INTRODUCTION
PB Ltd manufactures a range of electrical products. They specialise in four main models: Product A; Product B; Product C and; Product D.
ASSIGNMENT
In June 2016, budgeted costs and selling price per production unit for each model for August 2016 were as follows
By July 2016, PB Ltd was made aware that direct materials were to be in short supply in August 2016 due to staff holidays, although the supplier has advised there will be no increase in the material price. The supplier has offered PB Ltd £102 000 worth of direct materials in August. All models are made from the same grade of direct materials. PB Ltd realised that reallocation decisions would need to be made. Market research had indicated that demand for all products was likely to increase so PB were reluctant to discontinue any. No changes were anticipated in selling price, fixed overheads or unit variable costs. Maximum profit would depend on producing and selling sufficient quantities of models that make most profitable use of direct materials. The management of PB have a desire to produce and sell a minimum of 1000 units of each model.
Task
a) Prepare a detailed budget statement that shows the total contribution for each model.
b) Prepare a statement for the management of Hulme Ltd that details the maximum profit obtainable taking into account all of the current restrictions.
c) The management are reviewing their decision to continue to produce all four products. Discuss FOUR (4) limitations of manufacturing all four models in contrast to a reduction in product range.
d) The accountants for PB Ltd have used a traditional absorption costing method to absorb the overheads of each of the four products. Advise the management on the methods the accountants may have used to absorb the overheads of the four models
e) It has been suggested at a recent management meeting that an activity based costing approach could be superior to traditional absorption costing. Evaluate this view in a memo to the management of PB Ltd.