

Method A: CMU = 60 − 40 = $20. Break-even = 20,000 ÷ 20 = 1,000 units.
Method B: CMU = 60 − 30 = $30. Break-even = 80,000 ÷ 30 = 2,667 (round up) = 2,667 units.

(b) Indifference: set the two operating-income expressions equal.
20Q − 20,000 = 30Q − 80,000
⇒ 60,000 = 10Q
⇒ Q = 6,000 units.

(c) At 1,500 units (below the indifference point of 6,000): choose Method A — it has lower fixed costs and breaks even sooner. (Quick check: at 1,500 units, Method A OI = 20 × 1,500 − 20,000 = $10,000; Method B OI = 30 × 1,500 − 80,000 = −$35,000.) At 4,000 units (still below indifference point): also choose Method A. (Method A: 20 × 4,000 − 20,000 = $60,000; Method B: 30 × 4,000 − 80,000 = $40,000.) Method B only becomes preferable above 6,000 units, where its lower variable cost outweighs the heavier fixed cost burden.