Read the case study and answer following question: Why has Wolfgang Keller been so successful in the past and what steps should he take to optimize his career in the future? Please consider any challenges Keller may face as he is promoted to more senior management and leadership positions and provide recommendations for how he can best respond to these challenges.
Use the case study as your only source.
Introduction to Accounting
Question 1:
Alfa Manufacturing makes parts for the automobile industry. The company currently uses traditional allocation of fixed overhead cost based on budgeted direct labour hours. For next year 20,000 direct labour hours are budgeted. The plant manager has heard of a new way of overhead costs allocation that uses cost pools and cost drivers. Having investigated this new system further, the plant manager together with a management accountant identified three main activities and the cost drivers for each activity. They assigned the fixed overhead cost to each activity and identified expected level of each cost driver as follows:
Cost of Activity
Maintenance
£120,000
Cost driver
Machine hours
5,000
Equipment Setup
£34,000
Number of setups
200
Quality Inspection
£60,000
Number of quality inspections
1,000
A new customer approached Alfa Manufacturing and asked to submit a bid for a proposed job. The plant manager feels that obtaining this job is a special opportunity that would result in new business in future years. Estimates for the proposed job are as follows:
Direct materials:
The job requires 3,000 kg of material K which is used regularly by the company in its production. The company has 2,000 kg of material K currently in stock which was purchased last month for a total cost of £1,960. Since then
the price per kilogram for material K has increased by 10%. The job also requires 4,000 kg of material L. There are 4,500 kg of material L in stock which are not required for normal production. This material originally cost a total of £3,150. If not used for the job, the stock of material L would be sold for £0.50 per Kg.
Direct labour:
100 semi-skilled labour hours are required for this job. These hours will be worked by existing employees who currently have sufficient spare capacity to complete the proposed job. They are permanently employed by the business on a salary equivalent to £20 per hour.
For the purpose of this job, the business will have to employ a highly skilled worker who will be contracted for 50 hours and paid £40 per hour.
Fixed manufacturing overheads:
The management accountant estimates that the total amount of fixed overheads will not change if Alfa Manufacturing decides to undertake this special job. However this job will consume the following level of three main activities:
Number of machine hours
Number of setups
Number of quality inspections
80
8
6
Required:
a) Calculate the full cost of the proposed job using the traditional overhead cost allocation, considering budgeted direct labour hours as the basis of cost allocation.
b) Calculate the full cost for the proposed job using Activity-based costing.
c) Prepare a memo for the management comparing and outlining the main features of the traditional full (absorption) costing and activitybased costing, and explaining which one produces the more accurate cost assignment.
d) Show with supporting explanations the minimum price Alfa Manufacturing can offer to the new customer for the special job such that it would be neither better nor worse off as a result of undertaking it.
(e) Explain which of the two methods (full absorption method versus relevant costing method) you would recommend Alfa Manufacturing adopts in costing this special Job.
Question 2:
Mark plc makes 3 products, K, L, and M. Estimates for the next year include the following:
Product
Selling price (per unit)
Materials cost (per unit)
Other variable costs (per
unit)
Allocated fixed costs
Sales demand (in units)
K
£50
£12
L
£45
£8
M
£60
£18
£10
£5
700
£4
£5
1,500
£7
£6
1,200
To manufacture these products, the business uses a special machine which has a limited capacity of 5000 hours per year. Products K, L, and M require 2, 3 and 2 machine hours respectively for the production of one unit.
(a) State, with supporting workings, which products and in which quantities the business should plan to produce next year in order to maximise its profits.
(b) CVP is both simple and simplistic. If you want realistic analysis to underpin your decisions, look beyond CVP. Do you agree? Explain
Question 3:
A large textile business is considering a capital investment in a new piece of equipment in its Eastern European division to diversify its product range and increase its market share. It is said that when a business is evaluating a capital investment only relevant costs and benefits are to be considered. Give two examples of relevant and two examples of irrelevant costs or benefits in the context of capital investment appraisal, and explain why you consider them to be so. Discuss three non-financial factors that the large textile business should consider when making capital investment decision.