COOL RIDE SKIS LTD CASE STUDY It is the end of 2015 and Grace Miller, senior management accountant for Cool Ride Skis Ltd has been analysing the Victorian division's 2015 results. Both she and the company's Managing Director, Jackson Pham felt that overall 2015 had been quite a successful year for the Victorian division, particularly in light of certain competitive and environmental pressures that the company has experienced. At the request of Jackson, Grace is currently focusing on the performance of the division's two product lines – snow skis and snowboards. Jackson has asked Grace to prepare a detailed analysis of the performance of these two lines for presentation at a specially scheduled meeting with the manager of the division, Dominic Silk. The focus of this meeting is to identify how well Dominic and the division have performed during the past year, and if necessary, identify any specific areas that require further analysis and need to be considered in the ongoing planning process. Company Background Cool Ride Skis Ltd (Victoria) is the Victorian based division of a medium sized Australian snow-sport equipment manufacturer and retailer. Until 1992 Cool Ride Skis Ltd was predominantly a centralised company. However it had experienced quite rapid growth in the 1980's and its managing director, Jackson Pham saw the need for greater decentralisation. Consequently, the company was divided into 4 market-based divisions – Cool Ride Skis Ltd (Victoria), Cool Ride Skis Ltd (NSW), Cool Ride Skis Ltd (Tasmania) Cool Ride Skis Ltd (South Western region). Cool Ride Skis Ltd (Victoria) manufactures and sells both skis and snowboards. The division has one manufacturing plant, located in an outer Melbourne suburb. It also has 20 retail shops located in different regions throughout Victoria. Dominic Silk is the manager in charge of the Victorian division. He is responsible for all aspects of his division's performance including production, marketing, advertising, sales and distribution . Consequently Dominic's division is treated as a profit centre. The Ski and Snowboard Markets in Victoria The state of Victoria has three major snowfields – Mount Buller, Mount Hotham and Falls Creek. While snow skiing has been popular for many years, snowboarding is a relatively new sport. In fact it was only in 1998 that it first became a sport at the Winter Olympics. Cool Ride began producing and selling a small number of snowboards 8 years ago. However recently it has been clear that there are real gains to be made as the snowboarding market is growing and snowboards generally have higher margins than do skis. This is primarily due to the fact that snowboarding is viewed as a newer and more fashionable activity than skiing, and customers are therefore willing to pay relatively high prices for snowboards. The markets for skis and snowboards in Victoria are affected primarily by the same factors. The overriding factor that impacts on annual sales of both products is the number of people visiting the Victorian snowfields each year. This in turn is dependent on a number of factors. The most important of these are firstly prevailing economic conditions, and secondly, snowfalls during the ski season. As snow sports are relatively expensive pastimes a downturn in the economy could have quite an impact on the number of people who choose to go skiing/snowboarding. Also extremely important is the amount of snowfall for a given season as this impacts on such things as the number of days available to ski/snowboard and the number of ski lifts open for use on a given day. Consequently a particularly good or bad snowfall in a given year could significantly affect the number of skiers/snowboarders choosing to visit the snowfields, which would in turn influence sales of snow equipment. Cool Ride Skis Ltd has been well aware of the increasing popularity of snowboarding. At the end of the 2014 year, Jackson Pham met with all his divisional managers in order to emphasise the need to focus their efforts on increasing sales in the snowboarding market. It was made clear to Dominic Silk (and the other divisional managers) that he was expected to exploit the opportunities for high margins offered by snowboards and it was anticipated that this would be achieved through aggressive marketing and advertising. Jackson also pointed out that decisions relating to expenditure on advertising and marketing had to be considered extremely carefully as these types of costs could in fact erode high margins if they did not result in adequate returns. Jackson suggested to Dominic that he may need to find ways to reduce his expenditure during 2015, in order to cover his advertising costs. Anticipated market sizes for the ski and snowboard markets in 2015 were as follows (note that these figures represent a 10% increase from 2014). Anticipated Market Size – Victoria 2015 Skis Snowboards Market size (Victoria) in sales units 100,000 131,250 Profit Planning and Control at Cool Ride Skis Ltd In her role as senior management accountant, Grace co-ordinates a team of marketers, accountants and operations managers who undertake the profit planning (budgeting) process for the coming year. The objective of this planning process is to develop profit plans for the division. These profit plans are used as the basis for divisional performance evaluation at the end of the year. They are also used to determine such things as production scheduling and cost budgets for the manufacturing plant and sales budgets for the retail shops. This process is described below. Sales Forecasting Each year the first step in the profit planning process is to generate a sales forecast for skis and snowboards for the coming year. A variety of factors are considered in developing these sales forecasts. They include external factors such as anticipated economic conditions affecting the market, expected snowfalls and days available for skiing at the three Victorian snowfields and predicted behaviour of Cool Ride's major competitors. Internal factors are also taken into account, such as anticipated sales promotion efforts by Cool Ride and any changes to the design of the products. In most of these cases the impact of external and internal factors are estimated using judgement, expertise and experience. For instance, for the 2015 year Grace consulted with both Jackson and Dominic and after a lengthy discussion of the relevant factors, all three concluded that it was likely that the market for both skis and snowboards would increase by 10% from the previous year. Under the assumption that Cool Ride could maintain their share of the market in 2015, Grace then built this estimate of market growth into the sales forecasts for the two product lines. In addition, Grace, again in consultation with Jackson and Dominic, included in her sales forecast for snowboards the impact of the anticipated increase in advertising and marketing. Exhibit 1 contains details of the Victorian Division's sales forecasts for the two product lines and forecast expenses resulting in Budgeted Profit for each. Cost Classification and Budgeting Cost classifications at Cool Ride had been established a number of years ago. All costs are classified as being either "fixed" or "variable". Variable Costs: Direct costs designated "variable" are assumed to move in line with volume of production or sales. Indirect costs designated "variable" are assumed to vary according to selected drivers (as follows). Allocation bases for variable overhead Variable overhead Allocation base Indirect materials Total direct materials dollars Indirect labour Direct labour hours Utilities Machine hours Machine setups No. of machine setups Other Machine hours Selling and Distribution Sales units Standard variable costs per unit for materials and overhead were determined a number of years ago. New labour standards had been developed during 2014. The table on the following page summarises the standard usage of inputs involved in producing each of the products: Standard Usage of Direct Materials, Labour and Machine Time Skis Snowboards Timber (metres) 4.4 3.4 Fibreglass (metres) 2.1 1.8 Metal Alloy (kgs) 2.0 1.6 Direct Labour (hours) 2.2 1.8 Machine hours (hours) 0.8 0.9 Fixed Costs: All categories of fixed costs are assumed to remain at the same value regardless of changes in sales units. For 2015, all fixed costs other than advertising and marketing were determined using the past year's actual costs as a starting point, and then each category was increased by 10%. When determining the budget for advertising and marketing in 2015, Dominic and Grace decided that last year's actual expenditure on these items were adequate for skis. However, it was decided that expenditure on advertising and marketing for snowboards should be 20% greater than the prior year's actual expenditure to take account of the need for more aggressive advertising and marketing of that product line. Following consideration of the forecast sales and costs, Grace produced the Budget for 2015 as displayed in Exhibit 1 on the following page. EXHIBIT 1: Budgeted Profit & Loss Statement – 2015 Skis Snowboards Sales in units 15,000 10,500 Sales Revenue $13,500,000 $8,820,000 Less Variable Costs: Direct Materials Timber 1,386,000 749,700 Fibreglass 2,520,000 1,512,000 Metal Alloy 660,000 369,600 Direct Labour 990,000 567,000 Variable Manufacturing Overhead Indirect materials 913,200 526,260 Indirect labour 495,000 302,400 Utilities 96,000 75,600 Machine setups 34,800 26,880 Other 288,000 198,450 Non-Manufacturing Variable Overhead Selling and Distribution 180,000 110,250 Contribution Margin $5,937,000 $4381,860 Less Fixed costs Machine Maintenance 250,000 180,000 Machine Repairs 80,000 60,000 Advertising 150,000 212,000 Marketing 100,000 96,000 Selling and Distribution 970,000 840,000 Administrative* 390,000 390,000 Net Profit $3,997,000 $2,603,860 Notes: ^Assume Cool Ride's production and sales are equal in any given year. *These costs included an estimate of the allocation of costs from head office. Actual Results for 2015 The following purchases of materials were made in 2015: Direct Materials Purchases Skis Snowboards Timber (metres) 100,000 100,000 Fibreglass (metres) 40,000 25,000 Metal Alloy (kgs) 34,000 19,000 The actual profit results for Cool Ride are contained in Exhibit 2. EXHIBIT 2: Actual Profit & Loss Statement – Year ended 31 December 2015 Skis Snowboards Sales Revenue $ 13,056,000 $ 9,856,000 Direct Materials Timber 979,200 564,480 Fibreglass 2,496,960 1,523,200 Metal Alloy 584,936 396,704 Direct Labour 1,166,880 776,160 Variable Manufacturing Overhead Indirect materials 730,997 447,189 Indirect labour 636,480 423,360 Utilities 60,384 46,872 Machine setups 44,880 32,160 Other 163,200 128,520 Non Manufacturing variable costs Selling and Distribution 136,000 100,800 Contribution Margin $6,056,083 $5,416,555 Fixed costs Machine Maintenance 140,000 90,000 Machine Repairs 220,000 160,000 Advertising 90,000 304,000 Marketing 93,000 124,000 Selling and Distribution 890,000 782,000 Administrative 450,000 450,000 Net Profit $4,173,083 $3,506,555 Grace Miller collected some additional information about operations in 2015 that she believed may help understand why actual results differed from budgeted. She summarised these findings as follows: • It was expected that both markets would increase in size by 10% from the previous year, however due to a lower than average snowfall and the economic crisis, the actual size of the skis market was 97,143 units, while the snowboard market was actually 86,154 units. • Standard selling prices for the two products were conservatively estimated due to anticipated competitive and environmental pressures. Actual prices for skis and snowboards were in fact higher than expected, at $960 and $880 respectively. • The two products were manufactured in batches. At the beginning of the year it was budgeted that each product would be manufactured in batches of 50 units. Each production batch would require one machine setup. • The actual number of machine setups for skis and snowboards was 340 and 240 respectively. • Cool Ride imports its metal alloy from overseas. Unfortunately, exchange rate changes were not favorable in 2015. This resulted in the average price for metal alloy being 15% higher per kilogram than anticipated. However the metal alloy was of a higher quality than usual and this resulted in less wastage than expected. • The raw materials purchasing manager, Michelle Lee, negotiated a price discount of $3.00 per metre for bulk purchases with Matlock Timber, suppliers of the timber used in the manufacture of skis and snowboards. The discount applied to all purchases of timber. While the timber was of excellent quality, purchase quantities were unnecessarily large. • Michelle Lee also found a new fibreglass supplier that was willing to supply fibreglass at a price significantly below standard. • The manufacturing manager, Janek Sidhu, was unhappy with the quality of fibreglass. In particular it seemed that the glass cracked more often than usual, which resulted in higher than normal levels of scrap. It also required unexpected rework on both skis and snowboards. It was estimated that 2,800 metres and 1,900 metres of fibreglass was scrapped in the production of skis and snowboards respectively. • 36,720 metres of fibreglass were actually used in the manufacture of skis and 22,400 metres in the manufacture of snowboards. These amounts include the fiberglass that was scrapped due to poor quality. • During 2015 Cool Ride's manufacturing employees were awarded an unexpected wage increase. As a result of the increase in labour costs per hour, Cool Ride's manufacturing manager decided to employ lesser skilled workers for much of the production process in an attempt to meet budget. As a result of these two factors, the average direct labour rate was actually $3 higher than standard. • Actual machine hours used to produce skis and snowboards were on average 25% less than standard for both products. • Dominic Silk realized he had underestimated the amount he needed to spend on additional advertising and marketing for the snowboard line. He decided to spend over the budget on these items. However he reduced machine maintenance substantially for both products in order to cover some of the additional advertising and marketing costs. ASSESSMENT REQUIREMENTS This assessment has four primary aims: 1. To provide you with an opportunity to develop your understanding of standard costing and variance analysis; 2. To provide you with the means to further refine your analysis and problem solving skills; 3. To provide you with an opportunity to develop teamwork capabilities; 4. To provide you with an opportunity to develop your report writing skills. YOUR TASK After considering carefully all the information above you (as assistant to Grace Miller) are going to prepare a report to be presented in a meeting to Grace, Jackson Pham, Michelle Lee and Janek Sidhu. Within the report you need to address the following. 1. Outline and explain the purpose and potential benefits of standard cost systems and variance analysis. (To gain marks your discussion must not simply be a restatement of the Horngren text). (3 marks) 2. Using the information in the case, (a) Prepare a flexible budget for Cool Ride Skis Ltd for the year ended 31 December 2015. (3 marks) (b) For each product (skis and snowboards) prepare a complete analysis of the variance between budgeted profit and actual profit, contained in Exhibits 1 and 2. In your analysis include the following variances: • Sales volume variance (calculate individually for each product) • Sales mix variance (calculate individually for each product) • Sales quantity variance (calculate individually for each product) • Market size and market share variances (calculate individually for each product) • Selling price variance (Note that the selling price variance has not been directly covered in lectures). • Price and quantity variances for each type of direct material • Rate and efficiency variances for direct labour • Spending and efficiency variances for each variable overhead category • Spending variances for each fixed overhead category. (9 marks) 3. Provide an evaluation of how well Cool Ride Skis Ltd (Victoria) has managed its revenue and costs in 2015. Each revenue/cost item should be discussed separately in your report. Your evaluation should do the following: • Use the variances calculated in part 2 and information in the case as support for your arguments; • Identify the likely causes of the variances you calculated in part 2. • Identify any interdependencies among the variances you calculated in part 2. • Raise any concerns you have with the calculation of the variances. (3 marks) 4. Based on your evaluation of Cool Ride Skis' revenue and cost performance in 2015, identify and discuss the major items which should be investigated further in subsequent meetings. (3 marks) 5. Identify any limitations you believe exist in the following areas at Cool Ride Skis and give your recommendations on the existing system to improve and overcome the limitations you identified in the following areas: • The Standard Costing System. • Variance Analysis. (4marks) 6. Briefly explain how management accounting reporting practices can be considered as a social practice? (5 marks) Note that the last two issues require you to read beyond the Horngren text. PREPARATION OF THE REPORT When preparing the report please note the following. 1. You must prepare the report in a professional format that would be suitable for presentation at a meeting of Cool Ride Skis management. Although the preceding points are numbered, they must not be regarded as a list of Questions, rather as a guideline of minimum issues that must be addressed in your Professional Report. 2. The RMIT Study and Learning Centre provides on-line tutorials to help students with their Report Writing Skills. You can find these tutorials at the following website: http://www.dlsweb.rmit.edu.au/lsu/content/2_AssessmentTasks/02reports.htm 3. As a general guideline your report should include the following sections; Title Page Contents Page Executive Summary: Include a summary of results (not just contents) of your report so that the reader would understand the key issues and findings. This is not the place to discuss the business in detail; Introduction: Introduce the business and provide a context/background for your report. Provide a brief outline of the content of your report. The Body of your Report This section should have a number of sections, each one relating to a specific issue you are analysing/discussing. Each section should begin with a Heading or Subheading. These Headings or Subheadings should give the reader a specific idea of the issue to which the section relates. Conclusion: Draw together your discussion into a specific and concise conclusion, so that the reader could understand the basic issues and findings of your Report by reading this section only. Bibliography/References: Evidence of research. If you are unsure about how to reference, please view the following RMIT website. http://www.dlsweb.rmit.edu.au/lsu/content/4_WritingSkills/05referencing.htm Appendices: detailed calculations Footnotes: If you have quoted or used the ideas of any text/article or other source you must footnote this source. Otherwise you will be plagiarizing! If you are unsure about how to footnote, please view the following RMIT website. http://www.dlsweb.rmit.edu.au/lsu/content/4_WritingSkills/05referencing.htm 4. Marks will be deducted for poor presentation and inadequate referencing of materials used. Please note that PLAGIARISM is a serious university offence. Any evidence of plagiarism in this assignment will be sent to the Head, School of Accounting. If you are unsure of the meaning of plagiarism, please read this subject's course guide, and/or see the course coordinator. 5. The assignment is worth 30% of your total assessment and has a 2,500 word limit. 6. The assignment due date is on the 8th October 2016 on or before 12.00 Midnight 7. You are expected to work in groups of 4 with all students having joint responsibility for every part of the assignment. No individual assignments will be accepted. PLEASE NOTE: IT IS STRONGLY ADVISED THAT YOU DO NOT ASSIGN THE CALCULATIONS TO ONE GROUP MEMBER, AND DISCUSSION TO OTHER MEMBERS– THIS IS A TEAM ASSIGNMENT. IF YOU CHOOSE TO PREPARE YOUR ASSIGNMENT IN THIS WAY YOU MUST ENSURE THAT YOUR DISCUSSION IS BASED ON THE COSTS CALCULATED. NOTE ALSO THAT THE TOPIC TO WHICH THIS CASE STUDY RELATES IS EXAMINABLE IN THE FINAL EXAM. 8. Please ensure you attach the following assessment page to the front of the assignment. This is a guideline of the attributes your tutor will be assessing. Marking Guide: Grammar: Sense, Clarity, Spelling and Punctuation Avoid use of first person (I, me, you, we etc) Clear and concise Structure of Report: Title Page Table of Contents Executive Summary Introduction Main body of report – use of headings and subheadings Conclusion Bibliography/References Appendices Organisation: Logical and clear Presentation: Typed, 2.5cm margins, paragraph spacing, 12 point font Calculations: Other Comments Mark: Student Names Student ID Signature* * Your signature is formal acceptance of the standards set by the university regarding written submissions. We would like to draw your attention to the treatment of Plagiarism. It is the presentation of the work, idea or creation of another person, without appropriate referencing, as though it is one's own. It is not limited to direct quotes, rather substantial use. Plagiarism is not acceptable. The use of another's work or ideas must be acknowledged. By all means, use your text sources – just make sure your foot note appropriately.