Cost Accounting and Performance Management Questions

Answer three questions from this section

1. Specialist Designs Ltd has received an order from Elite Machines to produce 8,000 units of Xlesia, a newly designed component, to be delivered in eight weekly batches of 1,000 units for 8 weeks. Each batch involves direct labour working on machines for 80% of the time and 20% of the time without machines. The estimates for each batch are: 

Materials

Metal - 300 metres @ £5 per metre

Small components 1000 packs @ £0.5 per pack

Direct labour 60 hours @ 22 per hour

Machine variable overhead @ £1.50 per direct machine hour

Labour variable overhead @ £2.50 per direct labour hour 

The agreed price per batch is £5,000, which is lower than Specialist Designs Ltd normal requirement, as their normal mark-up is 100% on variable costs. However competitive pressures mean that a higher price would lose them the work. They also expect that repeat orders will be made.

The purchasing and production departments have been asked to look at the possibility of reducing costs.

Required

a) Calculate the variable costs for one batch and the normal price that would be charged. 

b) Assuming that:

(i) The metal price could be reduced by 10% for all orders after the first 600 metres have been bought.

(ii) No discount is possible for the small components.

Calculate the total cost of the first 8 batches and comment on the profitability of the total order. 

c) Using the learning curve formula the following information has been obtained: The average hours per batch of cumulative production for 7 batches is 26.757 hours. 

If the price is maintained at £5,000 per batch, calculate the contribution which will be made on each additional batch.

d) Explain the importance of knowing the learning curve effect for decision making and control purposes.

2. Blacks Industrial Ltd plans to grow its net income before tax by 20% per year. The company has several products in regular demand which generate the following performance each year:

Sales revenue 4,000

Variable costs 1,000

Attributable fixed costs 500

Attributable advertising 400

Blacks also introduces more exciting products regularly with short lifecycles. The forecasts for the two products currently in production are:

The company’s common fixed costs are £1,400,000 in 2019 and expected to increase by 2% per year. A new product the “Janitron” has been developed and tested and is due to be launched in 2020. It has the following expenditure information: Attributable Development Costs for Janitron of £1,000,000 were incurred over several years up to 2018.These were included in research and development expenses and were written off by including them in common fixed costs in the years in which they were incurred. Pre-product launch expenditure for Janitron of £200,000 will be incurred in 2019. It is expected that Janitron will not trade in 2026 and there will be disposal expenses of £350,000 in that year.

Janitron’s estimated costs per year are shown below: 

Blacks Industrial Ltd are considering their future strategy in the light of the above forecasts and wish to know what sales of Janitron would be needed for the company to meet its target of 20% increase in net income before tax each year based on the previous year’s net income before tax and starting from 2019. 

Required:

a) Produce a complete long-term budget for the years 2019 to 2025 incorporating all the revenues and costs mentioned above and calculate the sales of Janitron which would be needed to meet the net income before tax requirement mentioned above, assuming that the other product forecasts are regarded as reliable (iii) A 75% learning curve will be experienced up to batch eight, after which no additional efficiency will be experienced. 

b) Comment on the sales figures you have calculated in (a) above and consider whether they are likely to match the marketing strategy for Janitron (assuming that the growth and decline patterns of previous products are typical). Discuss possible additional information which is needed to create a realistic long-term plan.

c) Show the product life cycle budget for Janitron based on the estimated sales from part (a) and comment on the performance of the product.

3. Theatres For You Ltd owns three theatres in large cities. The theatres are partially subsidised and regard their mission as making theatre available to as many citizens as possible. They have an education section working with schools and drama clubs. Audio description and signing for the deaf is provided at some performances and there are free theatre tours. The theatres stage performances, have a bar and café and let out the theatre and other spaces in their complex when these are not in use for performances. The financial year end is 30th March. In order to monitor and improve on activities the theatres keep both financial and non-financial records as shown below:

Required:

a) Using the information provided above, calculate any financial ratios you think appropriate.

b) Comment on the performance of each theatre for 2018 and 2019 and in comparison with the other theatres. You should comment on financial and non-financial areas. Organise your comments into categories rather than looking at each theatre separately. Draw out areas where a theatre may be able to learn from others. Make and state any reasonable assumptions, if necessary, to help your analysis.