AYB225 Management Accounting
- Six technical reports with two supporting schedules. Management is considering various costing system options. To facilitate their decision-making they have requested the preparation of these schedules. The data and the schedules are in the Excel file on Blackboard.
- Short answers to 2 questions from management. Your answers to each of the questions should be complete, but also should be clear and concise, and in a form that is easy for managers to read and understand. You may use bullet points if they assist in the presentation of your answers. Answers must be written in acceptable Business English.
A discussion based on (i) Schedule 6 (ABC), (ii) the facts of the case (iii) and an article from the literature.
**The full requirements of the assignment are on pages 5 and 6**
The Company: Sneakers Unlimited
Sneakers Unlimited is a manufacturer of men’s and women’s leisure shoes. What began as a small family business has now grown into a firm with a large product range.
The firm produces three lines in the range – Dance, Run and Walk. The firm’s products have a relatively short lifetime and often styles popular in one period are out of fashion by the next period.
The market for shoes is highly competitive because of several new entrants. It has therefore become difficult to estimate the demand for shoes for the next period. This gives the production manager flexibility over the quantities produced during each period. Given the current market conditions, management is not concerned about the variability of demand from period to period.
Costing system currently used
The firm accounts for its products using standard absorption job costing, applying overhead to products using a plant-wide rate based on direct labour hours. Materials purchases are recorded at actual cost. Work in process and finished goods inventories are recorded at standard cost. All cost variances in the period are transferred to cost of goods sold at the end of the period.
This existing costing system was established when only one type of sneakers was produced and when overhead was a significantly smaller proportion of total cost than it is now.
Materials for sneakers are fabric, cottons, and depending on the styles, zippers, buttons, Velcro, laces and logos. At the present time the only material which is traced directly to the product is fabric. Cottons, buttons, zippers, laces, Velcro and logos are treated as indirect materials (overhead). All on-costs such as superannuation, payroll tax, provisions for leave on wages are treated as indirect costs (overhead).
Standards are determined at the point when the product is initially designed, and efficiency variances are regularly updated to reflect all changes in the manufacturing process. The firm prides itself on its very efficient labour force, and in the past the company seldom had cost over-runs due to labour inefficiency.
In the period which is the focus of this review, two changes were made in the manufacturing process. First, a change was made in the layout of the manufacturing space which should reduce the standard time per product in the long run. The direct labour standards have not yet been updated to include this change. Secondly, a new type of material was purchased from the current supplier. The supplier had claimed that the new material (which is of high quality, yet cost a similar price to the old material) is easier to work with in terms of both cutting and sewing. The supplier is known to be reliable in terms of material supply.
Review of costing system
The firm is commencing an extensive review of its costing system and reporting practices. This review will involve all divisions of the firm. Your task is only a small part of the entire review:
- One product only (“Dance” sneakers), and
Selected tasks only - for example, a discussion on implementing Activity Based Costing
Some of the issues which have prompted the review are:
- Various pressures from competitors have alerted the firm to be more cost conscious. The firm has had a number of issues with their product pricing recently. The firm sets prices based on a mark-up on total cost (i.e. inventoriable (product) cost + period cost for each product). Various inconsistencies have been identified when comparing Sneakers Unlimited prices with those of its major competitors. As a result, the firm wants to have more confidence in the product cost generated by the accounting system, in particular the cost of each individual product (Dance, Run and Walk).
- In addition to product pricing, the costing data provided by the firm is now being used extensively for other decision-making within the firm. This means that the accuracy of costing data is becoming increasingly important.
In recent times the firm has been faced with limited storage space at their premises. The firm is unable, at this stage, to consider options involving a significant capital outlay to relocate or rebuild. Further, Just in Time inventory is not an option for this firm. (Note: the recent change in factory layout has no impact in any way on storage capacity.)
The requirements of the case begin on the next page. In addition to the tasks management have asked you to complete, they have also indicated that there are a few issues that you are not to include:
- Ways of reducing costs - You are to take all costs as given, and at this stage not recommend any particular ways of attempting to reduce or eliminate costs.
- Use all data as given, including all the fixed overhead figures without trying to fine-tune those figures in any way.
- Management has stressed that your responses to the questions should be based only on the facts with which you have been provided. Do not go outside these facts.
Requirements of the Assignment
Schedules (5 marks)
Complete Excel schedules in the appropriate spaces on pro-formas. Do not delete any parts of the pro- forma. Show all required working in the relevant spaces, and only show required working.
- Variance report related to units produced. (Schedule 1)
- Calculation of standard costing cost variances relating to the product “Dance”. The firm calculates price variances for all manufacturing costs, efficiency variances for all variable manufacturing costs, and a fixed overhead volume variance. The material price variance is calculated on usage. (Schedule 2)
- The Normal Absorption Costing Income Statement for the period, with relevant variances expensed to the period and; recast the Income Statement (with relevant variances expensed to the period) assuming Standard Absorption Costing. (Schedules 3 and 4, and a schedule to calculate COGS)
- Show the journal entries for the period under the standard absorption costing system currently used by the firm. Journal entries must be presented in proper form. (Schedule 5)
Prepare a comparison of overhead costs per product under the existing costing system (a plant- wide rate based on DL hours) with an Activity Based Costing system using the cost pools and cost drivers identified in the data. (Schedule 6 and workings for Schedule 6)
ENTERING YOUR RESULTS INTO BLACKBOARD AND CHECKING OF FIGURES
Figures in the schedules (1, 2, 3, 4, 5 and 6) can be entered and checked on Blackboard up to 5 times per student. It will indicate if your answer is correct or not. Zero mark will indicate that the answer is wrong.
To be clear, all worksheets are to be completed using formulas that draw values from the data provided. In each worksheet, students will be deducted marks for each cell that contains a numerical value that has not been obtained using an Excel formula. You must use an “if” statement to enter the label “U” or “F” in the column next to the relevant variance value (see the example in the worksheet).
Management is keen to know the breakeven point (BEP) for the firm.
- Calculate the contribution margin for Dance based on the standard unit cost. (1 mark)
Given that Run and Walk have contribution margins of $50 and $70 respectively, what is the BEP for the firm based on the budgeted production mix in the provided Excel data sheet? (3 marks)
The use of Excel and formulas is not required for this part.
- Refer to the variances in Part A, Schedule 2 that you have calculated. Select ONLY ONE (1) variance to follow up, i.e. the one that you think needs the most urgent attention (1 mark)? Explain why you would choose that particular variance to follow up in the light of the facts provided by the case (2 marks). Furthermore, in the light of the facts provided by the case, what would be the most likely reason that this particular variance has occurred (root cause) (1 mark)?
Do not use any citations in your answers to Part B
PART C: Discussion (pro-forma provided) (12 Marks)
Based on your analysis in Schedule 6 and the facts of the case, discuss why you would or would not recommend ABC. Also, provide further evidence for your discussion by referring to at least one (maximum three) article(s) from the literature (use the Internet or QUT’s database). Articles from professional or scientific journals/magazines that report on costing system (e.g. ABC) experiences will serve this purpose well. Textbooks such as Horngren et al. (2014) do not qualify as an article. Use the AREA critical thinking framework document on Blackboard under Lecture 2 to structure your discussion. Your discussion should be no longer than two pages (1.5 line spacing).