Assignment: Cost Management Systems
Assignment: Case Study
Word Limit: 2000 words (± 10%)
Individual Assignment
This case study must be considered to be equivalent to 2,000 words (including PART A and B). The assignment should be submitted via the online submission portal.
Disclaimer: The information used in this assignment is fictitious and does not represent any business or industries actual financial performance or position.
Case Study: Background
Proven Patio Furniture Ltd manufactures patio tables for residential and restaurant uses. With the recent downturn in the patio furniture market, Proven Patio experienced a decline in financial performance. The management team is in the process of preparing the 2016 budget and put together the following budgeted information.
Annual sales are expected to be 5000 units. Budgeted sales for the period of April and May 2016are provided below (Table 1). All sales are on credit. A 5% discount is offered if payment is made within the month of sale.
Table 1: Expected Sales in Units and Dollars for Apriland May 2016
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Residentialtable
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Restauranttable
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|
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Units
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Price
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Units
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Price
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April
|
250
|
$285
|
160
|
$625
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|
May
|
260
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$265
|
200
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$680
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The annual production is expected to be5100patio tables.Table 2 identifies the material requirements and costs for each table. These costs are not expected to change during the budgeted period.
Table 2: Budgeted Direct Materials - Inputs and Costs as at April 1, 2016
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Residential table
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Restaurant table
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|
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Quantity*
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Cost**
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Quantity*
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Cost**
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Metal
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2.5 m
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$5.50
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5 m
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$5.50
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Pine Timber
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3 m
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$13
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4 m
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$14.50
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Fabric
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1.5 m
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$7.50
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3 m
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$12.50
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*metre **per metre
Beginning inventories of Direct Materials are shown below. For direct materials, the policy of target ending inventory is to be 20% of the current month's production.
Table 3: Direct Materials Inventory - as at April 1, 2016
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Residential table (Metres)
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Cost
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Restaurant table (Metres)
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Cost
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Metal
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125
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$625
|
180
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$900
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Pine Timber
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300
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$3750
|
350
|
$4935
|
|
Fabric
|
220
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$1584
|
215
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$2580
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Proven Patio uses a FIFO cost flow assumption for both direct materials and finished goods inventory. Finished Goods ending inventory policy is 25% of the current month's sales. The following information is provided on the current ending inventory of finished goods.
Table 4: Finished Goods Inventory as at 31 March, 2016
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Residential table
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Restaurant table
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In Units
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45
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32
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In Dollars
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$8460
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$10432
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Direct labour for patios is divided into two processes: Assembly and Packaging and it is expected that direct labour hours for 2016 to be 15000 hours. The following information is provided for all classes of direct labour for each of the tables.
Table 5: Direct Manufacturing Labour - Inputs and Costs forApril 1, 2016
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Residential table
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Restaurant table
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|
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Hours*
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Cost**
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Hours*
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Cost**
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Labour - Assembly
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2
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$30
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2.5
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$30
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Labour - Packaging
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0.3
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$22.00
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0.5
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$22.00
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Proven Patio uses an activity based costing system and classifies overhead into three activity pools: setup (based on set-up time);
Processing (based on machine hour) and inspection (based on inspection time). Activity rates for these activities are $115 per machine set-up hour, $8 per machine hour and $21 per inspection hour, respectively. Other information as follows:
Table 6: Cost driver information
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Residentialtable
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Restauranttable
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Number of units per batch
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15 units
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12 units
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Machine Hour (MH) per unit
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4 hours
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6 hours
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Machine set-up time per batch
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1.5 hours
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2 hours
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Inspection time per batch
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5 hours
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6 hours
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Non-manufacturing fixed costs for March equal $52000, of which 50% (half) are Admin and Salaries. Admin and Salaries are expected to increase 8% in April. In addition non-manufacturing cost of sales commission for April is estimated to be 2% of sales revenue.
In June 2017, Proven Patio Furniture Ltd received the following report from the management accountant on its performance over the past quarter.
Table 7: Budget Report
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Proven Patio Furniture Ltd
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Budget Report for Quarter ending 30 June 2017
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Actual
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Flexible
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Flexible
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Sales
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Static
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Results
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Budget
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Budget
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Volume
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Budget
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Variance
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Variance
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|
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Units Sold:
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|
|
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Residential
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3325
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|
|
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3500
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Restaurant
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4620
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|
|
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4200
|
|
Revenues:
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|
|
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Residential
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$1,213,212.50
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$1,213,212.50
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$1,250,750.00
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Restaurant
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$871,563.00
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$889,350.00
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$808,500.00
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Total Sales Revenues
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$2,084,775.50
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$2,102,562.50
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$2,059,250.00
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|
Direct Materials:
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|
|
|
|
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Metal(Residential)
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$104,363.44
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$99,750.00
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$105,000.00
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Pine Timber (Residential)
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$170,931.90
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$171,465.00
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$136,762.50
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Fabric (Residential)
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$9,875.25
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$9,143.75
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$9,625.00
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Metal (Restaurant)
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$18,534.60
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$15,390.00
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$24,435.00
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Pine Timber (Restaurant)
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$47,015.50
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$47,381.25
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$49,875.00
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Fabric (Restaurant)
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$56,368.50
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$52,632.00
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$46,485.00
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Total direct Materials
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$407,089.19
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$395,762.00
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$372,182.50
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Direct Labour
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|
|
|
|
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Labour - Assembly
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$450,495.00
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$412,953.75
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$388,162.50
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Labour - Packaging
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$31,358.25
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$24,282.00
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$23,490.00
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Total Direct Labour
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$481,853.25
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$437,235.75
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$411,652.50
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Variable Overhead
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$339,931.82
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$289,165.45
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$271,945.45
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Total Variable Costs
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$1,228,874.26
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$1,122,163.20
|
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$1,055,780.45
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Contribution Margin
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$855,901.24
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$980,399.30
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$1,003,469.55
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Fixed Manufacturing Costs
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$236,500.00
|
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$215,000.00
|
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$215,000.00
|
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Operating Profit
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$619,401.24
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$765,399.30
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$788,469.55
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Required:
PART A: Operating Budgets
Prepare the following budgets for Proven Patio Furniture Ltd, for April, 2016 both in dollars and units as required (Referring Tables: 1-6).
I. Revenues Budget
II. Production Budget
III. Direct Materials Usage Budget
IV. Direct Materials Purchases Budget
V. Direct Manufacturing Labour Budget
VI. Manufacturing Overhead Budget
VII. Ending Inventories Budgets (Direct Materials and Finished Goods)
VIII. Cost of Goods Sold Budget
IX. Budgeted Income Statement
All budgets and supporting schedules must be neatly presented (students are encouraged to use Excel workbook to do all the calculations). Cells and worksheets must be linked via formulas/references wherever possible (Important!!).
PART B: Variance Analysis
1. Calculate the flexible budget variances and sales volume variances for the quarter ending June 30, 2017 based on the information provided in the Table 7 in both dollars and percentages.
2. Write a report (750 words) which analyses the variances calculated in requirement 1.Your report must include the following:
• Potential causes of any variance above 5% including both favourable and unfavourable variances
• Recommend possible courses of action to address the potential causes of significant variances, where this is within the control of Proven Patio Furniture Ltd.
PART B (2) Report should be within the word limit of 750 words (± 10%)