Question 1
Whateva Ltd uses a flexible budget and standard costs to aid planning and control of its machining manufacturing operations. The costing system for manufacturing has two direct cost categories (direct materials and direct manufacturing labour, both variable). At the 24 000 budgeted direct manufacturing labour-hour level for August, budgeted direct manufacturing labour is $480,000, budgeted variable manufacturing overhead is $288,000 and budgeted fixed manufacturing overhead is $340,000. The following are actual results for August: Direct materials purchase 160 000 kg. Direct materials usage 96 000kg Direct manufacturing labour 25 500hrs The standard cost per kilogram of direct materials is $11 .50. The standard allowance is 3 kilograms of direct materials for each unit of product. During August 30 000 units of product were produced. There was no beginning inventory of direct materials.
There was no beginning or ending work in process. In August, the direct materials price variance was $1.10 per kilogram. In July, labour unrest took place as a result of cheaper, inferior direct materials purchased by the company. The inferior products were considered dangerous by the workers resulting in a major slowdown in the pace of production. This caused an unfavourable direct manufacturing labour efficiency variance of $45,000. There was no direct manufacturing labour price variance. Labour unrest persisted into August. Some workers resigned due to the dangerous work environment. Their replacements were hired at higher wage rates, which had to be extended to all workers. The actual average wage rate in August exceeded the standard average wage rate by $0.50 per hour. Larry Laidback, the junior cost accountant reported the direct material and direct manufacturing labour variances to the production manager Andy Anxious. Andy is concerned that the variances reported to him may reflect badly on him due to the large volume of poor-quality material purchased.
He is also concerned that the report will affect staff bonuses (including his and Larry’s) and asks Larry to calculate the labour variances by changing the actual hours to the ‘budgeted’ or ‘standard’ hours. Required a) Research the events in the case study above and apply flexible budget variance techniques to calculate the variances of Whateva Ltd for direct materials and direct manufacturing labour in Augustusing the actual 25 500 labour hours. b) Interpret the variances, and report to Andy how the purchase of the poor-quality direct materials in the production process impacted the direct material and direct manufacturing labour variances. In reporting to management (Andy), explain what you think will happen in September. Write a maximum of half a page. c) If Larry agrees to Andy’s request, critique his behaviour against the CIMA Code of Ethics for Professional Accountants? Advise Larry what he should do. Write a maximum of half a page.
Answer: Question 2 Eye Spy (ES) produces home security cameras that can be connected to personal devices through Wi-Fi and 5G. The company is worried because one of its competitors has recently come under public scrutiny owing to data breaches. ES’s only problem with its security camera is the electronic switch which, when faulty, allows for remote access by unauthorised users. The problem can usually be detected and repaired during an internal inspection. The cost of the inspection is $4.50 per device and the repair cost is $2.50. All 500 000 security cameras produced during the previous year were inspected of which 7% were found to have problems with the electronic switch. Another 2.5% of the 500 000 cameras had problems with the electronic switch but were not detected during internal inspection. When ES has sold and shipped defective cameras to customers, customers return them, and ES pays $5.50 for shipping costs and repairs the units at a cost of $2.50 per camera.
However, the shipping and repair costs are not the only costs resulting from the defects that remained undetected by the internal inspection. Management estimates that negative publicity and social media commentary will result in a loss of $250 for each defect discovered by customers. Data privacy issues are of increasing concern to governments worldwide. Required Evaluate and calculate each cost-of-quality category, and the total costs of the system quality assurance for ES. ES is concerned about the high up-front cost of inspecting all 500 000 units. It is considering an alternative internal inspection plan that will cost only $3.50 per camera. During the internal inspection, this alternative technique will detect only 5.5% of the 500 000 cameras that have electronic switch problems. The other 2.5% will be detected after the cameras are sold and shipped. Critique this technique by calculating the total costs of quality of following this process. Which inspection techniques should ES adopt? Assess social responsibility and sustainability factors, evaluate against the context above, and offer a critique of how this may impact of management’s decision.
Answer: Question 3 Cool Runnings Ltd (CR), is an organiser staging events on behalf of clients across Tasmania. Before the onset of COVID-19, beginning 2020, CR’s stated strategic objective is to: ‘provide advice and access to resources in the creation, staging, promotion and operation of events.’ It then communicated this objective externally, through a variety of advertising and promotional materials during early 2020. The company defined a client strategy as follows: CR focuses on growing revenue and profitsthrough increased support to its existing clients Customer loyalty: ‘We want the customers to visit us throughout the year and come to CR for the complete range of their event organising needs.’ To create this loyalty: Our Brand must satisfy the customer’s aspirations and goals, and Our advice and support must promote customer loyalty. We must do a superb job of defining our customers’ needs.
The engagement with clients was considered extremely important. Key attributes were availability of consultants in the offices in Hobart, Launceston, Devonport, and Burnie on short notice. Professional on-site visits are considered essential. High quality, in-office engagement was captured by an explicit vision of the five elements of the ‘perfect engagement’: Great looking offices with professional impact Clients welcomed by knowledgeable, friendly consultants Clear communication of agendas, minutes of meetings, and action lists Event organisers with good event organising knowledge A sincere thanks and diarising of the next meeting As a result of the COVID-19 pandemic, CR experienced a massive decline in the number of clients visiting their offices, with some events being cancelled. CR did not qualify for the Job keeper grant and have decided to reduce their number of offices, and to embark on a voluntary employee redundancy program. In the later part of 2020, CR experienced a resurgence in customer interest in organising events. However, the nature of engagement with customers have changed to mostly zoom meetings, with several recurrent events now being staged online.
To be sustainable, the company determined that it would have to reinvent itself in offering services to their clients. The company also identified a clear need to be ‘socially responsible’ in arranging safe and secure events which are compliant with government directives on public gatherings. CR was reasonably successful in responding to the COVID-19 pandemic, resulting in servicing a few new customers which filled the void left by cancelled events to some extent. The table below summarizes the target and actual performance for 2020. Objectives Measures Target performance Actual performance Financial perspective Increase shareholder value Operating profit changes from productivity improvements $0 $40,000 Operating profit changes from growth in existing customer services $500,000 $-200,000 Customer perspective Increase growth of existing customer services market share Market share in providing services to existing customers 90% 95% Internal-business-process perspective Improve professional impact of offices Number of stores 75% 100% Communication of meeting agendas Days’ notice 5 days 2 days Learning and growth perspective Develop professional office engagement skills Percentage of employees trained in professional office engagement with clients 90% 30% Enhance customer service Percentage of employees trained in event organisation 85% 15% (1st quarter) Required Explain whether CR was successful in implementing its strategy in 2020. If not, offer possible reasons why not. Write half a page.
Evaluate CR’s balanced score card and offer a critique of why the company did not reach its target market share in 2020? Explain what other measures you might want to add under the customer perspective and why. Write half a page.
c) Evaluate the learning-and-growth perspective. Do you think employee training and satisfaction are now less important for CR? In your answer consider the impact of COVID-19 and the redundancy program. Explain fullyby considering CR’s social responsibilities and sustainability strategies in the business context. Write half a page. Answer:
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