STUDENT CODE NO ............................................................ STUDENT'S SIGNATURE ..................................................... DATE SUBMITTED ............................................................... MODULE TITLE : BUSINESS MANAGEMENT TECHNIQUES TOPIC TITLE : COSTING TECHNIQUES TUTOR MARKED ASSIGNMENT 3 NAME....................................................................................................................................... ADDRESS................................................................................................................................ .................................................................................................................................................. .................................................................................................................................................. ...................................................... HOME TELEPHONE ..................................................... EMPLOYER............................................................................................................................. .................................................................................................................................................. .................................................................................................................................................. ...................................................... WORK TELEPHONE...................................................... BMT - 3 - TMA (v1) © Teesside University 2011 Published by Teesside University Open Learning (Engineering) School of Science & Engineering Teesside University Tees Valley, UK TS1 3BA +44 (0)1642 342740 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the Copyright owner. This book is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, re-sold, hired out or otherwise circulated without the publisher's prior consent in any form of binding or cover other than that in which it is published and without a similar condition including this condition being imposed on the subsequent purchaser. IMPORTANT Before you start please read the following instructions carefully. 1. This assignment forms part of the formal assessment for this module. If you fail to reach the required standard for the assignment then you will be allowed to resubmit but a resubmission will only be eligible for a Pass grade, not a Merit or Distinction. You should therefore not submit the assignment until you are reasonably sure that you have completed it successfully. Seek your tutor's advice if unsure. 2. Ensure that you indicate the number of the question you are answering. 3. Make a copy of your answers before submitting the assignment. 4. Complete all details on the front page of this TMA and return it with the completed assignment including supporting calculations where appropriate. The preferred submission is via your TUOL(E) Blackboard account: https://eat.tees.ac.uk 5. Your tutor’s comments on the assignment will be posted on Blackboard. 1 Teesside University Open Learning (Engineering) © Teesside University 2011 1. Anderson Ltd. manufacture gearboxes for use in cars. At the start of the year, the management of Anderson Ltd. estimated that its costs would be: This was based on the following: 80 employees 2000 hours worked by each employee 40 000 gearboxes manufactured in the year as budgeted production £200 unit selling price. You have recently been employed by the company to establish a standard costing system. At the end of the year you were able to extract the following information: • labour costs £4.40/hour • 32 000 units sold • £210/unit selling price • 160 000 hours were worked • variable production overheads were £640 000 • fixed production overheads were £810 000 • administration costs were £350 000 • raw material prices were 10% higher than expected • total expenditure on raw material was £3.696 M • there were no opening or closing stocks of raw materials. % of sales value Direct labour Direct material Variable production overhead Fixed production overhead Administration overhead 8 50 8 12 5 2 Teesside University Open Learning (Engineering) © Teesside University 2011 (a) You are required to prepare an operating statement for the year, using a standard absorption costing system. Calculations should proceed according to the following headings suffixing ‘A’ for Adverse and ‘F’ for Favourable where appropriate. Resulting quantities required for the statement are then entered in the ‘Operating Statement for the Year’ sheet shown on page 6. (All working must be shown.) (Budgeted) Costs Unit cost £ Direct labour Direct materials Variable overhead Fixed overhead Admin. overhead Total Selling price Standard profit (per unit) Budgeted profit Sales price variance Sales quantity variance (These last three entries are added to the ‘Operating Statement for the Year’ on the final sheet of the calculations.) 3 Teesside University Open Learning (Engineering) © Teesside University 2011 Cost Variances Labour Variances Standard hours = Standard cost/hour = Rate variance = Standard time = Actual time = Time variance = Efficiency variance = (Add rate and efficiency variances to ‘Operating Statement for the Year’ on the final sheet of the calculations.) Material Variances Material price = Material usage – standard = – actual = Material usage variance = (Add price and usage variances to ‘Operating Statement for the Year’ on the final sheet of the calculations.) 4 Teesside University Open Learning (Engineering) © Teesside University 2011 Variable overheads Standard cost = Actual cost = Expenditure variance = Efficiency variance = (Add expenditure and efficiency variances to ‘Operating Statement for the Year’ on the final sheet of the calculations.) Fixed overheads Expenditure variance = Volume variance = (Add these variances to ‘Operating Statement for the Year’ on the final sheet of the calculations.) Admin overhead (treat as fixed) Expenditure variance = Volume variance = (Add these variances to ‘Operating Statement for the Year’ on the final sheet of the calculations.) 5 Teesside University Open Learning (Engineering) © Teesside University 2011 Operating Statement for the Year £’000 £’000 Budgeted Profit Sales variance – price – quantity Cost variances Labour – rate – efficiency Material – price – usage Variable – expenditure – efficiency Fixed – expenditure – volume Admin – expenditure – volume Actual Profit 6 Teesside University Open Learning (Engineering) © Teesside University 2011 (b) Give reasons/explanations why the variances in (a) above have occurred for the following: (i) material price (ii) labour efficiency (iii) fixed overhead expenditure. (c) The accountant suggests that a standard marginal costing system may be more suitable. He asks you to outline the strengths and weaknesses of both systems and recommend the most suitable. (d) The Board of Anderson Ltd. want to adopt ‘ideal’ standards because they feel it will encourage harder work. You are asked to produce a brief report giving your views. 7 Teesside University Open Learning (Engineering) © Teesside University 2011 2. (a) For the following categories of activities assign an appropriate cost driver from the list provided against each activity in TABLE 1. Cost Drivers: • Cost of Inspection/Test • Machine use hours • Direct Labour Hours • Number of Purchase Orders • Number of Production Runs • Material Delivery/Invoices. TABLE 1 Activities to produce product Activity Centre 1 Machining Activity Centre 2 Machining Product Assembly Cost Drivers Materials Procurement Activities Product Materials Purchased Material Reception/Storage Materials Issued/Production Run Support Activities Production Planning Machine Setting Up/Tooling Statistical Quality Control 8 Teesside University Open Learning (Engineering) © Teesside University 2011 (b) TABLE 2 shows the cost drivers, the quantity and unit cost of the cost driver, and total activity cost. For two products A and B it is found that: • The direct labour hours for products A and B are the same. • It takes approximately four times as many machining hours in both cost centres to produce product B as product A. • Product A requires one quarter of the materials purchased for B. • Product A requires one third of the total Delivery notes/invoices. • Product A has issued one third of the total materials issued per production run. • Product A has issued one half of the planning per production run of that required by Product B. • Product B requires twice as many machine set-ups as product A. • The products have the same number of quality control inspections. 9 Teesside University Open Learning (Engineering) © Teesside University 2011 If the company produces 50 000 each of products A and B: (i) Complete TABLE 2 to determine the cost driver unit costings in column 5 for the activities of column 1. Show also the product quantity splits in column 4 of each activity for product A and B (e.g. quantity of cost driver Activity Centre 1 is shown as split 100 000 product A and 400 000 product B). (ii) Determine the overhead activity cost allocations to products A and B (using the activity proportions calculated in column 4) by completing TABLE 3. (iii) Determine the total overhead allocations to products A and B. (iv) Find the per unit product overhead cost allocations for each product. 10 Teesside University Open Learning (Engineering) © Teesside University 2011 TABLE 2 Cost Driver Unit cost/rate per Cost Driver £ Activity Centre 1 Machining Activity Centre 2 Machining Product Assembly Materials Procurement Activities Product Materials Purchase Product Material Reception/Storage Materials Issued/Production Run Support Activities Production Run Planning Machine Setting Up/Tooling Statistical Quality Control Total Allocated Cost of Activity £ Quantity of Cost Drivers Activity involved to Produce Product Activity Cost Driver 750 000 500 000 400 000 600 000 240 000 225 000 150 000 30 000 10 000 Machine Use hours Machine Use hours Direct labour hours Purchase Orders Number of Invoices or Material Delivery Notes Number of Production runs Number of Production runs Setting up/tooling labour hours Sample inspection and Test Cost 500 000 (100 000 prod A 400 000 prod B) 250 000 100 000 5000 3000 1500 1500 750 400 11 Teesside University Open Learning (Engineering) © Teesside University 2011 TABLE 3 Activity Centre 1 Machining Activity Centre 2 Machining Product Assembly Materials Procurement Activities Product Materials Purchase Product Material Reception/Storage Materials Issued/Production Run Support Activities Production Run Planning Machine Setting Up/Tooling Statistical Quality Control Total Product A £ Product B £ Activity 1.5 × 100 000 150 000 1.5 × 400 000 600 000 12 Teesside University Open Learning (Engineering) © Teesside University 2011 Teesside University Open Learning (Engineering) © Teesside University 2011 Question No.