When James Beech, a skilled carpenter, was made redundant he
set-up KitTab Limited to produce a self-assembly dining table, the
Constable. A few years later he introduced the Monet, also a
self-assembly kit, and for several years KitTab achieved steady
growth in turnover and profits selling the two tables to DIY
stores. Increased competition in the selfassembly furniture market
forced James to design the Dali, a more complex, adjustable table
but still in kit form. The Dali has proved a success, its sales
increasing as the demand for the Constable and the Monet declined.
Moreover the Dali continues to sell surprisingly well despite a
recent price increase. Ongoing demand for the Constable and the
Monet appears to be dependent on maintaining old prices and as
overall profitability is falling James is considering phasing out
these and concentrating on the Dali and other new tables of more
unusual design. James is, however, worried that his present product
costing system is flawed and he has called you in as a consultant
to advise him.
DETAIL:
You establish that James runs an organised workshop using a
batch production system, making each table type in alternate
batches. To minimise the number of set ups of his machines he
produces in batches larger than the sales order quantities and
holds the excess in stock for the next order. Each table uses
different types of wood and fittings.
All production overhead is currently absorbed on a machine hour
basis but you ascertain that KitTab’s processes involve four main
activities. The budgeted costs and revenues, and cost driver
information for a typical month are as follows:
- Background When James Beech A Skilled Carpenter Was Made Redundant He Set Up Kittab Limited To Produce A Self Assembl 1 (15.06 KiB) Viewed 55 times
Your report to James Beech covering the following:
f) An explanation of any evidence you find to support his
suspicions that the present product costing system is flawed.
g) A calculation of total profits, analysed by product, using
the present (machine hour absorption) costing system. Highlight
return on sales (profit margin) in total and by product.
h) A similar analysis using appropriate activity based costing
methodology and burden rates. Highlight the amended return on sales
(profit margin) of each product.
i) Your explanation for the differences in product profit
margins observed.
j) Your recommendations to KitTab, including your advice on the
future product and production strategies that KitTab should adopt
as a consequence of the ABC analysis
Activities Cost Drivers Machining Set-up Purchasing and Materials Handling Packing and Dispatch Costs $ 13,400 4,400 6,000 4,200 machine hours production runs purchase orders sales orders Constable 150 Monet 160 20,800 Dali 80 12,800 21,000 Sales Units Sales Revenue ($) Direct Costs: Materials ($) Labour ($) Machine Hours Production Runs Purchase Orders Sales Orders 5,250 1,800 525 3 3 10 5 7,680 2,880 315 3 10 4,000 1,760 160 4 20 8 DO