Moriarty Ltd is a Small Manufacturing Company Producing Two Products: Management Accounting Assignment, DBS

Question 1 (Budgeting)

Moriarty Ltd is a small manufacturing company producing two products, W and D. Details for the products are as follows:

Sales forecast for the year to 31^st December 2021

Due to the seasonal nature of the company’s business 30% of the sales are expected to be made in the first six months of the year and the remaining sales in the second half of the year.

The selling price at the beginning of the year is €96 for product W and €108 for product D

Due to increasing costs, the company anticipates that it will have to increase the selling price of both products by 5% from July 1^st.

The following information is also available:

Even though sales are seasonal in nature, production of the company’s products and purchase of materials is spread evenly throughout the year.

It is expected that Raw material B will increase in price by 10% on 1^st September 2021 and an €0.80 per hour pay increase for grade 2 labor will come into effect on 1^st July 2021.

Planned closing inventory on 31^st  December 2020 was:

Product W                   2,800 units

Product D                   1,600 units

Raw material A           42,400 kilos

Raw material B           38,500 kilos

Management plan to reduce all closing inventory by 15% by the end of 2021.

Requirement

• Prepare a sales budget
• Prepare a production budget
• Prepare raw material usage budget
• Prepare a raw material purchases budget
• Prepare a labor cost budget
• Your CEO has heard the term ‘principal budget factor’ mentioned. However, doesn’t understand what it means. Write a brief memo to the CEO explaining the term in the context of the business and give two examples of possible principal budget factors that the company could possibly face in the future.
• These budget assumptions were created in early 2020 (as you see the company budgets well in advance and adjusts if necessary), do you think that the present COVID 19 pandemic may impact these number? If so explain to the CEO what steps may need to be taken and if there are any government schemes that the business could benefit from to assist its cash flow.

Question 2 (Cost Volume Profit)

Online Computer Gaming Ltd has developed new gaming software which is sold online at €45 per unit. Variable labor costs are €25 per unit, variable overheads are €7 per unit and fixed overheads for the year are budgeted at €195,000.

Required:

• Calculate the breakeven point in units and € value for the business.
• How many units will need to be sold in order to produce a profit of €65,000?
• What is the percentage margin of safety if 20,000 units are sold?
• If the company adds an on-line technical advice service which will be charged at a rate of €10 per request and will have variable costs of €5 and will add €50,000 to annual fixed costs, what will be the new breakeven where just 50% of the customer’s avail of the service?
• Briefly discuss the weaknesses of break-even analysis.
• Advise the CEO in a briefing memo whether he should continue to insist on CVP calculations being presented at management meetings.

Question 3 (ABC Costing)

Molloghan Ltd currently uses absorption costing. The following costs have been prepared using direct labor hours as a base for recovering overhead.

The management is currently reviewing the cost accounting policy in relation to overheads and is considering the implementation of an activity-based costing system.

The management accountant has done an activity analysis and divided the overhead cost into the following cost pools and drivers:

     Cost Pools                                                                                Cost drivers

Raw material handling          €28,025          number of material requisitions

Machine set-up costs           €34,400          number of set up hours

Machine related costs          €203,298        number of machine hours

Quality checks                       €70,488           number of inspections

Finishing and dispatch costs  €51,510        number of items

The following information is also available;

*You can assume that the machinery is set up for each batch.

Requirement

• Calculate the cost and profit per unit of the four products using activity-based costing.
• The production manager is an advocate of the introduction of ABC and has said that ‘all companies should adopt it as it will give the true cost of the products produced’.

Your CEO (not a management accountant) is not sure and has asked you to write a brief business memo where you compare the costs and profits for the four products with absorption costing giving possible reasons for the differences between both systems and critically comment on the production managers’ statement.

Question 4 (Traditional Costing)

Aungier Manufacturing Company Ltd. has three production and three service departments.

The primary analysis work relating to factory overhead expenses (such as power, rent, and rates, etc.) has already been done on the overhead analysis sheet which is in preparation for the imminently commencing financial year. This yields the following sub-totals for each department;

Service dept                            €

1                                         3,800

2                                         4,500

3                                         5,300

Production dept €

A                                 20,800

B                                 15,200

C                              11,400                                                    61,000

It is now necessary to complete the sheet and compute predetermined absorption rates to be used for the year ahead. A technical assessment for apportioning the costs of the service departments (reduced to percentage terms) gives the following figures:

Dept A                    Dept B                         Dept C

Labour hours                 8,000                           5,000                         200

Machine hours are       1,000                            600                         800

Requirement (see c, d & e on the following page)

• Show the remaining work to be done on the overhead analysis sheet by using the continuous allotment/ repeated distribution method of reallocating service department costs.

• Calculate appropriate overhead absorption rates for each department.

A regular product of the company is article Zed, whose prime cost per unit in the most recently concluded monthly accounting period was as follows:

Direct material

10kg. Raw Material X @ €12.25                             122.50

5kg. Raw Material Y @ €13.44                              67.20                                    189.70

Direct labor

3hrs Dept A @ €10                                                     30.00

1.5 hrs Dept B @ €8                                                   12.00

1hr Dept C @ €6                                                     6.00                        48.00

237.70

Machine utilization is expected to be :

Dept A                        4 hours

Dept B                        1 hour

Dept C                        2 hours

Administration and selling and distribution overhead came to €50 per unit.

Requirement

• Compute an expected production cost per unit in the upcoming year using the absorption rates you have selected in part (b) above.

Assume at the end of the period that actual overheads in Dept B were €20,438 and actual labor hours were 4,820 and actual machine hours were 1,110.

• Prepare and overhead control account for Dept B clearly explaining the reason for any under or over absorption.

• Your CEO has been reading about traditional costing and other cost measures. You have been asked to write a memo outlining whether traditional costing is the correct costing approach for the company. You are also asked to explain the reasons for preparing pre-determined overhead absorption rates based on budgeted information rather than actual overhead figures.

Question 5 (Marginal Costing)

Shedworld Ltd manufactures garden sheds. The company has always used an absorption costing system, but at a recent conference, the Managing Director discovered that many businesses use a variable costing system for internal reporting purposes. The Managing Director is unclear on the differences between absorption costing and variable costing and accordingly, is seeking your advice. Shedworld makes substantially more sales in the spring and summer months which involves building up stocks in the early months of the year.

The Managing Director has presented you with the following information regarding the company’s activities in 2019

Budgeted information for 2019        Per unit

Direct materials                                      4 meters * €9 per meter

Direct labor                                                2 hours * €10 per hour

Variable manufacturing overhead             €15

Variable selling overhead                          €8

Budgeted fixed overheads for 2019

Manufacturing                            €100,000

Selling                                         €145,000

The normally expected production volume per annum is 10,000 units.

The actual production for 2019 amounted to 10,600 units. The sales volume achieved for the year was 11,500 units with a unit selling price of €200. The actual fixed manufacturing overhead was €130,000 and fixed selling overhead was €145,000. All variable costs per unit were incurred as budgeted.

The opening stock of finished goods on 1^st Jan 2019 consisted of 3,000 units valued at €260,000 which included €30,000 with respect to fixed manufacturing overhead.

Requirement

• Prepare an operating profit statement for Shedworld for 2019 using
• Absorption costing
• Marginal/variable costing
• Referring to (a) above reconcile the operating profit as shown in the absorption costing statement and the marginal costing statement.
• Write a brief memo Advising the Managing Director as to the potential advantages and disadvantages of adopting marginal costing profit  statements for internal purposes compared to absorption costing and give your advice whether you believe marginal costing would be suitable for Shedworld.