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Key Topics
- Requirement
- Solution
- Aber plant
- Falmouth plant
- b. Cost calculation.
- C. Calculation of profitability under each type of briefcase
- D. Calculation of agenda item 1
- E. Recommendation on producing satchel
- F. Reservations regarding the appropriateness of linear allocation of non-unit-level activities to individual units
- References
Requirement
Performance Measurement and Management
How to change the costing system
Solution
The existing costing system needs to be changed because the extra cost has occurred in both the plants. The Aber plant produces two types of briefcase in which the structure is similar which can be used under a single setup to reduce the costing per unit. Similarly, Falmouth plant also requires changing the existing cost system because the extra cost is occurring in quality assurance and employing a number of laborers which impacts the profitability.
Aber plant
There are two types of briefcase which are produced by Aber plant, namely, GobStandard and FancyPants. The GobStandard produced standard products, but the new setup is required at every modification in the briefcase which increases the budget of costing and machine hours of GobStandard are 4,500 which impacts on the profitability. The second product is FancyPants which is a customized product which requires high costing due to change in setup for every new briefcase.
The existing costing system can be changed by using the standard setup in which the briefcase is prepared in a modified manner, and the modifications are inbuilt in the machine which is set up by considering the consumers taste and preference which helps to build standard setup. The standard setup eliminated the costs of new setup for every modification, and by using single set up the machinery expense will also reduce which helps to increase the profit margin. The standard modified setup helps to produce FancyPants by selecting the options according to the consumer’s demand which removes the problem of extra costs in setting new setup. The single setup will work because the structure of both the products is similar only the appearance is changed which will be fulfilled by inbuilt the modification in the setup machines and it helps to produce the FancyPants in a customized manner by reducing the costing per product. The unit costing method is recommended because the method is suitable for the industry in which the manufacturing is continued, and units are identical. In this case, the structures of both the products are identified, so unit costing method is recommended which helps to reduce the non-valuable cost by managing the cost per unit
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Falmouth plant
Under this plant specialized product is produced, namely, Smartphone wallets which are produced through labors without any setup. The quality is assured by assembly line workers because the material is manufactured by local manufacturers. The existing costing system can be changed by selecting the single manufacturer with the least cost and best quality among the various manufacturers which helps to reduce the time and cost on checking the quality with the production of specialized products. Single setup for assembling helps to reduce the cost and time of labors by reducing the number of labors required which impacts on the profitability and helps to provide standard quality products. The single setup helps to improve the quality of the product which can't be achieved through handmade work.
b. Cost calculation.
a. Cost of GobStandard
The total cost is 1, 80,180 which comprises material costs, direct costs, machine hours and manufacturing overheads. The material cost is 54,000, direct labor is 36,000, machine hours are 4,500, and manufacturing overhead is 85,680.
b. Cost of fancypants
The total cost is 48,900 in which the material costs are 14,000, direct costs are 10,000, machine hours are 4,500 and manufacturing overhead is 85,680.
c. Cost of smartphone wallets
The total costs are 60,000 in which the material cost is 24,000, direct labor is 24,000, machinery hours are zero and manufacturing overhead is 12,000.
C. Calculation of profitability under each type of briefcase
Old system
Under the old system, the FancyPants is having sales margin of 2,400 which is an adverse price variance whereas the GobStandard is having favorable sales margin volume of 496. The price variance of GobStandard shows the favorable outcome of 4,250 and usage variance shows the favorable outcome of 3,000 whereas the FancyPants shows the adverse price variance of 420 and usage variance of 700 which shows that the profitability of GobStandard is better than the FancyPants because the actual performance is higher than the estimated performance. So the profitability of GobStandard is favorable than the profitability of FancyPants.
Alternative system
Under the alternative system, the profit margin of GobStandard is 11.3% in September 2016 which includes various expenses such as direct labor cost, direct material cost, and manufacturing overhead. The profit margin of FancyPants is 40.25%, and the expenses include direct labor cost, direct material cost, and manufacturing overhead. The profit margin of Smartphone wallet is 20%, and the expenses include direct labor cost, direct material cost, and manufacturing overhead. The FancyPants is having highest profit margin among the three products because the selling price of the FancyPants is highest among all the products.
Recommendations
The company can improve its profitability by adopting the various marketing strategies which help to promote the brand in the eyes of the consumers. The marketing activities include advertisement, discounts, offers, promotional events and others. Another option is to improve the costing system which helps to reduce the cost per product, and it enables to increase the profitability of the company. The effective costing system helps to eliminate the non-valuable costs which help to utilize the funds in the most efficient and effective manner which is the aim of every organization.
D. Calculation of agenda item 1
Effect on actual performance
The two items are discussed in the Agenda 1, namely, FancyPants and GobStandard. The material variance includes price variance and usage variance. The material usage variance is calculated by multiplying the actual quantity* standard priceless standard quantity*standard price. The price variance is calculated by deducting the (selling price less actual price)* actual quantity. The efficiency variance is calculated by deducting the actual unit from the standard unit then multiplies with the standard cost. The rate variance is calculated by deducting the actual price from the expected price then multiplies with the actual quantity. The effect of price variance in GobStandard is positive because the actual performance is higher than the standard performance which includes a purchase of lower quantity than the actual price, adequate price negotiation by the procurement team; receive purchase discounts by the company which leads to the overall cost effective procurement by the company. The Usage variance is also having the positive impact on the actual performance because the performance is higher than the standard performance (DRURY et al., 2013). The price variance of FancyPants is having adverse impact because the actual price is less than the standard price which it includes the hike in the market price of materials, purchase of material at higher quantity, increment in the bargaining power of suppliers, inefficient purchase by the procurement department (Roberts et al., 2014). The Labour variance of both the products shows the lower productivity of direct labor as compared to the standard performance during the particular period of time which includes recruitment of low skilled labors, decrease in the motivation and morale of labors and others (Peng et al., 2015).
Cost of GobStandard
Material variance
Price variance- (SP-AP)*AQ
£4,250
Usage variance- (AQ-SQ)*SP
£3,000
Labour variance
Efficiency variance- (AU-SU)*SC
£1,000
Rate variance- (AP-EP)*AQ
£750
Sales volume - £496
Cost of FancyPants
Price variance- £420
Usage variance-£700
Labour variance
Efficiency variance- £2,000
Rate variance-£600
Sales volume- £2,400
Reconciliation of Budgeted and actual gross margin
GobStandard
The actual margin of GobStandard is 496, and the expected margin is 11.3%
FancyPants
The actual margin of FancyPants is 2400, and the budgeted margin is 40.25%
The recommendations in the c part help to generate the gross margin similar to the budgeted gross margin by applying the various marketing techniques which help to generate a high-profit margin by promoting the brand in the eyes of the consumers. The actual margin is less than the budgeted gross profit margin which can be achieved by applying the recommendations. The marketing activities such as an advertisement, discount, and others help to generate higher revenue which enables to achievement the budgeted gross margin (Öker et al., 2016).
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Place Your OrderE. Recommendation on producing satchel
The company should produce satchel because wasting twenty percent of material which leads to manage the cost-efficiently. The waste material can be used for making the Satchel which helps to utilize the waste material in the most efficiency and effective manner which help to increase the profit margin and increase new product in line which broadens the line of products offered to the consumers. The wasting of twenty percent raw material impacts on the cost management of resources which can be managed by utilizing the waste material to produce the satchel. The material cost is zero because the scrap will be considered as the raw material and the production will be done in the Aber plant, so the estimated sales per unit are equal to the cost incurred in producing one product. It may not produce the higher profit margin in the beginning, but once the product is correctly positioned then, it will help to contribute to the profit margin of the company. The main reason for producing the satchel is proper utilization of waste material by producing the new product which also helps in providing a new product to the consumers. The production of satchel may attract the consumers with the low budget which helps to attract the new consumers by utilizing the waste material in the most efficient and effective manner. Waste management is necessary for the company because it helps to utilize the resources and manage the costing system effectively (De Waal et al., 2013).
F. Reservations regarding the appropriateness of linear allocation of non-unit-level activities to individual units
The non-unit level activities are defined as the activities which are not incurred at every stage, but the cost related to these activities varies with the number of units produced. The reservation regarding the packaging and dispatching is required because these are the non-unit level activities but it takes more time, and it is considered as individual units. The activity based product costing must be done which helps to assign the cost to the activities (Laonapaporn et al., 2014). The reservation to the packaging and dispatch helps to calculate the cost of time required in packaging and dispatching per product which help to allocate the cost of each product in a most efficient and effective manner. When the packaging and dispatching are considered as an individual unit it helps to apply the effective costing system. The effective costing system impacts on the profitability of the company. The packaging and dispatching are the non-unit activities because the variant time is required for every product which creates the improper allocation of resources, so the assignment of packaging and dispatching as individual activities helps to determine the cost of time used in the particular product.
References
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De Waal, A. (2013). Strategic Performance Management: A managerial and behavioral approach. Palgrave Macmillan.
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Laonapaporn, B., & Phanthunane, P. (2014). Activity based costing system of continuous ambulatory peritoneal dialysis under the Universal Coverage Scheme in Thailand. BMC Public Health, 14(Suppl 1), P7.
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Öker, F., & Ad?güzel, H. (2016). Time?driven activity?based costing: An implementation in a manufacturing company. Journal of Corporate Accounting & Finance, 27(3), 39-56.
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Peng, Y. (2015). The application of activity based costing in cost accounting system of electric power enterprises. Automation & Instrumentation, 11, 081.
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Roberts, M., & Russo, R. (2014). A student's guide to analysis of variance. Routledge.
-
DRURY, C. M. (2013). Management and cost accounting. Springer.
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