Strategic Management AccountingCoursework
Question 1 –5Note:you must show all step-by-step workings, calculations, formulas’etc.The number one question is based on cost volume profit analysis
Q1. Two of the ready family size meals Farm Fresh produces and sells are V (Vegan) and M (Meat).Budgets prepared for the next six months give the following information:Ready meal V / unit Ready meal M / unit££Selling price 10.00 12.00Variable costs: production and selling5.00 10.00Common fixed costs: production and selling for six months £561,600You are required, in respect of the forthcoming six months:
(i) to state what the break-even point in £(i.e.,value)will be and the number(i.e., volume)of each product this figure represents if the two products are sold in the ratio 4V to3M; (6marks)
(ii) to state the break-even point in £s and the number of products this figurerepresents if the sales mix changes to 4V to 4M (ignore fractions of products);(6marks)
(iii) to advise the sales manager which product mix should be better, that in
(i) above orthat in (ii) above, and why; (4marks)[this should be brieflike 100 words]
(iv) to advise the sales manager which one of the two products should beconcentrated on and the reason(s) for your recommendation assume thatwhatever can be made can be sold, that both products go through a processingprocess and that there are only 32,000 processing hoursavailable, with productV requiring 0.40 hour per unit and product M requiring 0.10 hour per unit.(4marks)[200 words]i.e., (word count for question 1 (iii) and (iv)should be 300 words max)
Activity Based Costing (ABC):
Q2. FarmFresh produces two “Gourmet Supper” prepared meals. The company currently allocatesoverheads to units using a traditional method based on machine hours.The managementaccountant has concerns over the accuracy of the information and is considering introducingActivity Based Costingto allocate overheads to units.The following information relates to the budget forthe year ahead:ActivitiesBudgeted Production OverheadFood Processing £90,000Batch Preparation £60,000Total£150,000Direct materials Product data GS1GS2Production / Sales (units)75,000 15,000Direct materials cost per unit (£)£1.90 £2.90Direct labour hours per unit (hours)0.1 0.2Machine hours per unit in machining process (hours)3 5Number of machine Set Ups per batch of 500 meals2 5It is estimated that direct labour costs will be £10 per hour forthe budgeted period and a profit mark upof 35%of total product cost is added to attain the selling price.Using the current traditional costing method the total budgeted product cost for GS1 is £4.40 and forGS2 is £7.40.Both products are produced in batches of 500 units per batch.The sales manager has reported that sales for GS2 have fallen, however, the sales forGS1 have risen. The sales manager has suggested that the sales price for GS2 bereduced.The total direct materials cost, total direct labour cost and the total direct cost to produce 75,000 GS1and 15,000 GS2 are shown below :Direct costs GS1 GS2Output in units 75,00015,000Direct materials cost per unit (£) £1.90 £2.90Total Direct Material cost (£) £142,500 £43,500Direct labour hours per unit (hours) @ £10 per hour 0.1 0.2Direct Labour Cost per unit (£) £1.00 £2.00Total Direct Labour cost (£) £75,000 £30,000
Total Direct Cost (£)£217,500 £73,500The total number of machine hours in the food processing, the total number of batches required andthe total number of machine setups in the batch preparation process to produce 75,000 GS1 and15,000 GS2 are shown below:GS1 GS2TotalOutput in units 75,000 15,000Machine hours perunit in food processing (hours) 3 5Total number of machine hours 225,000 75,000 300,000Number of set ups per batch 25Total number of batches (Output/batch size) 150 30 180Total number of machine setups 300 150 450Required :
(a) Using ABC revise the total budgeted production overhead cost for each of the meals by allocating the production budgeted overhead costs for the activities Food Processing and Batch Preparation based on the cost drivers machine hours and machine setups.(2marks)
Allocation of overheads using ABC GS1 GS2 TotalOutput in units 75,000 15,000Total number of machine hours225,000 75,000 300,000Allocate Machining budgeted production cost£90,000Total number of machine setups 300 150 450Batch Preparation budgeted production cost £60,000Total Budgeted Production Overhead Cost £150,000
(b)Calculate the revised total and per unit budgeted product costs using ABC.(2marks)GS1 GS2 TotalOutput in units 75,000 15,000Total Budgeted Production Overhead Cost £150,000Total Direct Costs £217,500 £73,500 £291,000Total Budgeted Product Cost £441,000Per unit Budgeted Product Cost using ABC
c) Calculate the revised selling price for each meal using the ABC budgeted total cost and compare the results to those given by using the current traditional costing and sales price information given in the question.(2marks)GS1 GS2Budgeted Product Cost per unit usingABCRevised Selling Price using ABC @ 35% profitmark-upBudgeted product cost using current traditionalmethod (£) £4.40 £7.40Current sales price after profit mark up 35% (£) £5.94 £9.99(d) State, giving reasons, whether or not, the sales price for the GS2 meal should be reduced toincrease sales. (4marks)[100 words](e) Briefly, critically evaluate Activity Based Costing (10marks)[200 words][word count for question d and e should be 300 words max].
Decision making:
Q3. A FarmFreshdistribution centre has production capacity of 50,000 crates of ready meals(units) but in the next month sales volume is expected to be 35,000 units at a sellingpriceof £40. Expected costs and revenues for the next month at an activity level of 35,000units are:£ £Dir Lab 12420,000Dir Mats 8 280,000Var Manufacturing ohds 2 70,000Fixed Manufacturing ohds 8 280,000Marketing and Distribution 3 105,000Total costs 33 1,155,000Sales 40 1,400,000Profit £245,000A new once off customer has offered to purchase 3,000 units next month at £20 a unit butrequires their company logo to be attached to every product at an anticipated cost of £1 perunit. They will collect these crates from the distribution centre hence there will be noadditional marketing or distribution costs. Currently labour is under utilised.Required:Complete the schedule as per below and advise whether the centre should acceptorreject the offer. (20marks)[advise 300 words max]Do Not Accept DifferenceAccept Order(RelevantUnits 35,000 Cost)£££ £Dir Lab 12420,000DirMats8 280,000Var Manufacturing ohds 2 70,000Inserting Logo 10Fixed Manufacturing ohds 8 280,000Marketing and Distribution 3 105,000Total costs 33 1,155,000Sales 40 1,400,000Profit£245,000
Cash Budget:Q4.The following data andestimates are available for a FarmFresh food processing section in adistribution centre for April, May, and June.ItemApril (£)May (£)June (£)Sales22,00025,00020,000Wages6,5007,5006,600Overheads6,0006,100,6,100April (£)May (£)June(£)Opening Stock2,5001,500500Material Usage11,00013,00012,000Closing Stock1,5005003,000Additional Notes:
1. The closing cash balance at 31st March is expected to be £1,800.2. 25% of sales are for cash, the balance being received the following month. The amount to bereceived in April for March’s sales is expected to be £15,000.
3. Purchases of direct materials are paid for in the month after purchase. In April £9,500 will bepaid for purchases relating to the previous month.
4. Overheadsinclude £500 per month for depreciation. Overheads are paid in the following month.In March, overheads are anticipated to be £5,900 including depreciation.
5. Wages are paid in the month they are incurred.6. A new machine for the centre is planned to bepurchased in June at a cost of£10,000, this willbe paid in the month of purchase.Required:
(a) Calculate the amount to be paid for direct materials purchases in each of the months ofApril, May and June. (4marks)
(b) Calculate the amount to be received from sales in each of the months of April, May andJune. (4marks)(c) Prepare cash budgets for the months April, May and June. (10marks)
(d) What advice would you offer the company given the forecast closing cash balances.(2marks)[300 words max].Controlling and Variances:
Q5.FarmFresh produces luxury Easter picnic baskets (6 per box) which has the followingstandard cost per box:£ / UnitDirect Material (on average) 4 kg @ £12 per kg 48Direct Wages 5 hrs @ £7 per hour 35Variable prodn. ohd 5 hrs @ £2 per hour 10Fixed prodn ohd 5 hrs @ £10 per hour 50£143Variable production overhead is deemed to vary with the hours worked.During the period the Actual results were as follows :Production 18,000 UnitsDirect Material 76,000 kg costing £836,000Direct Wages 84,000 hrs worked £604,800Variable prodn overhead84,000 hrs worked £172,000Fixed production overhead £1,030,000£2,642,800Required :
a) Using the information above calculate the sub variances for Materials, Wages and Variable overheads. (12marks)Fixed overheads are absorbed into production on the basis of standard hours of production andthe normal volume of production for the period is 20,000 units (100,000 hours of production)
b) Using the information above on the budgeted fixed overheads calculate the fixed overhead expenditure and volume variances. (2marks)c) Put all 8 calculated sub-variances into a schedule which reconciles Actual (£2,642,800) to Standard cost (£2,574,000). (2marks)d) Comment briefly on the usefulness to management of investigating variances.(4marks)[300 words max]