Accounting Business Reporting for Decision Making

CHAPTER 11 Costing and pricing in an entity 493

Required

a. Calculate the price per tonne for each grade of feed using the method described for setting prices.

b. Does the price in part (a) take into account how much customers are willing to pay for the

product? Explain.

11.27    LO3, 4

Windows R Us manufactures two product ranges: the standard range and the special range.

During July, 300 standard windows and 50 specialised windows were manufactured and indirect

production costs of $73 000 were incurred. An analysis of indirect costs reveals the following

activities.

Activity Cost driver Total Cost

Materials handling

Machine set-ups

Quality inspections

Number of requisitions

Number of set-ups

Number of inspections

$25 000

27 000

21 000

Total $ 73 000

The cost driver volume for each product was as follows:

Cost driver Specialised Standard Total

Number of requisitions

Number of set-ups

Number of inspections

400

150

200

600

300

400

1 000

450

600

Required

a. Draw a diagram showing the structure of the costing system used by Windows R Us.

b. Calculate the indirect activity cost rate for each activity.

c. Allocate the indirect manufacturing overhead costs for July to the products using the activity

cost rates calculated in (b).

d. Write a memo to the managing director of Windows R Us explaining the benefits of

activity-based costing.

Problems

 BASIC |   MODERATE |    CHALLENGING

11.28 Market-based pricing, customer preferences  LO6

Transrapid is a new magnetically levitated train being developed to run between major cities in

Germany at a speed of 300 miles per hour. Engineers developed a system with trains departing

every 10 minutes. Suppose Transrapid asked you to research customer preferences and to recom-

mend a pricing policy. It costs considerably more to have trains depart as frequently as 10 minutes

apart, so a cost-based pricing schedule will result in ticket prices that are considerably higher

than alternative modes of transportation.

Required

a. In addition to customer preferences, what information would you like to gather before recom-

mending a pricing policy? Explain why each item you list is relevant.

b. Explain why it is important to understand customer preferences before building the system.

c. Is the need to consider customer preferences different for this organisation than for another

type of organisation? Why or why not?

11.29 Product pricing decisions and profitability  LO5, 6

Screen Industries manufactures two products: Alpha and Beta. Both products are produced on the

same assembly lines and packaged with 20 units of product per package. The predicted sales are

320 000 packs of Alpha and 400 000 packs of Beta. The budgeted costs for the coming year are

as follows.