ACCOUNTING FOR BUSINESS DECISION MAKING ASSIGNMENT

TASK 1 - Topic: Cost-Volume Profit Analysis

Objectives - To be able to identify the relevant and irrelevant costs and benefits associated with each feasible alternative with the greatest overall net benefit to aid decision making.

Linen Fasterners Sdn. Bhd. makes three different clothing fasteners in its manufacturing facility in Klang.  Data concerning these products is as follows:

All three products are sold in highly competitive markets, so the company is unable to raise its prices without losing unacceptable numbers of customers.

The company has an extremely effective lean production system, so there is no beginning or ending work in process or finished goods inventories.

You are required to answer in a contribution income statement format, the following:

a) What is the company's overall break-even point in dollar sales?

b) Of the total fixed expenses of $400,000, $20,000 could be avoided if the Velco product is dropped, $80,000 if the Metal product is dropped, and $60,000 if the Nylon product is dropped. The remaining fixed expenses of $240,000 consist of common fixed expenses such as administrative salaries and rent on the factory building that could be avoided only by going out of business entirely.

i. What is the break-even point in unit sales for each product?

ii. If the company sells exactly the break-even quantity of each product, what will be the overall profit of the company?

iii. If the managers drop the Velcro and Metal products, what will be the overall profit or loss of the company? Explain your result.

iv. Prepare a segmented income statement of all three products to prove your answer in (iii) above.

TASK 2 - Topic: Standard Costing and Variance Analysis

Objectives - To enable the learner to identify variance analysis and be able to benchmark for the purpose of performance evaluation for organisational efficiency and sustainability.

Cahaya Enterprise, a sole proprietor, is a registered contractor with Majlis Perbandaran Kajang (MPK) and operates a residential landscaping business. Besides business from MPK he has a diverse range of clients in the affluent residential areas of Ampang. In an effort to provide quality service, he has concentrated solely on the design and installation of landscaping covering  trees, shrubs, fountains and lighting. With his clients continually requesting additional services, Cahaya Enterprise recently expanded into lawn maintenance, including fertilisation.

The following data relate to his first year's experience with 53 fertilisation upmarket residential clients. Each residential client required six applications throughout the year and was billed $40 per application. 

Two applications involved Type A fertiliser, which contains a special ingredient for weed control.  The remaining four applications involved Type B fertiliser.

Cahaya Enterprise purchased 5,000 kg of Type A fertiliser at $0.53 per kg and 10,000 kg of Type B fertiliser at $0.40 per kg.  Actual usage amounted to 3,700 kg of Type A and 7,800 kg of Type B.

A new part-time employee was hired to spread the fertiliser at the rate of $11.50 per hour.  The employee logged a total of 165 hours at client residences.

Based on previous knowledge of his operations and conversations with other landscapers, Cahaya Enterprise established the following standards:

• Typical hourly rate of landscape personnel: $9
• Labour time per application: 40 minutes
• Fertiliser purchase price per kg: Type A, $0.50; Type B, $0.42
• Fertiliser usage: 40 kg per application

Unfortunately, Cahaya Enterprise's new lawn fertilisation business did not go as smoothly as planned, with customer complaints being much higher than expected.

You are required to:

a) Compute Cahaya Enterprise's direct material variances (price, quantity and purchase price) for each type of fertiliser.

b) Compute the direct labour variances (rate and efficiency).

c) Compute the actual cost of the client applications.  (Note: exclude any fertiliser in inventory, as  remaining fertiliser can be used next year.)  Was the new service a success?  Explain.

d) Analyse the variances you have computed in requirements (a) and (b).

i. Was the new service a success from an overall cost control perspective?  Briefly discuss.

ii. What seems to have happened that would give rise to customer complaints?

e) In view of the complaints, should the fertiliser service be continued next year? Why?