Acc203 Business Memorandum Answers Assessment Answers
A newly established brewing company in Sydney, Cool Brew Ltd, produces its main product, Cool Bay Draught, in 300 milliliter bottles.
There are two production departments: Mixing and Bottling. The manufacturing costs for each department during March 2013 were tabulated below.
|
Mixing |
Bottling | |
|
Direct materials |
$ 113 000 |
$ 17 000 |
|
Direct labour |
15 000 |
6 000 |
|
Manufacturing overhead |
32 000 |
9 000 |
In March 2013, Cool Brew Ltd produced 48 000 litres of Cool Bay Draught that was bottled into 160 000 bottles.
There were no beginning and ending work-in-process inventories.
Required:
(a) Calculate the cost per bottle for Cool Bay Draught
(b) Prepare the journal entries to record the production costs for March 2013, assuming that the costs of Mixing and Bottling Departments are charged to their respective work-in- process inventory accounts.
During October 2013, Kent Ltd’s material purchases amounted to 6 000 kilograms at a price of
$7.40/kg.
Actual costs incurred in the production of 2 000 units were as follows.
The standards for one unit of Kent Ltd’s product are as follows.
Required:
Calculate the following variances and indicate whether each variance is favourable or unfavourable:
- Direct material price variance; (b) Direct material usage variances; (2 marks) (c) Direct labour rate variance;
(d) Direct labour efficiency variance.
Sam, the manager of a local ice cream shop called Super Scooper, is disappointed at the loss-
making financial performance of his newly created fresh fruit juice counter. Sam has prepared following financial analysis for the year just ended.
|
Direct material |
$ 31 080 |
$7.40/kg |
|
Direct labour |
118 035 |
$18.30/hour |
|
Direct material |
Direct labour |
|
Quantity: 2 kg/unit |
Quantity: 3.5 hours/unit |
|
Price: $7.20/kg |
Rate: $18/hour |
|
Wages of counter staff |
$ 18 000 | ||
|
Consumables (e.g. cups and straws) |
6 000 | ||
|
Utilities (allocated) |
4 350 | ||
|
Depreciation of counter equipment and furnishings |
3 750 | ||
|
Depreciation of building (allocated) |
6 000 | ||
|
Super Scooper manager’s salary (allocated) |
4 500 | ||
Required:
(a) Evaluate Sam’s financial analysis for the year just ended;
(b) Provide a correct profit and loss analysis to financially assess whether the fresh fruit juice counter should be continued.
ABC Ltd has provided the following data relating to its two most popular models of an electronic
product.
|
Selling price |
70 |
120 |
|
Direct material |
15 |
22 |
|
Direct labour |
10 |
30 |
|
Manufacturing overhead @ $30/machine hour |
30 |
60 |
|
Monthly demand (units) |
40 000 |
24 000 |
The fixed manufacturing overhead component included in the above unit costs is $20 per machine hour.
On the very first day of June, a major piece of manufacturing equipment was damaged. It would take two weeks for replacement parts to arrive from Switzerland.
Consequently, there would be only 60 000 machine hours available in June to manufacture the two models of the electronic product.
Required:
(a) Given the limited machine hours available in June, conduct an appropriate financial analysis.
(b) Based on the above financial analysis, determine how many units of each product should be produced in that month to maximise ABC Ltd’s profitability.
Answer:
- a) The addition of the costs incurred in each of the two departments i.e. mixing and bottling would provide an estimate of the total costs. This process is conducted as highlighted below.
Mixing department (Total costs) = $113,000 + $15,000 + $32,000 = $ 160,000
Bottling department (Total costs) = $17,000 + $6,000 + $9,000 = $ 32,000
Production costs for March 2013 comprising of both departments = $ 160,000 + $ 32,000 = $ 192,000
Also, it is known that in March 2013, the number of bottles produced were 160,000.
The cost of each bottle would be the total production costs divided by the total quantity of production i.e. (192000/160000) which would yield cost per bottle as $ 1.2.
- b) The following journal entries have been prepared considering that the work in process is different for the two departments (Bhimani, Horngren, Datar & Foster, 2017).
- a) The formula for direct material price variance is as highlighted below (Damodaran, 2015).
Direct Material Price Variance (SP-AP)*AQ
Based on the given information, SP = $7.2/kg, AP = $7.4/kg and AQ = ($31.080/7.4) = 4,200 kg
The variance computed above is unfavourable owing to the fact that the actual price per unit material exceeded the budgeted or standard price per unit material.
- b) The formula for direct material usage variance is as highlighted below (Parrino & Kidwell, 2014).
Direct Material Usage Variance = (AQ-SQ)*SP
Based on the given information, SP = $ 7.2 per kg, SQ = 2*2000 = 4,000 kg, AQ = ($31.080/7.4) = 4,200 kg
The variance computed above is unfavourable owing to the fact that the actual consumption of quantity has exceeded the expected or budgeted quantity consumption.
- c) The formula for direct labour rate variance is as highlighted below (Drury, 2016).
Direct labour rate variance = (AR-SR)*AH
Based on the given information, AR = $18.30/hr, SR =$18/hr, AH= ($118,035/18.3) = 6,450 hours
The variance computed above is unfavourable owing to the fact that the actual labour cost exceeded the budgeted or standard labour cost per hour.
- d) The formula for direct labour efficiency variance is as highlighted below (Damodaran, 2015).
Direct labour efficiency variance = (AH-SH)*SR
Based on the given information, SR =$18 per hour, SH = 3.5*2000 = 7,000 hours, AH = ($118,035/18.3) = 6,450 hours
The variance computed above is favourable owing to the fact that the actual hours consumed for production are lower than the standard or budgeted hours expected for the production at the standard rate.
- a) The financial analysis that Sam has conducted in regards to the fruit juice business is not correct as the costs considered for computing profit are not limited to only the incremental costs that have been incurred because of the juice business. Taking into consideration the costs which were present to the same quantum before the business was established leads to over estimation of the costs and under estimation of the actual profitability of the business operations which is taking place for the juice business (Brealey, Myers & Allen, 2014).
- b) The appropriate financial analysis for the juice corner business is summarised below.
It is noteworthy that the above analysis does not include the following costs (Petty et. al., 2015).
- Building Depreciation – This was being incurred to the same even when juice counter had not been established and hence no contribution from the same should be attributed to this business.
- Manager Salary – The salary of the manager existed before the establishing of the juice counter and owing to the setting of this business, there has not been any incremental rise in the manager’s salary. Hence, incremental effect of the juice business on salary of manager is zero.
It is noteworthy that utility costs attributed to the business have been included owing to incremental utility consumption by the business.
(a) It is noteworthy that the fixed manufacturing overhead cost detail is present @ $20/hr. Taking into consideration the given data on total manufacturing overhead and the fixed manufacturing overhead, the variable overhead cost per unit can be estimated. The computation of the contribution margin per unit for Standard and Deluxe product is carried out below (Damodaran, 2015).
Considering that the fixed expenses associated with both the above products are the same, hence Deluxe model is more profitable in comparison with the Standard model (Parrino & Kidwell, 2014).
Owing to limited availability of machine hours and the objective of maximising the profit, it is essential that the production of that model ought to be maximised which deliver a higher profit per machine hour consumed. The superior model in this context can be identified from the following table (Drury, 2016).
Hence, it is apparent that for the month of June, superior option is Standard model.
- b) It is known that standard model monthly demand is 40,000 units which would need to b fulfilled on priority. Since every unit of standard model consumes 1 hour of machine hour, thus 40,000 machine hours would be consumed. Since, 60000 machine hours were available at the beginning of June, hence 20,000 machine hours would be left which would be used for production of the Deluxe model. As Deluxe model consumer two machine hour for producing one unit, hence number of units produced for this model would be (20000/2) = 10,000 units
In the month of June, the company should produce 40,000 and 10,000 units of standard and deluxe model respectively for maximising profits.
References
Bhimani, A., Horngren, C.T., Datar, S.M. & Foster, G. (2017), Management and Cost Accounting 4th ed. Harlow: Prentice Hall/Financial Times
Brealey, R. A., Myers, S. C. & Allen, F. (2014) Principles of corporate finance, 6th ed. New York: McGraw-Hill Publications
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York: Wiley, John & Sons.
Drury, C. (2016) Cost and Management Accounting: An Introduction. 6th ed. New York: Cengage Learning
Parrino, R. & Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London: Wiley Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M. & Nguyen, H. (2015). Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education, French Forest Australia
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