Financial Data Bonza Handtools Ltd. Manufactures

Questions:- 1.Bonza Handtools Ltd. manufactures a popular power drill suitable for the home renovator. Financial and other data for this product for the last twelve months are as follows : Sales 20000 units Selling price $130 per unit Variable manufacturing cost $50 per unit Fixed manufacturing costs $400000 Variable selling and administrative costs $30 per unit Fixed selling and administrative costs $300000. The directors of Bonza Ltd. want to try to increase the profitability of this product and invited senior staff to suggest how this might be done. Three suggestions have been received. The accountant, Jan Rossi, believes that a price increase of $10 per unit is the best way to boost profits. She would spend an additional $125000 on national advertising and contends, that if this is done, sales volume would not drop appreciably from last year. The production manager, Tom Tune, thinks that an improved quality product could increase sales volume by 25% if accompanied by an advertising campaign costing $50000 aimed at tradespeople as well as home renovators. The improved quality would add $5 per unit to the variable cost. Mr Tune believes that the price should not be increased. The sales manager, Mary Watson, wants to undertake a promotion campaign where a $10 rebate is offered on all drills sold during the three months beginning 1 April. Normally 6000 units are sold during that period and Ms Watson believes that this could be boosted to 10000 units if an advertising campaign costing $40000 were launched late in March. You have been asked by the Bonza board to comment on each of these three proposals. Draft a report in response to this request. You are not asked to make an outright choice, but rather to analyse the potential strengths and weaknesses. The sales volumes forecast by each staff member should be treated as estimates only and your report should examine the effects of variations in actual sales from these forecasts. Give figures to support your comments and mention qualitative factors that may also be involved. 2.The Tassie Company estimates that next year it will manufacture and sell 150000 units of its product. On the basis of that level of activity, it has budgeted for the following costs and prices per unit: Direct Material Cost $2.50 Direct Labour Cost 3.00 Variable Factory Overhead 1.50 Fixed Factory Overhead 2.00 Manufacturing Cost 9.00 Variable Selling and Administrative Cost 2.00 Fixed Selling and Administrative Cost 1.50 Total Cost 12.50 20% Mark-up 2.50 Selling Price $15.00 The Company has an opportunity to bid for the supply of an additional 40000 units of its product to a government department. No sales commission (variable selling and admin. cost) is involved and no additional fixed costs will be incurred. Give a reasoned opinion on the level of the bid that should be made in each of the following two circumstances: (i) The capacity of the Tassie Company's factory is 200000 units per year. (ii) The capacity of the factory is only 180000 units per year. 3.Critically discuss the following statements: Word limit for Question 3 - 750 words a budget is a forecast of what is expected to happen in a business during the next year budgets are okay but they stifle all initiative. No manager would work for a business that applies control through budgets. any sensible person would start with the sales budget and build up the other budgets from there. a budget trying to be realistic will not motivate best performance. only adverse variances are worth investigating, because favourable variances, by definition, must be good. 4.ABC Ltd makes trailers. It receives a special order to produce 350 trailers for a local retail outlet. The order will take 2,100 kg of material that costs $16.10 per kg and will require 1,400 direct labour hours and 525 machine hours. The following are the expected/budgeted annual costs for ABC Ltd: Direct labour $327,600 Direct labour hours 25,795 Direct materials $193,200 Indirect costs $98,400 Machine hours 9,840 Required: Calculate the overhead allocation rate: note that the process is labour-intensive Calculate the total costs of the special order Calculate the cost of the special order if ABC Ltd uses machine time as the basis for allocating overheads Calculate the minimum price per trailer that ABC Ltd could accept. Explain how segmented overhead cost pools and activity based costing can assist accurate costing for pricing purpose 5.Write around 500 words explaining how segmenting the overheads can help in allocating overhead costs to individual jobs or services. You must support your discussion by real world examples and acknowledge the source of your information. Answers: Task 1 Last 12 months performance PARTICULARS AMOUNT Sales (units) 20000 Selling price per unit $ 130 Revenue $ 2600000 Variable manufacturing cost per unit $ 50 Total variable manufacturing cost $ 1000000 Fixed Manufacturing costs $ 400000 Variable selling and administrative costs per unit $ 30 Total Variable selling and administrative cost $ 600000 Fixed selling and administrative costs $ 300000 Net Profit/Income $300000 Case 1: Jan Rossi vie PARTICULARS AMOUNT Sales 20000 Selling price per unit $ 140.00 Revenue $ 2800000 Variable manufacturing cost per unit $ 50 Total Variable manufacturing costs $ 1000000 Fixed Manufacturing costs $ 400000 Variable selling and administrative costs per unit $ 30 Total variable selling and administrative costs $ 600000 Fixed selling and administrative costs $ 300000 Advertising costs $ 125000 Net Income $ 375000 It can be analyzed from the first proposal that net income of Bonza Handtools Ltd. may increase up to $375000 that can be up by 25% if selling price is increased. Moreover, increase the advertising costs, the costs burden can be increased on the company. According to Jan Rossie, the sales can increase to approx 8% from last year if selling price and advertising cost is increased. Case 2: Tom Tune view PARTICULARS AMOUNT Sales 25000 Selling price per unit $130.00 Revenue $3250000 Variable manufacturing cost per unit $55 Total Variable manufacturing costs $1375000 Fixed Manufacturing costs $400000 Variable selling and administrative costs per unit $30 Total variable selling and administrative costs $750000 Fixed selling and administrative costs $300000 Advertising costs $50000 Net Income $375000 As per the second proposal, the company can be able to increase sales by 25% if selling price is kept same at 130. However, improving the product quality can be effective in generating sales but the company may not be able to earn profit more than the proposal presented by Jan Rossie instead it will be equal to her proposal. On the other hand, increasing the variable manufacturing cost per unit and incurring advertising costs can increase net income by $75000 units. Case 3: Mary Watson view PARTICULARS AMOUNT For the period of three months Rest period Sales (units) 10000 14000 Selling price per unit $120 $130 Revenue $1200000 $1820000 Variable manufacturing cost per unit $50 $50 Total Variable manufacturing costs $500000 $700000 Fixed Manufacturing costs $ 400000 Variable selling and administrative costs per unit $30 $30 Total variable selling and administrative costs $300000 $420000 Fixed selling and administrative costs $300000 Net Income $400000 According to third proposal, the company can be able to increase net income by 33% and company can register sales for the next nine months up to $182000. Therefore, the promotional campaign can be beneficial for the company. Task 2: Sales (unit) 150000 Selling price per unit 15 Revenue 2250000 Total Cost per unit 12.50 Total cost 1875000 Profit 375000 Case 1: Additional Sales (unit) 150000 40000 Selling price per unit 15 15 Revenue 2250000 600000 Total Cost per unit 12.50 10.50 Total cost 1875000 420000 Profit $555000 Case 2: Additional Sales (unit) 150000 30000 Selling price per unit 15 15 Revenue 2250000 450000 Total Cost per unit 12.50 10.50 Total cost 1875000 315000 Profit $510000 As per the case 1, the Tassie Company can be able to increase the profit percentage by 48% whereas according to the second case, Tassie Company can only be able to generate profit by 36%. In case 1, the sales volume is higher in comparison to case 2. Task 3: 3.1: According to Park and Kim (2012), preparing a budget can be useful for the company to forecast the future requirements. The company can analyze the future cash outflows, inflows, sales, etc that can help in determining the future profit. Apart from that, Chen et al. (2012) opined that if the prepared budget does not match up with the expected value then the company may suffer loss and conflict can arise in the management. 3.2: As per Bragg and Roehl-Anderson (2011), the budgets can be effective for the managers to know the loopholes in the business and where necessary arrangements can be made. On the other hand, if the budget has a full control over the business activities that it can bind the managers to work in flexible way and managers may not be able to implement better initiative. 3.3: Clendenning et al. (2005) mentioned that preparing a sales budget can be useful in knowing the costs that might incurred during the production and distribution such as overhead costs, material costs, human costs, administrative expenses, etc. Therefore, sales budget preparation can help in knowing the profit that can be generated from sales. 3.4: The budget that focuses on being realistic can impose pressure on the manager or employees to meet the goal. Therefore, it can decrease the efficiency level of workers and take away the flexible working environment. On the other hand, the realistic budget can be effective in aligning the workers to achieve set goal in formal way (Fenrick and Getachew, 2012). 3.5: Freebairn (2012) opined that adverse variances in the performance of employees, financial statements, companys policy, etc. can affect the growth of the company. The large amount of variances in actual and expected value can directly affect the sales and profit figure. Therefore, the management can address the adverse variance so that better solution or plan can be set in order to meet future requirements. Task 4: 4.1: Overhead allocation rate Labor hour rate 12.70014 Indirect cost $98400 Labor cost $17780.19 Material Cost $33810 Other Cost $6667.571 Overhead allocation rate 5.534249 4.2: Total cost of special order Material cost for special order 33810 Labor cost 17780.19 Other Cost 6667.571 Total Cost for special order 58258 4.3: Costs of special order, employing machine time Overhead rate per hour 10 Material Cost 33810 Labor Cost 14000 Other Cost 5250 Total Cost 53060 4.4: Minimum price per trailer Total Cost 58257.76 Total unit 350 Minimum per unit cost 166.4507 4.5: Segmented overhead costs pools and ABC The segmented overhead costs pools can be effective in analyzing the total costs of overhead costs that can be related to material purchase, machine setup, packaging, testing or cleaning and maintenance. Therefore, costs pool can be helpful in identifying the cost driver that can be useful in knowing the total cost and unit cost for each driver such as purchase orders, containers, tests, etc (Horngren, Datar and Rajan, 2012). On the other hand, after analyzing the unit cost then each cost activity can be allocated to the product so that activity based costing can be assigned. Further, when the cost is determined under ABC then per unit overhead cost can be estimated that can be allocated to each product. Therefore, it can be used in knowing the unit price of each product that can help in generating better sales and income (Kumar, 2012). Task 5: Segmenting the overhead costs can be useful in determining the cost that are not normally declared while estimating overhead costs but are associated to it. The expenses and income can be allocated to each department of production that can help in knowing that which business segments are more profitable (Pereira, n.d.). On the other hand, if the firm deals in more than one product then overhead costs can be effective that can help the manger to estimate the product line profitability. Further, the accountant of the particular firm can identify the overhead that can cause changes to the product profit either in negative way or in positive way. The overhead costs can be segmented in different expense heading that can help in determining the costs for individual jobs or services (Rossing and Rohde, 2010). VARIABLE OVERHEAD INDIRECT OVERHEAD ADMINISTRATIVE OVERHEAD MANUFACTURING OVERHEAD Wages for material handling Equipment utilities and production supplies Telephone and office expenses Administrative salaries Auditing and accounting expenses Legal expenses Research and Development Office supplies Front office expenses Wages or commission Outside legal and audit fees Sales and administration utilities Administration and sales office lease Building factory rent Managers and maintenance personnel salaries Property taxes Factory utilities Janitorial staff wages The overhead costs can be explained with examples. For instance, in Melbourne Private Hospital, Australia, treatment timing is ordered through computer system by the physicians at nurses station. Further, materials and orders of treatment are requisitioned and moreover, the costs and charges are recorded systematically as per the duration of patient in hospital. The costs related to meals for patient, X-rays report, bed charges, medicine, etc are taken in account. Therefore, when the patient gets well then the hospital authority sends bills to the person containing doctor fees, medicine and other direct and indirect overhead costs. Thus, the costs are mentioned in appropriate way in subsidiary ledger containing patient medical number and episode number (University.uog.edu, 2015). Apart from that, Redmond Gary Australia Pty Ltd a manufacturer company assign the labor hours so that exact cost can be assigned to the workers in order to generate the costs that can be incurred by the company . Moreover, the labor hours and other direct costs related to workers are maintained by the lawyers and accountants (Pan, 2011). References Bragg, S. and Roehl-Anderson, J. (2011). The controller's function. Hoboken, N.J.: Wiley. Budget impact of increasing importance for payers. (2007). PharmacoEconomics Outcomes News, NA;(538), p.2. Chen, M., Ma, Q., Guo, L., Qiu, Y., Li, Y. and Yang, W. (2012). Importance of lateral transport processes to 210Pb budget in the eastern Chukchi Sea during summer 2003. Deep Sea Research Part II: Topical Studies in Oceanography, 81-84, pp.53-62. Clendenning, L., Martin, J. and McKenzie, G. (2005). Secrets for managing materials budget allocations: A brief guide for collection managers. Library Collections, Acquisitions, and Technical Services, 29(1), pp.99-108. Fenrick, S. and Getachew, L. (2012). Cost and reliability comparisons of underground and overhead power lines. Utilities Policy, 20(1), pp.31-37. Freebairn, J. (2012). Mining booms and government budgets*. Australian Journal of Agricultural and Resource Economics, 56(2), pp.201-221. Horngren, C., Datar, S. and Rajan, M. (2012). Cost accounting. Upper Saddle River, N.J.: Pearson/Prentice Hall. Hu, Y. (2012). Peer-to-peer support for large scale interactive applications. [Riverside, Calif.]: University of California, Riverside. Kumar, R. (2012). Communication reliability in network on chip designs. [College Station, Tex.: Texas AM University. Pan, R. (2011). Determination Method of Overhead Cost Allocation Coefficient Based on Rough Set and Case Based Reasoning. JME, 47(07), p.157. Park, S. and Kim, M. (2012). The Impact of Attribute Importance in the Effects of Option Framing on Choice: Budget Range and Justification as Moderators of Loss Aversion. Psychology Marketing, 29(10), pp.726-737. Pereira, S. (n.d.). Optimal Overhead Cost Allocation in an Agency Model with Moral Hazard and Private Information. SSRN Journal. Rossing, C. and Rohde, C. (2010). Overhead cost allocation changes in a transfer pricing tax compliant multinational enterprise. Management Accounting Research, 21(3), pp.199-216. University.uog.edu, (2015). Understanding, Allocating, and Controlling Overhead Costs. [online] Available at: https://university.uog.edu/cals/people/pubs/mgt/f217.pdf [Accessed 6 Jan. 2015].