Assignment 2

Value: 20%
Due Date: 25-Sep-2019
Return Date: 21-Oct-2019
Length:
Submission method options: EASTS (online)
Task
Background 

You are still working for Farm Organic Ltd (FOL), excited to be part of an expanding
business. You are looking for ways to improve the business.  In this assignment you will be
providing advice and making suggestions on a number of ways to control operations and help
achieve FOL's goals.

Your assignment consists of different question styles including discussion questions, reports,
exercises, problem questions and spreadsheet questions. It assesses learning outcomes as
listed in the assignment rationale below.

The purpose of this assignment is to continue to develop skills in costing systems with an
emphasis on the role of control in managing the production of goods and services efficiently
in the workplace. Each question builds on the knowledge gained through the first assignment
to develop the concepts of management accounting control through costing. Each question
uses realistic data and professional practices similar to that found in workplaces.

Question 1: Budget (20 marks in total)

You are now preparing the budget for the Sheep Drench department for the months of April
and May. Sheep Drench manufacturing costs have been budgeted as follows:
 

Direct materials  $          3.0 per unit

Direct labour  $          1.5 per unit

Factory overhead

Variable   $        0.25 per unit

Fixed  $      5,000 per month

(Includes $1000 depreciation)

Selling and administrative expenses, including depreciation of $400 per month, are all fixed
and total $2500 per month.
Other information is as follows:

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There is an opening inventory of direct materials of $22,500 purchased in February.
The selling price of the product has been set at $26 per unit. Collections are scheduled as
follows: 70% in month of sale, 28% in month following sale, and 2% uncollectable.
The inventory of direct materials will be maintained at 25% of the next month's production
requirements. 70% of each month's purchases will be paid for in the month of purchase, and
the remainder in the following month. A cash discount of 2% will be taken on all purchases.
Opening inventory at the beginning of March was $22,500 purchased in February.
The direct labour payroll, factory overhead and selling and administrative expenses will be
paid for in the month incurred.
Sales and production for the March, April, May and June have been scheduled as follows:
 
Units Sold Units Produced

March 8000 11000

April 7000 10000

May 10000 12000

June 9000 8000

Required:

1. Use a spreadsheet to prepare a budget showing the cash receipts and cash payments
for the months of April and May with supporting calculations. Paste the result view
and formula view into your Word document.
2. Prepare a memorandum to David Scott explaining how best to use the budget.

Question 2: Budget (20 marks in total)

David Scott has come to you. He has read recently about the benefits of zero-based budgeting
and wants to know more about zero-based budgeting and whether it would be appropriate for
FOL.

Required:

Prepare a memorandum to David explaining the benefits and drawbacks of zero-based

budgeting. Include in your memorandum consideration of the behavioural implications of
zero-based budgeting. 

(500 words maximum)

Question 3: Variance Analysis (20 marks in total)

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You have introduced a standard cost accounting system for FOL. The following standard
costs have been developed for producing 1kg of the Cattle drench.
 
Direct materials (1 kilogram)  $         20

Direct Labour (.25 hours)  $         15

Overhead (DLH basis)  $           3

 $         38
 
Production and cost information for May was:
 

Actual direct material purchased  1200 kilograms

Actual direct materials issued 900 kilograms

Actual output 800 kilograms

Actual cost of materials purchased  $      25,500

Actual direct labour rate  $             60 per hour

Actual direct labour hours 280

Actual overhead costs  $        4,500

Required

1. Calculate the following standard cost variances for May and provide general
journal entries to record the cost flows for May.
              (a)    materials price
              (b)    materials usage
              (c)    direct labour rate
              (d)    direct labour efficiency
              (e)    total overhead

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Question 4: Activity Based Costing (20 marks in total)

You have recently attended a seminar on activity-based costing (ABC). FOL's accounting
system has three cost categories: direct materials, direct labour and overhead costs. FOL has
allocated indirect production costs based on direct labour cost. The following is the 2019
budget for the Cattle Drench department. These costs are spread evenly over the 12 month
period.

 
Materials 306000

Direct labour 201600

Overhead costs 54000

You are now suggesting to David that you experiment with the ABC system in the Cattle
drench department. He agrees and together you identify the activities that cause overhead
costs and select a cost allocation base for each activity. You also identify expected activity
levels for the next month as follows:
 
Predicted
Activity Cost Allocation base cost $ Predicted Activity level

Inward materials handling No. of deliveries 1500 5

Research/Quality control No. of Kgs of drench 5000 900

Outwards materials handling No. of boxes shipped 2500 90

Required
Write a memo to David that:

1. Explains how overhead costs are allocated in the Cattle Drench department using the
traditional system.
2. Explains how overhead costs would be allocated under the ABC system. Include a
calculation of all the allocation rates used.
3. Calculates the cost of Cattle Drench production for the next month using the
traditional system.
4. Calculates the cost of Cattle Drench production for the next month using the ABC
system.
5. Explains to David why costs are different in the two costing systems.
6. Recommends one system giving reasons for your recommendation.

Question 5: Relevant information for decisions (20 marks in total)

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The development of a new pesticide for the horticultural industry has been successful. David
is now discussing with you, options to expand operations to include this new line of pesticide,
Microcide. A key issue is whether to make one of the components of the pesticide, Factor X,
or to buy it in.  Demand for the next 12 months is expected to be 200,000 litres.  Costs if FOL
makes all the components are as follows:
 
 

Direct material  $        1,200,000

Direct labour  $         190,000

Factory overhead variable  $           25,000

Factory overhead fixed  $         300,000

Total costs  $      1,715,000

 
If FOL buys in the Factor X the unit costs of direct material will increase by 10%. Fixed costs
will decrease by 65% representing the costs of the additional section of the production line
which are avoided if the Factor X is bought in.
If FOL produces Factor X as part of the joint process of producing Microcide production,
there will be a surplus of 30,000 litres of Factor X which can be sold at $4.50 per litre.

Required

1. Prepare a schedule that compares the make or buy alternatives. Show totals and
amounts per unit. Calculate the difference between making and buying.
2. Prepare a memo to David outlining the qualitative factors that impact non-routine
decision making. Understanding these will help David make the right decision. (500
words)