Question 1 Manufacturing Statement and Profit and Loss (20 marks) Jupiter Australasia Ltd hasrecently acquired the Kiewa Milk Co in north-east Victoria and you have been seconded there as part of yourmanagement accounting graduate role. The CEOof Kiewa Milk Co has mentioned the term ‘production constraint’ to you on a number of occasions and you are unsure what she is referring to. You decide to conduct your own research (which goes beyond the text) to find out what a ‘constraint’ is in a manufacturing environment. Required: Discuss the notion of production capacity in a manufacturing environment. Your answer should discussthe different meanings oftheoretical capacity and practical capacity asthey are applied inmanufacturing firms. Describe some of the constraints which may impact on the productive capacity of a manufacturing company. In your answer also address the ‘relevant range’ concept as it is applied inmanagement accounting andasitrelatesto capacity constraints(300-450words). Please ensure that you properly reference allsources(including websites) and avoid simply cutting andpasting
Question 2 ComprehensiveManufacturingBudget (40 marks) This question builds on prior studies and relates to learning material and objectives from Topics 1, 2, 3 and 4. Attached is an example of a ‘Sale Production Budget – Schedule of Manufacturing Costs’ which may assist you in approaching this question. You have been asked to prepare a 5 year budget forecast for the Kiewa Milk Dried Infant Formula canned product. The recently purchased Kiewa Milk Co utilises a traditional manufacturing cost flowinventory and accounting system. Unitsales ofthis product have been rapidly increasing overthe pastthree years with year on year growth of more than 20% per annum partly driven by Chinese Daigou shoppers who are satisfying the demand amongst the increasingly wealthy Chinese upper and middle classfor high quality dairy products afterseveralscandalsinvolving Chinese-made produce. The Kiewa Milk Co has also been able to increase its per unit price of its infant formula by more than double the rate of inflation for each of the last three years. The marketing department are confidentthatthese per annumincreases will hold forthe nextfive years. The Strategic Planning Committee ofJupiter Australasia Ltd are finalising plansforthe new division andhaveaskedyoutoprepareacomprehensive5yearbudgetfortheDriedInfant Formulaproduct line. As at June 30th, 2020 the following financial and trading data was provided: 2020 Financial Year data Sales (Units) 27.65 million Price (average 2020 price per unit received) $2.300 Prime Costs (per unit) Ingredients & Canning $0.725 Direct Labour $0.040 Other Variable Manufacturing Costs (per unit) $1.250 Annual Fixed Manufacturing Overhead $5,000,000 Inventory on Hand (at valuation): Ingredients & Packaging (335,000 equivalent units) $235,625 Finished Goods (325,000 units) $727,500 All variable manufacturing costsincluding direct labour and ingredient costs are expected to increase annually atthe rateofinflation. Allmanufacturing costs are variable and are assumed to vary directly with production (other than fixed manufacturing overhead). The current inflation rateof 2.0% is expected to hold overthe 5 year budget period. TheDried Infant Formula factorymaintainstargetsafety stock ofrawmaterialsinventory and tin can inventory amounting to the equivalent of one (1) week of the current year’s budgeted unit production. Finished goods inventory levels are kept at the equivalent of one (1) week of the current year’s budgeted unit sales. The Dried Infant Formula division does not utilise a Work in
Processinventoryaccount. The Dried Infant Formula factory has been operating out of its site in the small town of Tangambalanga in the Kiewa Valley for almost 100 years and has undergone numerous upgrades. Themanufacturing facility is currently operating at almost 80% ofits estimated total practical manufacturing capacity of 35 million cans of baby formula per year. Required: (a) Five Year Budget (25 marks) For the 5 year budget period prepare: i. Sales, Production and Purchases budget ii. Budgeted schedule of Cost of Goods Manufactured (COGM) iii. Budgeted schedule of Cost of Goods Sold (COGS) andGross Profit calculation Please note that marks will be awarded based both on the accuracy of your answer and on your spreadsheet design and formula use. The solution should incorporate the use of the IF, ROUND and ‘Absolute Referencing’ functions in Excel. Use the IF formula to constrain unit sales to the production constraint. All 5 years of each budget should be shown side by side (1 column per year) for ease of comparison by management. All of the budgets should be presented on one worksheet together, working down the page commencing with the Sales, then Production budgets, COGM, through to Cost of Goods Sold and Gross Profit calculation. You should be able to drag the formula across for the whole of the budget if the first years are properly constructed with a data input section and using absolute referencing. This makes the process much quicker and easier. (b) The Jupiter Australasia StrategicManagement Committee has developed plansto have the factory completely overhauled in the next year(2021) which will double the capacity of the factory. The cost of the upgrade will be incurred as an additional $4 million Fixed Overhead manufacturingcostper annum. Using the flexibility ofthe excelmodel developed in part(i) calculate the impact on sales and gross profitifthe option of upgrading themanufacturing facility is exercised and the practical production capacity of the factory is increased by 100% and an extra manufacturing cost of $2 million is incurred each year from 2022. (Submit results as a separate worksheet). (5 marks) (c) Given your findings from part (i) and (ii) above, write a report for the Strategic Management Committee of Jupiter Australasia recommending whether to take up the option to upgrade the production facility. In your report consider all of the strategic and financial implications to the firm of reaching its production constraint and any implications or opportunities arising from upgrading the facility and having extra productive capacity. Your grade will depend on the accuracy and depth of your analysis, and your capacity to identify strategic issues which management should consider when making their decision (approx. 300 words).
Question 3 Activity Based Costing (ABC) (20 marks) This question builds on prior studies and relates to learning material and objectives from Topic 6. JupiterAustralasia Ltdowns VictoryMowers amanufacturer of gardening equipment which is sold domestically within Australia and to an increasing export market. Victory Mowers manufactures two different models of lawnmowers: the cheaper ‘Lawnmaster’ and the environmentally-friendlyandmore expensive ‘GreenMachine’.Adispute has arisenbetween seniormanagement atVictoryMowersoverthe strategicdirection ofthe company.The CEOof Victory, a former marketing executive, wishes to focus more strongly on developing the environmentally friendly ‘Green Machine’ as he believes it has a higher gross margin and is more profitable than the ‘Lawnmaster’. The ‘Green Machine’ is sold as a premium product through specialist mower dealers while the mass produced ‘Lawnmaster’ is sold as a basic model through the Bunnings Hardware chain. In contrast to her CEO the divisional management accountant has argued thatthe standard costing systemis notsuited to these products andmay producemisleading results. The Strategic Management Committee of Jupiter Australasia Ltd has asked for an analysis of the costing system to provide advice regarding the two models. Currently, Victory Mowers operates a standard costing systemwhere identifiable direct costs are charged to each product and manufacturing overheads are allocated using direct labour hours (DLH) as the sole cost driver. The following data is provided for the 2020 financial year: 2020 Sales and Cost estimates Lawnmaster Green Machine Forecast Sales (Units) 200,000 25,000 Selling price per unit($) $200 $300 Prime Costs per unit $100 $150 DLH per Unit 2.5 2.5 The activity costs budgeted for overhead forthe 2020 financial year and related activity cost driverswereasfollow: OH Activity OH Cost Cost Driver Amount of Cost Driver Lawnmaster Green Machine Set Ups $493,750 Number of Set ups 25 50 Laser Cutter $1,100,000 Machine Hours 30,000 10,000 Machining $2,100,000 Machine Hours 50,000 15,000 Assembly $1,250,000 Labour Hours 50,000 25,000 Packing $1,800,000 Number of Orders 1000 500
Required: (a) Using the currentstandard costingmethod of applying overhead using directlabour hours developa spreadsheetto calculate for eachmodelthe expected: i. Gross Profit perunit, ii. GrossProfitmargin($GP/$Sales), iii. TotalGross Profit perModel,and iv. Total Firm Gross Profit. (8 marks) (b) Using the overhead activity and cost data provided conduct the same analysis utilising Activity Based Costing (ABC)techniquesto allocate activity-based costs and again calculate for eachmodeltheexpected: i. Gross Profit perunit, ii. GrossProfitmargin($GP/$Sales), iii. TotalGross Profit perModel,and iv. Total Firm Gross Profit. (8 marks) (c) What advice would you give the Strategic Planning Committee and the management of VictoryMowersregardingtheappropriatecostingsystemandthecomparableprofitabilityof the two products? Provide an analysis explaining the reasons for the different outcomes achieved between using Standard Costing overhead allocation andABC overhead allocation. (150-200 words) ( 4 marks) Question 4. Standard Costing and Variance Analysis (20 marks) This question builds on prior studies and relates to learning material and objectives from Topic 5. Whilstundertaking yourrecentanalysisof costingatVictoryMowers younoticedsome anomalies in the variance reporting on the standard costing system. Budgeted costs for the ‘Lawnmaster’ mower for the previous month were as follows: Standard Amount per output unit Standard Price per input unit Direct Material (Pressed steel lineal metres) 50cm (per unit) $70 (per metre) Direct Labour 2.5 hrs (per unit) $30 (per hr) The firm produced 11,000 units during the last month and actual direct labour hours worked amounted to 28,200 hours at a cost to the firm of $851,000. Manufacturing of 11,000 mowers during the month consumed 6,500 linear metres of pressed steel which was purchased for $390,000