MERMAID. Manufacturers of surf gear Established The firm

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1 MERMAID Manufacturers of surf gear Established 1960 The firm Mermaid (Boardies) is a manufacturer of items of surf gear. What began as a small family business has now grown into a firm with a large and very popular product range. The department of interest for this case is the Clothing Department of Boardies which produces the board shorts product range. The firm produces three lines in the range Surf, Sun and Sand. Some of the firm s products have a relatively short lifetime. It is quite possible that styles popular in one period are out of fashion by the next period. This is the case with the board shorts product range. 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 line of board shorts was produced and when overhead was a significantly smaller proportion of total cost than it is now. Materials for board shorts are fabric, cottons, and depending on the styles, zippers, buttons, Velcro and logos. At the present time the only material which is traced directly to the product is fabric. Cottons, buttons, zippers, Velcro and logos are treated as indirect materials (overhead). All on-costs on wages are treated as indirect costs (overhead). Standards are determined at the point when the product is initially designed, and 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 Clothing Department seldom has cost over-runs due to labour inefficiency. In the period which is the focus of this review two changes have been made in the manufacturing process. First, a slight change was made in the layout of the Clothing Department 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 fabric was purchased from Boardies fabric 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. An initial testing by our sewer master supported this claim. The fabric 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 division only (the Clothing Department), One product only ( Sand board shorts), and Selected tasks only. For example, apart from your recommendation to implement Activity Based Costing rather than continue using a plant-wide overhead rate (Question 4), at this stage none of AYB225 Assignment Sem

2 the other costing systems used by the firm and described in the third paragraph of the case is subject to review. Therefore they should not be mentioned in any of your answers. Some of the issues which have prompted the review are: Various pressures from competitors seeking the advantages of life on Queensland s fabulous Gold Coast 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 Boardies 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 (Surf, Sun, Sand in this product range). 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. (1) 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. (2) Any comments about the way fixed overheads are treated. Management is aware of the problems associated with separating out certain costs by product, and will adjust for this when it combines the individual reports by product line. For example, the way the fixed overheads in total are treated (dividing them across the three products) may be of concern to you, but you are not to include comments about this in your answers. Use all data as given, including all the fixed overhead figures ($8,000 budget, $8,400 actual, and $4 per DL hour overhead rate) without trying to fine-tune those figures in any way. (3) Management has extensively reviewed the budgeting process of the firm and is happy that all budgets have been appropriately set. Therefore you should not include any issues related to the firm s budgeting process. (4) 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. (5) The information you provide will be combined with information relating to the other lines ( Surf and Sun ) for further analysis. This additional analysis and any issues which may result from combining the information are outside the scope of this case. (6) Finally, you have been asked to be as concise as possible with your responses. Do not include unnecessary padding in your answers. Do not use introductions and conclusions in any of your answers to management s questions. Management has set out a pro-forma (pro-forma 1) indicating the way they want you to structure your answers. AYB225 Assignment Sem

3 Material Required as part of Review Sand Board Shorts You are to assist the review process by providing management with the following items related to the product line Sand Board Shorts. 1. Short answers to four 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 of a standard in terms of English expression that would be acceptable in business. 2. Eight technical reports. Management is considering various costing system options. To facilitate their decision-making they have requested the preparation of these schedules. PART A: Answers to management questions (pro-forma 1).. (12 Marks) Please ensure that your answers (when completed) are exactly in the form of the example provided in the document Instructions and Check Figures on Blackboard. (1) Given the good reputation of the firm s labour, management is perplexed at the unfavourable efficiency variances which resulted in the period. Taking each of the variances separately under the headings provided in the pro-forma, suggest possible reasons (deriving from the facts provided in the case) that the firm has used more material and more DL hours than it should have. It is likely that for part of your answer a suggested reason may apply to more than one variance. Where this is the case, particular care needs to be taken with your written expression. As for all written expression you must be concise and succinct. (2) Management is keen to have more confidence in its product costs. One way to achieve this would be to implement Activity Based Costing (as you will recommend in (4) below). There are other improvements that this firm could make to the way the firm is currently costing its products which may provide product costs in which management of the Clothing Department can have more confidence (costs which would be less subjective). Identify and explain two improvements that can be made to the costing system based on the facts provided in the case. (50% each) (3) Management is uncertain about the meaning of the fixed volume variance. They have commented: the fixed OH volume variance is favourable, so this must mean that everything is OK there. Explain to management the meaning of the variance and why their observation is incorrect. (50%) In addition, following on from that explanation, explain related consequences for the firm given other concerns that management has raised, (50%) (4) Explain to management why you would recommend the implementation of ABC. Support your recommendation using the results of the analysis in schedule 8 (weighting 25%). Also indicate at least six other characteristics of Boardies (facts given in the case) which indicate that ABC will be beneficial to the firm (weighting 75%). AYB225 Assignment Sem

4 PART B: Schedules required - schedules 1-8 (pro-forma 2). (8 Marks) Complete schedules in the appropriate spaces on pro-forma 2. Apart from line-spacing to ensure that you fit each schedule on one page only, do not change the schedules in any way. Do not delete any parts of the pro-forma. Show all required working in the relevant spaces, and only show required working. Variance report related to units produced. (Schedule 1) Calculation of standard costing cost variances relating to the product Sand. The firm calculates price variances for all manufacturing costs, efficiency variances for all variable manufacturing costs, and a fixed overhead volume variance. The material price variance is calculated on usage. (Schedule 2) The Standard Absorption Costing Income Statement for the period, with relevant variances expensed to the period. (Schedule 3) Recast the Income Statement (with relevant variances expensed to the period) assuming standard variable costing. (Schedule 4) Recast the Income Statement (with relevant variances expensed to the period) assuming normal absorption costing. (Schedule 5) Recast the Income Statement (with relevant variances expensed to the period) assuming normal variable costing. (Schedule 6) Show the journal entries for the period under the costing system currently used by the firm. Except for the fact that narrations are not to be included, journal entries must be presented in proper form. (Schedule 7) Prepare a comparison of overhead costs per product under the existing costing system (a plantwide rate based on DL hours) with an Activity Based Costing system using the cost pools and cost drivers identified in the data. (Schedule 8) (Working for schedule 8 is to be shown in Appendix 1 Optional: If you want to be eligible for up to 3 bonus marks then you are required to use Excel for the ABC calculations. This means, you build a dynamic Excel model using formulas. The formulas will have to refer to other cells in the worksheet that either contain the original values, e.g. machine hours per unit, order times etc. or to formulas from a previous step. If you use Excel for Schedule 8, Schedule 8 will be marked out of 4 instead of 1. If you elect to do Schedule 8 in Excel, use the Excel pro-forma provided. You need to create the appropriate formulas in the Input sheet and also in the Report sheet The report sheet printout should look similar to the Word pro-forma for Schedule 8. In addition print out the formulas for both sheets.. NOTE: The maximum you can score for this assignment is 20 marks even though in theory your total, including bonus marks, may exceed this (12+8+3). AYB225 Assignment Sem

5 Selected data Board Shorts Product Range Product Line Sand All data relates to the period under consideration in this review, and actual and standard costs per unit are unchanged from the previous period. Non-manufacturing costs Budgeted and actual selling and administrative costs related to Sand are variable costs of $0.75 per unit sold, and fixed costs of $1,500 for the period. Budget (standard cost) data Production budget (standards) for 2,000 units: Direct materials (fabric) 1.4 $9.50 metre $13.30 per unit Direct labour 1 $18 hour $18 per unit Variable overhead 1 DL $3 hour $3 per unit Fixed overhead 1 DL $4 hour $4 per unit $38.30 per unit Overhead costs for Sand have been determined as follows: An overhead budget is determined for a particular period for the Clothing Section as a whole. Budgeted fixed overhead for the relevant period is $16,000. This cost is shared across the three product lines for budgeting and variance calculation purposes in proportion to the budgeted direct labour hours. This means that budgeted fixed overhead for Sand is $8,000. The fixed overhead rate is calculated taking standard (budget) data for all three lines of the product into account as follows: Sand 2,000 1 DL hour/unit 2,000 DL hours Sun 1,200 ½ hour/unit 600 DL hours Surf DL hours/unit 1,400 DL hours 4,000 DL hours = $4 per DL hour ($16,000/4,000) Actual data There is no opening or closing WIP, and no inventory of direct materials on hand at the beginning of the period. Opening inventory of finished goods is 500 units at the standard cost of $38.30 per unit. Units produced in the period - 2,500 units. Units sold in the period - 2,100 $96/unit. Purchases of direct materials for cash 5,000 $9.70 metre Direct materials used in the period 3,750 metres Direct labour hours worked in production 2,850 DL $18 DL hour Actual variable overhead $3.10 per DL hour Sand s share of actual fixed overhead $8,400* * Actual fixed overhead incurred by the Clothing Department is $16,200, shared for the purposes of variance calculation in proportion to the actual direct labour hours incurred. After consulting data related to Surf and Sun, Sand incurs actual fixed overhead of $8,400. (For the journal entries, credit Accounts Payable for actual overhead incurred.) Additional data collected overhead costs Sun and Sand include features that make them relatively machine intensive and involve considerable time in setting up equipment involved in design, drawing, cutting, tracing etc (called setup ). An analysis of overhead costs in the Clothing Department shows that the costs can be grouped into four categories: costs driven by direct labour hours costs driven by machine hours, costs related to ordering and transportation, which are driven by the number of orders, and costs related to setup, which are driven by the number of setups in the period. An analysis of the overhead costs for the Clothing Department into those three categories results in the following cost pools: OH Cost Pool Budgeted OH Costs (Clothing Department) DL-related $ 1,000 Machining $ 8,250 Ordering/transport costs $ 12,750 Setup costs $ 6,000 $28,000 Expected usage of the resources by the different products (based on budgeted production) is reproduced below: Surf Sun Sand Budgeted production units 2,000 1, DL hours per unit 1hr.5hr 2hr Machine hours per unit.5hr 2hr 3hr Number of orders in the period Number of setups in the period AYB225 Assignment Sem

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