Reference no: EM13955850

CASE STUDY 1:

Perfect Spuds (PS) operates at capacity and processes potatoes into potato cuts at its highly automated plant. It sells potatoes to the retail consumer market and to the institutional market, which includes hospitals, cafeterias and university dormitories.

PS's simple costing system has a single direct cost category (direct materials, which are the raw potatoes) and a single indirect cost pool (production support). Support costs are allocated on the basis of kilograms of potato cuts processed. Support costs include packaging materials. The 2013 total actual costs for producing 1.000.000 kilograms of potato cuts (900 000 for the retail market and 100 000 for the institutional market) are:

• Direct materials used $150 000
• Production support $983 000

The simple costing system does not distinguish between potato cuts produced for the retail and the institutional markets. At the end of 2013, PS unsuccessfully bid for a large institutional contract. Its bid was reported to be 30% above the winning bid. This feedback came as a shock because PS included only a minimum profit margin on its bid.

Moreover, its plant was acknowledged as the most efficient in the industry. As a result of its review process of the lost contract bid, PS decided to explore ways to refine its costing system.

First, it identified that $188 000 of the $983 000 total production support costs related to packaging materials and could be traced to individual jobs ($180 000 for retail and $8 000 for institutional). These costs will now be classified as direct materials. The $150 000 of direct materials used were classified as $135000 for retail and $15 000 for institutional.

Second, it used ABC to examine how the two products (retail potato cuts and institutional potato cuts) used indirect support resources. The finding was that three activity areas could be distinguished:

• Cleaning activity area: PS uses 1 200 000 kilograms of raw potatoes to yield 1000000 kilograms of potato cuts. The cost- allocation base is kilograms of raw potatoes cleaned. Costs in the cleaning activity area are $120000.
• Cutting activity area. PS processes raw potatoes for the retail market independently of those processed for the institutional market. The production line produces:

i. 250 kilograms of retail potato cuts per cutting-hour and

ii. 400 kilograms of institutional potato cuts per cutting-hour. The cost-allocation base is cutting-hours on the production line. Costs in the cutting activity area are $231000.

• Packaging activity area. PS packages potato cuts for the retail market independently of those packaged for the institutional market. The packaging line packages: (a) 15 kilograms of retail potato cuts per packaging-hour and (b) 50 kilograms of institutional potato cuts per packaging hour. The cost-allocation base is packaging-hours on the production line. Costs in the packaging activity area are $444 000.

REQUIRED:

A. Using the simple costing system, what is the cost per kilogram of potato cuts produced by PS?

B. Calculate the cost rate per unit of the cost driver in:

i. cleaning,

ii. cutting and

iii. packaging activity areas

C. Suppose PS uses information from its activity cost rates to calculate costs incurred on retail potato cuts and institutional potato cuts. Using the ABC system, what is the cost per kilogram of:

i. retail potato cuts and

ii. institutional potato cuts?

D. Comment on the cost differences between the two costing systems in 1 and 3. How might PS use the information in requirement 3 to make better decisions?

CASE STUDY 2:

William Bill is the production manager for Cheetah Motors Ltd and is responsible for preparing the production budget for the Cheetah car that the company manufactures. During the previous year, new robots were installed on the production line that significantly increased fixed factory overheads but reduced the amount of labour involved in production and the amount of material wasted due to improved efficiency.

In preparing the production budget for the next year, William decided to 'cut himself a bit of slack'. Because the cost structure of the production line had changed so much as a result of the new robots, William decided that in the first year of their introduction he would set a production budget that was easy to meet and management would not be able to recognise this as they couldn't compare it with previous production budgets.

William received a bonus if positive production variances were greater than 10%. By not reducing the amount of labour or materials costs in the budget by the amount that the new robots should save, William believed he was in for an easy year with a guaranteed bonus at the end.

REQUIRED:

A. Who are the stakeholders affected by William's budget?

B. What are the ethical issues involved, if any?

C. How could the company stop its managers padding their budgets?

CASE STUDY 3:

Stafford Clothing is a manufacturer of designer suits. The cost of each suit is the sum of three variable costs (direct materials costs, direct manufacturing labour costs and manufacturing overhead costs) and one fixed-cost category (manufacturing overhead costs). Variable manufacturing overhead cost is allocated to each suit on the basis of budgeted direct manufacturing labour hours per suit. For June 2015, each suit is budgeted to take 4 labour-hours. Budgeted variable manufacturing overhead cost per labour-hour is $12. The budgeted number of suits to be manufactured in June 2015 is 1 040.

Actual variable manufacturing overhead costs in June 2015 were $52 164 for 1 080 suits started and completed. There were no beginning or ending inventories of suits. Actual direct manufacturing labour-hours for June were 4 536.

Stafford Clothing allocates fixed manufacturing overhead to each suit using budgeted direct manufacturing labour-hours per suit. Data pertaining to fixed manufacturing overhead costs for June 2015 are budgeted, $62 400, and actual, $63 916.

REQUIRED:

A. Calculate the flexible-budget variance, the spending variance and the efficiency variance for variable manufacturing overhead.

B. Calculate the spending and production-volume variance for fixed manufacturing overhead

C. Comments on the above results