Appendix I

UNIVERSITI TUNKU ABDUL RAHMAN

FACULTY OF BUSINESS AND FINANCE
ACADEMIC YEAR: 2016/2017
JANUARY 2016 TRIMESTER
UBAM2023 PERFORMANCE MANAGEMENT

GROUP ASSIGNMENT
Course details
Course

: __AC______________________

Year and Trimester of study

: __Y2S3____________________

Tutorial Group

: __T10_____________________

Lecturers Name

: __Dr. Wong Kee Luen________

Tutors Name
Important Note
students.

: __Dr. Wong Kee Luen________

: Submission of assignment is the responsibility of the

Students Detail
Name

Student ID No.

1. Lau Wen Qi

1405621

2. Lee Hui Ying

1405377

3. Neo Ching Ai

1302096

4. Yu Pei Chen

1304378

Assignment Overall Marks: ____________ Marks.

Appendix 2
MARKING GUIDE
Case scenario ( 1 )
Excellent
(marks)

Good
(marks)

Average
(marks)

Poor
(marks)

Part (a)
(14 marks)

11 14

9 11

69

3-6

Part (b)
(12 marks)

9 12

69

36

0-3

Part (c)
(12 marks)

9 12

69

36

0-3

Part (d)
(12 marks)

9 12

69

36

0-3

Criteria

Marks

Total
(50 marks)

Comments:
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------Name & Signature of marker

Date

Case Scenario 1

(a)
Order Number 377
Summary total cost statement

(b)
Cost driver or we can called as cost generator or cost determinant is a factor which causes the
amount of cost incurred to change. This may be explained by considering costs for each of the
four levels in Order Number 377.
1. Unit based costs occur every time a service is performed or a product is made.
(i) Direct material costs are driven by the quantity, range, quality and price of materials
required per product unit according to the specification for the order.
For example, the direct material cost for product Zeta is based on cost per unit.
Total direct material cost = cost per unit total unit
(ii) Direct labour costs are driven by the number of hours required per product unit and
the rate per hour that has been agreed for each labour grade. For example, if a firm
produces 20% more units it will consume 20% more labour cost.
2. Batch related costs are costs incurred every time a group or batch of units is produced or
a series of steps is performed.
(i) The number of machine set-ups per batch is the cost driver for machines used.
For example, the cost to set up a machine to run a batch of 1,000 items is a batchlevel cost. This cost must then be allocated to the 1,000 items included in the batch.
(ii) The number of design hours per batch is the cost driver for design work.
For examples, the cost incur in the number of design hours to run a batch of 1,000
items is a batch-level cost. This cost must then be allocated to the 1,000 items
included in the batch.
3. Product sustaining costs are performed to enable the production and sales of individual
products.
(i) The number of marketing visits to a client per order is the cost driver for marketing
cost chargeable to the order. For example, the costs of marketing visit to clients are
based on the number of visit per order regardless of the number of units or batches
in which the units are produced.
(ii) The number of hours of production line maintenance per order is the cost driver for
production line cost. For example, the activities that are needed to support an entire
product line but are not performed every time a new unit or batch of products is
produced.

4. Business sustaining costs are performed to support the facilitys general manufacturing
process and include general administrative staff, plant management and property costs.
(i) These costs are absorbed at a rate of 30% of total cost excluding business sustaining
costs. This is an arbitrary rate which indicates the difficulty in identifying suitable
cost driver/drivers for the range of residual costs in this category. Wherever possible
efforts should be made to identify aspects of this residual cost that can be added to
the unit, batch or product related analysis.

(c) The likely cause of cost driver for each level as the following:
(i) Unit-based cost
The material price may be higher due to the inflation or inefficiency of material
procurement. Inflation is the cause that no one is able to control therefore this is
an unavoidable problem. Inefficiency material procurement can be the unpleasure
relationship between purchasing department and supplier and the negligence of
staff to wrongly buy the high price material. However, problem of inflation might
be solved by establishing good relationship with suppliers and try to get more
discounts by purchasing larger amount of materials for each times. For the
inefficiency material procurement, company may provide additional training
program to the purchasing department on sensitivity on the material price and the
way of communication with suppliers to avoid displease them.
(ii) Batch- related cost
The number of machine set up per batch may be affected by the units of product
Zeta per batch. Number of machine set up per batch can be reduced with proper
planning on the units per batch in order to reduce cost by maintaining the number
of orders of 5000 units that needed to fulfill. Company can plan to increase the
number of units in each batch up to 1,250 units to reduce the number of batches
from 5 batches to 4 batches. This approach will not only reduce the number of
machine set up per batch, it can also reduce the cost directly.

(iii)

Product sustaining (order level) costs

The production line maintenance cost may be reduced by either outsourcing

services or internal sourcing. Production line maintenance includes machine
installation, cabling, control panels, parts assembly and so on. For internal
sourcing, GMB Company can provide training to existing employees in
production department to improve the level of skill of maintenance. This may help
the company to save time in produce more products when employees have
sufficient knowledge on maintenance. On the other hand, GMB Company can
also use outsourcing with low price and high quality professional services in
reducing production line maintenance cost. This is because high quality
professional services in their maintenance can help to avoid time consuming on
parts assembly. When the problem of time consuming can be solve the cost will
also reduce since when high efficiency can increase the production of a company.
The training and outsourcing may be lead to high cost in temporary but this two
types of option can help the company to save cost and may make higher profit in
the long run.
The main benefit to identify the cause or causes of cost driver is to help the company in
reducing the costs per unit of cost driver. Moreover, identification of causes of cost drivers
also provides great assistance to the management. It provides the accurate allocation of cost of
resources used in each order. It offers the information about causes that affecting each cost and
help management to know which costs can be reduced and not necessary to incur.

(d)
There are many problems that may be encountered in the implementation of an activitybased system of product cost management. Firstly, it requires substantial resources such as
management time and cost in order to implement an activity-based system. Activity-based
system requires management to not only estimate the costs for each of the activities but also
identify and measure the cost drivers for such activities. It is costly to maintain the system as the
data concerning numerous activity measures must be updated on a regular basis.

Besides, activity-based system data need be used with care because the date can easily
be misinterpreted. As the result, the organization will take wrong decisions. Managers that used
this system required identifying which costs are really relevant before making any significant
decisions. The selection of relevant activities and cost drivers may also be complicated where
there are many activities and cost drivers in complex business situations. Thus, it will create
some difficulties in the collection of data which will affect the accurately of the cost driver rates
to be calculated. An extensive data collection and analysis system may be required in order to
solve this problem.
Moreover, in practice, most of the managers will allocate all costs to products, customers,
and other costing objects in an activity-based costing system. For example, the managers will
include the cost of idle capacity and organization-sustaining costs. This will lead to overstating
the costs and understanding the margins and mistakes in pricing and other critical
decisions. Management should know that not all productive activities need to add value to
products. For instance, fire safety campaign attended by an employee does not add any value to
the end product or service although it is a productive activity.
Furthermore, organization that choose to use activity-based system cannot compare its
result with others companies of the same industry. This is because most of the companies are
using traditional costing systems and reports produced by activity-based system are different
from the profit and loss reports produced through traditional costing systems. Activity-based
costing system produces numbers such as product margins that are at odds with the numbers
produced by traditional costing systems.
Lastly, activity-based costing system does not conform to generally accepted
accounting principles. Thus, an organization that involved in activity-based costing system
should have two cost systems. One system is for internal use and one is for preparing external
reports. This means that organization need to duplicate their efforts by maintaining two cost
systems and separate accounting books for internal use and external reports, filings, and statutory
compliance. This is costlier than maintaining just one system and may cause confusion about
which system is to be believed and relied on.