Inoca private limited produces two products ranges: the standard range and special range. During the July, 300 standard windows and 50 specialized windows were manufactured and indirect production costs of $73000 were incurred. An analysis of indirect costs reveals the following activities.
Activity Cost Driver Total Cost
Material Handling Number of requisitions $25000
Machine Setups Number of set ups $27000
Quality inspections Number of inspections $21000
The cost driver volume for each product was as follows.
Cost driver Specialized Standard Total
Number of requisitions 400 600 1000
Number of setups 150 300 450
Number of inspections 200 400 600
a. Indirect activity cost rate for each activity.
b. Allocate the indirect manufacturing overhead costs for July to the products using activity cost rates calculated in (a) above
c. Write a memo to the managing director of Inoca private limited explaining the benefits of activity based costing
d. Volume-based cost drivers are no longer appropriate in today’s business environment”. Discuss.
TASK 2: Managerial Planning
Leeway Maldives (Pvt) Ltd has the capacity to manufacture 50,000 units annually of its only product. The following information is available.
$26 per unit
Variable manufacturing costs
$12 per unit
Fixed manufacturing costs
Fixed selling and administrative costs
Variable selling and administrative costs
$ 4 per unit
a. Calculate the number of units that need to be sold annually to break even. 3
b. How many units would need to be sold to earn a target annual profit of $120,000?
c. In an attempt to achieve better results in the marketplace, management has been looking at changing the reward systems for making, distribution and sales personnel. This would result in an increase in variable selling and administrative costs by $2 per unit, and would reduce fixed selling and administrative costs by $50000.
(i) Calculate the number of units required to break even if management implemented the changes
(ii) Would you suggest management pursues the changes? Explain.
TASK 3: Short-term Decision Making
XYZ Company produces plunge pools. Currently, the company uses internally manufactured pumps to power water jets. XYZ Company has found that 40 per cent of the pumps have failed within their 12-month warranty period, causing huge warranty costs. Because of the company’s inability to manufacture high-quality pumps, management is considering buying pumps from a reputable supplier who will also bear any related warranty costs. XYZ company’s unit cost of manufacturing pumps is $83.75 per unit, including $17.25 of allocated fixed overhead (primarily depreciation of equipment). Also, the company has spent an average of $22 (labor and parts) repairing each pump returned. XYZ Company can purchase each pump for $92.50. During 2013, XYZ Company plans to sell 12,800 plunge pools (each pool requires one pump).
XYZ company’s unit cost of manufacturing pumps is $83.75 per unit, including $17.25 of allocated fixed overhead (primarily depreciation of equipment). Also, the company has spent an average of $22 (labor and parts) repairing each pump returned. XYZ Company can purchase each pump for $92.50. During 2013, XYZ Company plans to sell 12,800 plunge pools (each pool requires one pump).
a. Determine whether XYZ Company should make or buy the pumps, and the amount of cost savings arising from the best alternative. [8 marks]
b. What qualitative factors should be considered in the outsourcing decision? [7 marks]
e. “Fixed costs are always irrelevant in decision making.” Discuss. [5 marks]
TASK 4: Budgetary Control Systems
Madihaa Company Pte Ltd intends to start business on the first of January. Production plans for the first four months are as follows:
Each unit requires 2 kilograms of material. The company would like to end each month with enough raw material inventories on hand to cover 25 per cent of the following month’s production needs. The material costs $7 per kilogram. Management anticipates being able to pay for 40 per cent of its purchases in the month of purchase. They will receive a 10 per cent discount for these early payments. They anticipate having to defer payment to the next month on 60 per cent of their purchases. No discount will be taken on these late payments. The business starts with no inventories on 1 January.
a.Determine the budgeted payments for purchases of materials for each of the first three months of operations. [8 marks]
b.Madihaa Company Pte Ltd is preparing a master budget for the coming year. At present senior management are reviewing the inventory policies. Which budgets, would policies concerning the level of inventories be affected and why?
c. Discuss the potential issues arising for an entity if it takes a budgetary approach in which budgetary data are imposed on business unit managers by the CEO. Contrast this with an approach whereby the budgetary data is developed in a more participatory environment.
TASK 5: Decentralization and Performance Evaluation
Zam Gems Maldives (Pvt) Ltd manufactures jewelry for three different markets. The business has grown from a backyard hobby for the owners to quite a large manufacturing concern. The company is structured into three distinct divisions aligned with each market, as shown.
Children’s jewellery Adult jewellery Crystals & homewares
Sales $4,720,000 $2,480,000 $6,300,000
Variable costs 33% 38% 50%
Fixed costs $1,960,000 $1,800,000 $1,700,000
Divisional assets $5,000,000 $4,000,000 $12,000,000
Common costs for the year totaled $500,000 and were allocated based on sales.
The management of Zam Gems Maldives (Pvt) Ltd has come across a further investment opportunity. It does not want to develop a separate division, so one of the existing divisions would need to take responsibility for the new investment opportunity. Management estimates that the new investment opportunity would require an investment of $2500000 to deliver sales of $2000000 with variable costs estimated at $625000 and fixed costs at $1000000.
a. At present, divisional performance is evaluated based on ROI. If this is the case, which division would want to take over the new investment opportunity? [5 marks]
b. If the company changed its performance evaluation criteria to encompass residual income based on a charge for capital of 14 per cent, which division would want to take over the new investment opportunity? [5 marks]
c. Why is there a need to measure organizational performance? [5 marks]
d. Discuss the appropriateness of the use of ROI, RI, and EVA as performance measures. [5 marks]