The materials are difficult to obtain and are made by only one supplier. There will be a delay in delivery of the ingredients for the next week so Bella Corporation will use the ingredients in an inventory of:

Material No. 45 – 500 kg

Material No. 96 – 1,000 kg

The weekly machine capacity is 40 hours.

The weekly labor time is 200 hours. Five employees are paid for a 40 hour week even if there is not enough work to fill 40 hours.

The corporation can sell all of its production.

Required:

1. Using a graphical approach calculates the most profitable production quantities for the week, given the constrained resources and calculate the net income which will be made.
2. In this particular week, the only resource which could be increased is  The company could obtain more labor time by paying overtime of  £10  per hour. Calculate how many hours should be paid for and calculate whether this action would improve net income, considering the other constraints which exist.

White and Co Ltd has a target to grow its net income before tax by 20% per year. It has several products in regular demand which generate the following performance each year:

White and Co Ltd also introduces more exciting products regularly with short lifecycles. The forecasts for the two products currently in production are:

The company’s common fixed costs are £1,600,000 in 2019 and are expected to increase by 2% per year.

Peritron’s first year of trading was 2019 and it is expected to cease trading in 2024.

A new product, the Deritron, has been developed and tested and is due to be launched in 2020. Attributable Development costs for Deritron of £2,000,000 were incurred in the years up to 2018. These were included in research and development expenses and were written off by including them in common fixed costs in the years in which they were incurred.

Deritron has the following expenditure forecasts:

Pre-product launch expenditure for Deritron of £200,000 will be incurred in 2019. It is expected that Deritron will not trade in 2026 and there will be disposal expenses of £350,000 in that year.

Deritron’s forecast attributable fixed costs and advertising costs per year are shown below:

Case 2. White and Co Ltd wish to know what the net income before tax would be in the years 2019 to 2025 if Deritron’s sales in 2020 will be £2,000,000 and for each year of trading thereafter, its trading will follow the ratios of sales growth and variable costs as a percentage of sales seen in Peritron’s forecasts.

Required

1. Calculate the sales and variable costs for Deritron and produce a  long-term budget for the years 2019 to 2025 for the company as a whole.
2. Calculate the percentage net income growth for each year from 2020 and comment on the results, considering that White and Co Ltd has a target of 20% growth in net income before Advise White and Co Ltd on other strategic measures which would help to meet their targets.
3. Show the product life cycle budget for Deriton and briefly comment on the performance of the products.

Case 3. Donald Inc. is a USA based manufacturing company that focuses on the production of fashionable table lamps under the “Ambience” brand name. It produces two models: the ‘Standard’ and the ‘Super’. While the company has been reasonably profitable in recent years the results have been variable. CEO Tom Kerridge feels he is not fully in control of the company’s finances. In particular, he was disappointed with the latest results, which showed an operating loss.

The company’s system of budgetary control incorporates – on a marginal costing basis – standard product costs and detailed variance analysis. Standard product costs were calculated in 2018 in respect of the month of January 2019. They are shown below:

Analysis of the results for January 2019 (shown in the table below) are based on the following information:

• 12,000 units of the Standard Ambience were sold, (at an average price of $37.80 per unit), but only 9,000 units of the Super were sold (at an average price of $47.60 per unit).
• 49,000 lbs of Material W were consumed at an average price of $3.15, 35,000 lbs of X at an average price of $6.30 and 10,500 lbs of Y at $7.21.
• Direct Labour consisted of 12,000 hours at $15.40 and Variable Overheads rate was $6.30.
• The actual cost of packaging was $37,800; the company’s fixed expenses were $161,000 (compared with $140,000 originally budgeted).
• You also discover that the market changed in early 2019, so following the market trend, prices for the two categories of Ambience could have been Standard $39.20 and Super $46.20.

Tom Kerridge is very concerned to see a loss of $27,755 compared to the expected net income of $105,700

Required

1. Explain the difference between the budget and the flexed budget and calculate the sales volume contribution variance and the sales mix variance
2. Calculate the breakdown between price and efficiency variances for each of the cost variances shown in the variance column.
3. Calculate the material mix variance and explain what it means.
4. Calculate the ‘planning’ and ‘operational’ variances for the sales of both Standard Ambience and Super Ambience and explain how this information can be used.
5. Comment on the overall picture which emerges from the performance of Donald’s INC in January 2019 and identifies the areas which are most important for Tom to address.

Case 4. Carlos Camping Ltd manufactures tents and sleeping bags for the camping market. There are three separate production departments. The cutting department is automated with computer-controlled and laser-guided machines set up to cut the fabric components for batches of either tents or sleeping bags. The other separate departments assemble tents and sleeping bags by hand with operatives using traditional sewing machines. There are also two service departments: the material stores and the maintenance

The company currently operates a traditional absorption costing system in which production costs are calculated and consist of direct costs of materials and labor plus an apportionment of overhead costs by means of overhead recovery rates. In view of the fact that the staff in the cutting department are involved primarily in setting up machines and overseeing their activities, they are classified as ‘indirect’ rather than ‘direct’ labor. Shown below is a summary of the budgeted overhead apportionment exercise for 2019.

Direct Labour itself is charged to the Tents department at $17 per hour and to the Sleeping Bags department at $20 per hour.

The company manufactures five products: tents in ‘small’, ‘medium’, and ‘large’ sizes and sleeping bags in ‘adult’ and ‘youths’ sizes. Shown below is the information in respect of each product which is incorporated into the standard product costs for 2019.

Required

1. Calculate standard product costs for each of the five products on the traditional absorption cost basis, using the information given.
2. The company operates in a competitive market. The CEO, Tony, feels that the prices are dictated by ‘the market’. For 2019 he estimates the prices he will be able to charge for the Small, Medium, and Large tents are $77, $91 and $105 respectively, and for the Adult and Youths Sleeping bags $70 and $56. Using the concept of Target Costing he aims to manufacture his products at costs that give him selling prices at cost plus 25%. For each of the five ranges of products calculate the ‘Target Cost’.  
3. Tony wishes to investigate the effect of adopting Activity-Based Costing for the company’s standard product costs and to see if they would align more closely with the target costs. There are three activities that are currently subsumed within the overhead costs and which could be identified individually. In the cutting department, a considerable amount of time and resources are devoted to setting up the machine to cut the fabric to specific shapes and sizes. In both the tents and sleeping bags departments the overheads incorporate the cost of material movements and of inspections.

He asks you to prepare product costs on an ABC basis identifying those activities. In the cutting department, 50% of the apportioned expenditure ($740,000) relates to setups and 50% should continue to be recovered on a machine hour basis (i.e. $18.50 per m/c hour). In the tents, department and sleeping bags department (the total allocation of $918,000) can be split 50/50 between material movement and inspection. Tony advises that there will be 5,000 setups per annum, 10,000 materials movements, and 75,000 inspections.

The products are manufactured in batches and the following information relates to batch sizes, setups, material movements, and inspections.

1. Calculate rates per activity for set ups, material movements and
2. For each of the products, calculate costs per unit of set ups, material movements and inspections.
3. For each of the products calculate full standard product costs on an ABC
4. Comment on the outcome of the ABC exercise and discuss, where necessary, the steps Tony should take to establish a better alignment with the target cost.

Case 5. Gershwin Inc is a small company that sells its main product ‘The Copland’ through various outlets. In recent years demand for the Copland has been steady and the CEO, Susan, does not anticipate any dramatic changes. However, she does see an opportunity to introduce a similar new product ‘The Bernstein’.

Currently, the plant on which the Copland is manufactured is showing its age and is becoming increasingly unreliable. Breakdowns are frequent.

Susan has decided that the plant must either be thoroughly upgraded or replaced entirely. She has identified three options.

Option 1 is to undertake a major overhaul of the existing plant at a capital cost of $210,000. This would give the plant a further five years of reliable working life. Susan estimates that there will be a net cash inflow of $84,000 for each year of its five-year working life.

Option 2 is to purchase a new, and more efficient machine of the same capacity as the existing machine at a capital cost of $385,000. It should reduce the annual running costs and thus increase annual cash flow by $14,000 more than option 1. This level of the cash flow will continue for the machine’s working life of ten years.

Option 3 is to purchase an altogether larger machine that can produce both the Copland and Bernstein in the required quantities. This would have a capital cost of $700,000, would also have a ten-year life, and would bring in the same increase in annual net inflows as option 2. Additionally, for this option, Susan will cultivate sales of Bernstein. She hopes to see demand for the Bernstein grow steadily over the expected ten-year life of the plant. She estimates that sales of Bernstein will bring in a further $14,000 net cash inflows in year one compared to Option 2 and these will grow by $14,000 per year each year over the rest of the project life. She also recognizes that she will need to make a further investment of $70,000 in working capital at the start of the project.

The machines in all three options will have a zero value at the end of their working lives.

On the basis of these projections her accountant has correctly calculated the following Internal Rate of Return (IRR) for each option;

He is recommending the adoption of Option 1 as it has the highest IRR.

Susan however is not certain that Option 1 is the best choice and she turns to you for advice. You decide to do a more comprehensive appraisal embracing Payback, Accounting Rate of Return (ARR), and Net Present Value (NPV). For the latter, you identify that the company’s cost of capital is 10% per annum.

Required:

1. Explain the meaning of IRR.
2. Calculate the cash flows for each of the three options
3. Calculate the payback for each of the three options
4. Calculate the ARR for each of the three options
5. Calculate the NPV for each of the three options
6. Make a recommendation for the financially best option and explain to Susan the reasons why this option should be chosen.

Discount Factors at 10% per annum

Case 6. Highbury Components Ltd has received an order from Delta Production Ltd to produce 4000 units of Metalia, a newly designed component, to be delivered in eight weekly batches of 500 units for 8 weeks. Each batch involves direct labor working on machines for 50% of the time and 50% of the time without machines. The estimates for each batch are:

Material

Aluminum high grade 200 meters @ £3 per meter

500 packs of small components @ £0.10 per pack

Direct labor 40 hours @ 22 per hour

Machine variable overhead @ £2 per direct machine hour

Labour variable overhead @ £4 per direct labor hour

The agreed price per batch is £3,000, which is lower than Highbury Components Ltd.’s usual pricing policy, as their normal mark-up is 100% on variable costs. However competitive pressures mean that a higher price would lose them the work. They also expect that repeat orders will be made.

The purchasing and production departments have been asked to look at the possibility of reducing costs.

Required:

1. Calculate the variable costs for one batch and the normal price that would be charged.

2. Assuming that:

• The Aluminium price could be reduced by 6% for all orders after the first 400 meters have been bought.
• No discount is possible for the small components.
• An 80% learning curve will be experienced up to batch eight, after which no additional efficiency will be experienced.

Calculate the total cost of the first 8 batches and comment on the profitability of the total order.

3. Using the learning curve formula the following information has been obtained: The average hours per batch of cumulative production for 7 batches is 21.377 hours.

There will be no added efficiency for batches after batch 8. If the price is maintained at £3,000 per batch, calculate the contribution which will be made on each additional batch.

4. Explain the importance of decision making and control of knowing the learning curve effect.

Case 7. Explain why management accounting is as important in not for profit organizations (such as health care, education, and charities) as it is in private sector industries (such as manufacturing, retailing or service). With regard to one type of not for profit organization, describe how THREE management accounting techniques would be applied in that organization.

Case 8. With regard to FOUR of the management accounting terms listed below, explain their meaning, give an example of their use, and identify any problems with which users should be aware.

• Principal Budget Factor
• Job Costing
• Marginal Cost
• Ratio Analysis
• Margin of Safety
• Zero Based Budgeting