AYB225 Management Accounting
You are to assist the review process of Sneakers Unlimited’s costing system by providing management with the following items related to the product line “Dance”.
- 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.