Answers
Answers
Answers
(a)
Keypads
$
164,000
Variable costs
Materials ($160k x 6/12) + ($160k x 105 x 6/12)
($116k x 102)
Direct labour
Machine set-up costs
($26k $4k) x 500/400
($30k $6k) x 500/400
Display screens
$
118,320
60,000
40,000
27,500
231,500
30,000
208,320
44,000
4,000
33,600
81,600
313,100
328,000
14,900
58,000
6,000
38,400
102,400
310,720
344,000
33,280
Robber Co should therefore make all of the keypads and display screens in-house
(Note: It has been assumed that the fixed set-up costs only arise if production takes place.)
(Alternative method)
Relevant costs
Keypads
$
Direct materials
($160,000/2) + $160,000/2 x 105
$116,000 x 102
Direct labour
Heat and power
$64,000 (50% x $40,000)
$88,000 (50% x $60,000)
Machine set up costs:
Avoidable fixed costs
Activity related costs (w1)
Avoidable depreciation and insurance costs:
40% x $84,000/$96,000
Display screens
$
164,000
40,000
118,320
60,000
44,000
58,000
4,000
27,500
6,000
30,000
33,600
313,100
391375
41
018625
38,400
310,720
3884
43
0416
As each of the components is cheaper to make in-house than to buy in, the company should continue to manufacture keypads
and display screens in-house.
Working 1
Current no. of batches produced = 80,000/500 = 160.
New no. of batches produced = 80,000/400 = 200.
Current cost per batch for keypads = ($26,000 $4,000)/160 = $1375.
Therefore new activity related batch cost = 200 x $1375 = $27,500.
Current cost per batch for display screens = ($30,000 $6,000)/160 = $150.
Therefore new activity related batch cost = 200 x $150 = $30,000.
(b)
The attributable fixed costs remain unaltered irrespective of the level of production of keypads and display screens, because
as soon as one unit of either is made, the costs rise. We know that we will make at least one unit of each component as both
are cheaper to make than buy. Therefore they are an irrelevant common cost.
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Keypads
$
41
289
Buy
Variable cost of making ($231,500/80,000)
($208,320/80,000)
121
05
242
Display screens
$
43
26
17
075
227
(a)
Non-financial factors
The company offering to supply the keypads and display screens is a new company. This would make it extremely risky
to rely on it for continuity of supplies. Many new businesses go out of business within the first year of being in business
and, without these two crucial components, Robber Co would be unable to meet demand for sales of control panels.
Robber Co would need to consider whether there are any other potential suppliers of the components. This would be
useful as both a price comparison now and also to establish the level of dependency that would be committed to if this
new supplier is used. If the supplier goes out of business, will any other company be able to step in? If so, at what cost?
The supplier has only agreed to these prices for the first two years. After this, it could put up its prices dramatically. By
this stage, Robber Co would probably be unable to begin easily making its components in house again, as it would
probably have sold off its machinery and committed to larger sales of control panels.
The quality of the components could not be guaranteed. If they turn out to be poor quality, this will give rise to problems
in the control panels, leading to future loss of sales and high repair costs under warranties for Robber Co. The fact that
the supplier is based overseas increases the risk of quality and continuity of supply, since it has even less control of
these than it would if it was a UK supplier.
Robber Co would need to establish how reliable the supplier is with meeting promises for delivery times. This kind of
information may be difficult to establish because of the fact that the supplier is a new company. Late delivery could have
a serious impact on Robber Cos production and delivery schedule.
(b)
Spontaneity: unlike goods, a service is consumed at the exact same time as it is made available. No service exists until
it is being experienced by the consumer.
Heterogeneity/variability: services involve people and, because people are all different, the service received may vary
depending on which person performs it. Standardisation is expected by the customer but it is difficult to maintain.
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(Also acceptable characteristics are that No transfer of ownership takes place when a service is provided and service
industries rely heavily on their staff, who often have face-to-face contact with the customer, and represent the organisations
brand.)
(c)
(ii)
(d)
(a)
Quarter
2010
Q3
Q4
2011
Q1
Q2
Q3
Q4
2012
Q1
Q2
Actual volume
of sales
000 units
Centred moving
average
000 units
Seasonal percentage
900
1,100
1,200
1,000
1,050
1,300
106875
111250
116250
120625
11228
08989
09032
10777
1,400
1,150
124375
128750
11256
08932
The average seasonal variations can now be calculated to see whether any adjustment to the percentages is required, since
they must be 40 in total.
13
Since the averages total 40057, each one needs to be reduced by 00014
2010
2011
2012
Total
Average
Rounded
Q1
Q2
11228
11256
22484
11242
11228
08989
08932
17921
08960
08946
Q3
09080
09032
Q4
10820
10777
18112
09056
09042
21597
10799
10785
40057
40001
Since the budgeting style has been an imposed one rather than a participative one, morale amongst staff is likely to be
low, since they have not been involved in the process at all.
Additionally, since sales targets appear to be unachievable and staff have not received performance related bonuses,
staff are not motivated to try and achieve targets since they feel like they are impossible to achieve. Team spirit will be
low and an atmosphere of doing the bare minimum is likely to exist.
Since budgets are imposed from the top down, the culture will not be one in which operational management generate
ideas, as they will feel like they are not appreciated and that their views are not taken into account.
Business
Since sales levels are overestimated, production volumes must also be too high. As well as this leading to high inventory
costs because actual sales are then lower than expected, since the product is also perishable, waste levels have probably
been high. These will be significant costs to the company.
(a)
Also, when customers do receive their goods, it is likely that they will be close to their expiry date, since they will have
been taken from inventory that has been held for some time. This will be frustrating for customers because products
may then perish before the end customer gets to use them. Also, it is likely that a sauce that is two months old does
not taste as good as a sauce that is only a few days old. Both of these factors may be causing damage to the companys
reputation.
Too many staff are probably being employed in the business, bearing in mind that the staffing levels will be related to
forecast production volumes. One can only assume that whilst initially, production volumes relate to the forecast, as it
becomes apparent that sales are not as high as anticipated and inventory levels increase, production slows down. Staff
are probably sitting idle for some of the time, which is demotivating for them and costly to the company.
Variance calculations
Sales market share:
Revised budgeted sales
Actual sales
at std contribution per unit of $44
Sales market size
Original budgeted sales
Revised budgeted sales
at std contribution per unit of $44
900
960
60
$2,640
1,000
900
100
$4,400
14
units
units
units
F
units
units
units
A
$182 A
$576 F
$960 F
$192 F
$365 F
$151 F
Total
Reconciliation Statement
Budgeted sales revenue
Budgeted standard variable cost
Budgeted contribution
Sales contribution variances
market share
market size
Variable cost variances
Materials
price
usage
Labour efficiency
Variable overhead
efficiency
expenditure
$
80,000
(36,000)
44,000
2,640
(4,400)
(182)
576
(1,760)
42,240
394
960
192
365
Actual contribution
(b)
557
44,151
TQM relies on a culture of continuous improvement within an organisation. For this to succeed, the focus must be on
quality, not quantity. The cost of failing to achieve the desired level of quality must be measured in terms of internal and
external failure costs.
Traditional variance analysis focuses on quantity rather than quality. This could mean that, for example, lower grade
labour is used in an attempt to reduce costs. This would be totally at odds with a TQM culture, which is the basis of
the problem of the two systems running side by side.
A traditional standard system allocates responsibility for variances to the different departmental managers. When a TQM
system is adopted, all employees roles in ensuring quality are highlighted and everyone is seen as equally important in
the quality assurance process. This difference would make it difficult for the two systems to co-exist.
Traditional standard costing systems usually make allowances for waste. This would be totally contrary to the TQM
philosophy, which aims to eliminate all waste.
Continuous improvement makes the standard cost system less relevant due to regular small changes to the process.
It would seem to be the case that the two systems would struggle to co-exist at Lock Co.
(a)
ROI
Return on investment
= net profit/net assets
Division B
$311,000 x 12/$23,200,000 = 1609%
Division C
$292,000 x 12/$22,600,000 = 155%
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(b)
Residual income
Net profit
Less: imputed interest charge
$226 x 10%
$232m x 10%
Residual income
(c)
B
$000
3,732
C
$000
3,504
(2,260)
(2,320)
1,412
1,244
(d)
(2,532)
1,332
This calculation shows that, if the investment is undertaken, RI is actually lower than without the investment. So, if either
ROI or RI is considered by Division Bs manager when deciding whether to undertake the investment, the investment will not
be undertaken. This decision will be in the best interests of the company as a whole, since the RI of the investment alone is
actually negative ($132k $212k = $(80k)).
(e)
Behavioural issues
The staff in both divisions have been used to meeting targets and getting rewarded appropriately. Suddenly, they will find that
even though in reality divisional performance has improved, neither division is meeting its ROI target. This will purely be as
a result of the inclusion of the head office costs. The whole basis of being assessed on uncontrollable apportioned costs is
questionable in the first place. However, if it is going to be done this way, at the least the target ROI must be revised.
Staff are likely to become frustrated with a new system which is inherently unfair. This could give rise to staff organising
themselves together in order to oppose the system. At the least, they are likely to become quickly demotivated, working slower
than possible and perhaps withdrawing things like voluntary overtime. The cost to the company as a whole is likely to be
high and the situation needs to be resolved as quickly as possible.
16
(a)
1
05
1
3
1
05
1
(Method 2)
Direct materials
Direct labour
Heat and power
Avoidable fixed costs
Activity related costs (w1)
Avoidable depreciation and insurance
Total relevant cost of manufacturing/cost per unit
Conclusion
(b)
(c)
1
05
1
1
2
1
05
1
1
1
1
1
1
1
1
Non-financial factors
Per factor
1 or 2
20
Maximum
Total marks
17
Marks
2
(a)
Steps
Develop product
Set target price
Set profit margin
Set target cost
Close gap
Value engineering
Negotiate
1
1
1
1
1
1
1
Maximum
(b)
Characteristics
Spontaneity
Heterogeneity
Intangibility
Perishability
Other
1
1
1
1
1
Maximum marks
(c)
(d)
(ii)
Difficulties
Each difficulty explained
20
Total marks
(a)
(b)
3
2
1
1
1
1
1
10
Likely impact
Per point discussed
10
20
Total marks
18
Marks
4
(a)
(b)
Reconciliation statement
Variance calculations
Market share
Market size
Material price
Material usage
Labour efficiency
Variable overhead efficiency
Variable overhead expenditure
Reconciliation statement
15
15
1
1
1
1
1
4
12
2
1
20
Maximum marks
Total marks
(a)
(b)
(c)
ROI
ROI for B
ROI for C
1
1
RI calculations
RI for B
RI for C
15
15
Discussion
ROI discussion
RI discussion
Extra ROI calculation under old method
Valid conclusion drawn
2
2
1
1
Maximum marks
(d)
(e)
2
1
2
Behavioural issues
ROI of investment
Per valid point
20
Total marks
19