Assignment: Accounting and Finance
Question 1
LM plc produces three (3) types of fertilizer name the D Compound, Top Dressing and Vegetable fertilizers. LM plc is facing increasing competition following the entry of three new players in the Zambian Fertilizer industry. In response to this increase competition, LM has invested in a high tech manufacturing plant in an effort to enhance its efficiency and its product quality.
Following these changes, LM seeks to review its approach to allocating overheads to the three fertilizers. Currently, LM uses the traditional cost absorption approach based on labour and machine hours. The Finance Director is proposing the use of the Activity based costing approach. He argues that the traditional approach is no longer appropriate considering the changes in LM's circumstances. However, the Managing Director does not seem to appreciate the benefits to be derived from changing to the use of activity based costing.
The Finance Director has provided the following information for the year ended 2016 to demonstrate his view point.
|
|
D-Compound Fertilizer
|
Top Dressing Fertilizer
|
Vegetable Fertilizer
|
|
Sales (50 kg Bags)
|
50000
|
50,000
|
40,000
|
|
Selling Price (K Per 50 kg Bags
|
280
|
270
|
240
|
|
Direct Materials:
|
|
|
|
|
Nitrogen (Kgs per 50 kg bag)
|
10
|
8
|
6
|
|
Phosphorus (Kgs per 50 kg bag)
|
8
|
9
|
6
|
|
Direct labour hours
|
100,000
|
150,000
|
60,000
|
|
Ware house floor space (Square meters)
|
3000
|
3000
|
2900
|
|
Number of dispatches
|
50
|
25
|
80
|
|
Number of Customer orders
|
100
|
80
|
120
|
|
Number of material receipts
|
50
|
50
|
80
|
|
Number of machine hours per 50 kg bag packaged
|
1
|
1.5
|
1
|
| Maintenance Hours |
100 |
100 |
100 |
|
Number of inspections
|
33
|
25
|
40
|
The following additional information is available:
1. Nitrogen cost was K5 per kg, phosphorus cost was K 6 per kg while the direct labour rate was K20 per hour.
2. The total fixed overheads were K11,630,000.00 and were attributed to various activities as follows:
|
Details
|
Amount K
|
|
Material receiving
|
1,860,800.00
|
|
Storage costs
|
1,744,500.00
|
|
Dispatch costs
|
1,163,000.00
|
|
Maintenance costs
|
1,744,500.00
|
|
Customer order processing Cost
|
1,628,200.00
|
|
Packaging costs
|
1,163,000.00
|
|
Quality control costs
|
2,326,000.00
|
|
Total
|
11,630,000.00
|
3. Under the traditional approach, LM assumes that fixed overheads relate to both direct labour hours and machine hours with 60 percent of the total fixed overheads relating to direct labour hours and 40% to machine hours.
Required:
a) Compute the profit for each of LM's three fertilizers using:
i) LM's current method of overhead attribution.
ii) Activity based costing method.
b) Discuss the finance director's proposal for the use of Activity Based Costing and his statement that the traditional approach is no longer appropriate for LM's circumstances. In so doing, address the concerns raised by the Managing Director. Wherever necessary, reference should be made to the computation in (a) above.
Question 2
Konje Plc, a mobile phone manufacturer is facing increasing competition from manufacturers of high end smart phones from China. In response to the increased competition, they are considering production of two smart phone versions namely the Konje100 and the Konje 200. The Marketing department has provided the following details for the two phones:
|
Phone
|
Market price similar Phones (K
|
Estimated production cost (K)
|
|
Konje100
|
7,000.00
|
4,000.00
|
|
Konje 200
|
8,000.00
|
6,500.00
|
In order for Konje Plc to achieve the return expected by its shareholders, a markup of 40% on sales of all phone sales is required.
Required:
(a) Calculate the target cost and target cost gap for each of the two phones and explain the significance of your computations.
(b) Assuming the estimated production cost for the konje 200 was higher than its target cost, advise Konje plc on what actions they can take to reduce the target cost gab.
(c) Based on the assumption in (b) above, explain how Kaizen costing can be useful in the production of the Konje 200 after your proposed actions have been implemented.
(d) Explain the advantages of target costing compared to traditional costing approaches.