Questions and Topics We Can Help to Answer
Paper Instructions;
The individual assignment of 2000 words will be weighted at 30% of the overall course
assessment. The assignment is about the issue of accuracy and relevancy of costs and draws on
ideas from Activity based costing theory. The relevant session will be helpful as indeed
would a wider reading on the topic of Activity Based costing.
The Cylinder manufacturing company. The Cylinder manufacturing company is a large producer of oil tanks and is located in
the north of Buckinghamshire in the United Kingdom. It was started as a company in
1970 and has enjoyed steady growth in both sales and profits.
Davina Brinkwater, the founder’s daughter, joined the company in 1998 after graduating
from university with a degree in accounting and finance. One of her first tasks was to
revise the Accounting system as there was a demand for more accurate product cost
information to support the firm’s strategy of offering keen prices in a highly competitive
market where a few firms dominated. Davina is surprised by the depth of opposition that she faces in trying to change the
organisation. Some members of the firm appear to be happy to accept the shortcomings
of the “old” system on the basis that there are comfortable with it and they understand its
workings. However, with the support of her powerful and influential father, she wins the
argument and now has the job of implementing her “new “system. Davina’s father has now retired and she is conscious that she must prove herself to the
organisational members and is aware that disruption due to the implementation of a new
system can be upsetting. However, at the same time, profits are down below budget
and the accountant is very critical of the current costing system saying that it is out of
line with the updated manufacturing systems as well as way behind current theoretical
ideas on product costing. According to the accountant, they are still absorbing
overheads on labour hours and that they have an artificially high overhead absorption
rate of £150 per labour hour. He claims that they are pricing themselves out of the
market on their established product line. He suggests that product costs would be more
meaningful if absorbed on the basis of machine hours.
Davina decides that she should investigate this matter. Over the past five years,
overhead costs had risen to £599,300 per month, a 46% increase, while direct labour
hours have risen from £168,200 to £170,000, a small increase. The product
processes are now largely mechanised with a high level of automation. Direct labour
hours are 4,000 compared with machine hours of 6,500 (it is possible that some labour
is still being classed as direct when in fact the change in technology and automation
has altered the nature to indirect. Davina asks the manufacturing manager about the rise in overhead costs but this results
in him getting very upset and saying—“How can I keep costs down when marketing
ignore our standard specifications and insist on 23 different versions of every product? I
need more specialist engineers to monitor the changes and they do not come cheap. Also there are completely new parts coming through from design with huge material
costs; materials handling is an increasing headache. And the number of specials going
through on small production runs continues to increase. I need many more set-ups per
shift and it is skilled work, but you cannot pick up that sort of skilled labour easily, so
overtime is going through the roof”. Davina then decides to talk to the marketing manager, who says—“We are facing fierce
competition for our main high volume lines and we just can’t match the low prices in the
marketplace. However, we have successfully increased our sales of the more
specialised tanks despite an increase in prices forced on us by manufacturing. So, we
are meeting our overall sales targets and as we encourage this trend towards the high
margin specialist product lines, our profits will rise. I don’t see any problem at present
but there will be many problems if manufacturing do not get control of their cost
increases”
Davina starts to pull together the information and gets frustrated at the inconsistencies
“We are meeting our sales targets but production costs are rising because of the switch
to specialist products. However, as these are sold at a higher price, we should be
improving our profits. I really don’t understand why our profits are falling” As Davina designed the costing system, she is reluctant to admit it is at fault and she
remembers clearly the opposition she had when she last recommended changes. She
no longer has her father to back her up so she decides to bring in a consultant (you, the
student) to help identify the problem and to make recommendations as to future action. Davina supplies you with the following information. Budgeted overhead costs per month: £
Machines 279500
Set-up and engineering support 200200
Materials handling 119600
Total overheads 599300
Direct labour 170000
Total manufacturing cost excluding direct materials 769300
Further details:
Budgeted labour rate * £42.50/ labour hour
Budgeted overhead burden* £149.825/ labour hour
Total cost per labour hour £192.325
based on budgeted labour hours of 4000
Labour machine no. of no of
Hours Hours set ups stores orders
Standard products (high volume) 2500 3500 80 160
Specialised products (low vol.) 1500 3000 200 300
4000 6500 280 460
Questions:
1. Analyse the problem and give advice as to the advantages of switching to
machine hours as an overhead recovery base.
2. Show how an activity based system would change the analysis of the costs
between the standard and specialist products. 3. Advise on the implementation of an ABC system. How can Davina’s fears be
lessened?
Notes on submitting assignment:
Please keep to a maximum of 2000 words in total for the non-numeric aspects of the
assignment. If you use references please ensure to include these in a bibliography. In
total the assignment counts for 30% of the course assessment and is split as follows.
Part 1 will include the main calculations and will have 40% of marks allocated to it. Part 2 will require additional cost details in your arguments and will have 35% of marks.
Part 3 will be essentially discussion and will have 25% of marks.
Please note that following criteria will be used to assess the submitted work in its
entirety:
1. Criticality and discussion: a critical approach is adopted and theoretically rooted
arguments are developed and built to address key elements of the question.
2. Analysis and application: The extent to which the literature chosen is used to
inform and support the subsequent analysis and application of practice. 3. The paper meets the required standards of presentation including correct
Harvard style referencing, a logical structure, clear use of sub-headings, correct
grammar, punctuation and spelling, clear diagrams and tables where included.