Reference no: EM133550021

Background:

You are a newly qualified management accountant who has recently been appointed as the junior management accountant for F&F Limited.
F&F Ltd is an Irish manufacturing business, who specialises in textiles, manufacturing several different lines of pillows and duvets ranging from basic to more deluxe options.

The company has several issues which they require your expert opinion. Olive the Managing Director ('MD') has approached you and asked you to write a detailed note on the issues set out below.

Issue one:
The company did not have a full time management accountant within the business until they recently hired you. As such, many tasks fell under the radar. Olive informs you that no manufacturing accounts were prepared for 2022.

The following figures have been extracted from the company's ledgers at the year-end 31 December 2022:

	€	€
Stocks at 1 January 2022:
-     Raw Materials	24.500
-    Work in progress	44,200
-     Finished goods (including a profit of 20%)	30.000
Purchase of raw materials	239.300
Carriage inwards	8,600
Factory wages	75.000
Manufacturing Royalties	8.200
Light and heat	28.000
Sales Revenue		880.150
Returns Inwards	1.000
Returns Outwards		2.800
Purchase of finished goods	9.100
Office stationery	2.750
Office salaries	40.500
Office expenses	3.300
Delivery expenses	5.000
Advertising expenses	4.900
Bad Debts	1.000
Factory canteen staff wages	40.100
Factory cleaning expenses	6.800
Plant and machinery (at cost)	60.000
Delivery vehicles (at cost)	25.000

Additional information:

You are given the following additional information:

Inventory on 31 December 2022	€
Raw materials	21,500
Work in progress	23.200
Finished goods (included at cost plus 20% mark-up)	25.400

Factory wages are to be divided 3/5 for direct wages and 2/5 for supervisor's wages.

Light and heat is to be apportioned 80% to the factory and 20% to the office. Light and heat owing at the end of the year was €8.000.
Depreciation is to be provided as follows:
1. Plant and machinery - 20% of cost
2. Delivery vehicles - 10% of cost.
Delivery vehicles are used by the company for delivering finished goods to their customers.
Goods are transferred from the factory at a profit of 20%.

Requirements:
(a) Prepare a manufacturing account for the year ended 31 December 2022.
(b) Prepare a statement of profit and loss for the year ended 31 December 2022.
(c) Prepare an extract from the statement of financial position (balance sheet) as of 31 December 2022 to show the inventories held at the year-end.
(d) Discuss the rationale for manufacturing divisions to add a profit mark-up, when transferring goods to the warehouse for sale by the retail division of a company.

Issue two:
Olive tells you that the company has been concerned that they have been inaccurately costing their products. They have decided to pilot an ABC system at one of its factories. The factory produces a product that is available in both a deluxe model and a basic model. The company has manufactured the basic model for years. but introduced the deluxe model serval years ago in order to tap a new segment of the market.

Since introduction of the deluxe model, the company's profits have steadily declined and management have become increasingly concerned regarding the accuracy of its costing system. Interestingly, sales of the deluxe model have been increasingly rapidly.

Currently manufacturing overhead is assigned to the products based on direct labour hours. For the current year, the company has estimated that it will incur €800,000 in manufacturing overhead cost and will produce and sell 5,000 Deluxe models and 40,000 Basic models. The Deluxe model requires 2 hours of direct labour time per unit. and the Basic model requires 1 hour of direct labour time per unit.

Material and Labour costs per unit are as follows:

	Deluxe	Basic
Direct Materials	€30	€15
Direct Labour	€16	€8

The following information has been obtained in a bid to develop an Activity Based Costing System.

Manufacturing overhead costs:

Activity Cost Pool	Activity Measure	Estimated Overhead Cost
Purchasing	Purchase Orders Issued	€186,000
Processing	Machine Hours	€140,000
Scrap/rework	Scrap/rework orders issued	€358,800
Shipping	Number of shipments	€115,200

                                                                                                                     Total: €800.000

Estimated Activity levels by Product

Activity Measure	Deluxe	Basic	Total
Purchase orders issued	200	400	600
Machine Hours	20,000	15,000	35.000
Scrap/rework orders issued	1,000	1,000	2,000
Number of shipments	250	650	900

Requirements:

(a) Calculate the cost per unit of the Basic and the Deluxe, assuming all manufacturing overheads are allocated based on direct labour hours.

(b) Calculate the cost per unit for the Basic and the Deluxe using Activity Based Costing.

(c) From the data you have developed from Requirements A and B, identify and discuss any factors which may account for the company's declining profits.

(d) Describe the principal deficiencies in the traditional product costing system which ABC seeks to correct, and why it may be a more appropriate costing method in today's environment. Your answer should reference once academic published article.

Issue three:

The company manufactures various types of duvets. The company has a standard basic Duvet that sells for E25. At present. this product is manufactured in a small plant that relies heavily on direct labour workers. Thus. variable costs are totaling E15 per Duvet.

Last year. the company sold 30.000 standard duvets with the following results:

	E
Sales Revenue (30.000 standard duvets)	750.000
(Direct Materials - 30.000 standard duvets)	(220.000)
(Direct Labour - 30,000 standard duvets)	(230.000)
Contribution Margin	300.000
(Less fixed expenses)	210.000
Profit	90.000

Requirements:

(a) Compute (a) the CM ratio and the break-even point in duvets, and (b) the degree of operating leverage at last year's level of sales.

(b) Due to an increase in labour rates, the variable cost of the company will increase by E3 per Duvet next year. If this change takes place, and the selling price per Duvet remains constant at E25. what will the new CM ratio and break-even point be in Blazers?

(c) Refer to the data given in b) above. If the expected change in variable costs take place, how many Duvets will have to be sold next year to earn the same levels of profit (€90,000).

(d) Refer again to the data given in b) above. Olive feels that the company must raise the selling price on the standard Duvets. If the company wishes to retain the same CM ratio as calculated for last year. what selling price must be set for the standard Blazer to cover the increased labour costs?

(e) Refer to the original data given. The company is considering constructing a new automated plant to manufacture the standard Duvet. The new plant would reduce the variable costs per Duvet by 40% but it would cause fixed costs to double in amount per year. Give your opinion as to whether you believe the company should follow this route.

(f) Explain two assumptions of CVP analysis.