ABC Co. Ltd. specialises in manufacturing electronic products. The range comprises of 2 products, Personal Computers (‘PC’) and Video Players (‘VP’). The company’s products have the data shown below.
Products PC VP
Maximum monthly demand unit 10,000 20,000
Direct labour hours per unit hr 2 4
Selling Price $ 1,200 1,600
Unit variable costs
Direct Material $ 600 800
Direct Labour $ 200 400
Other variable O/H $ 200 20
The company has adopted the OAR in term of direct labour hour. The total estimated fixed cost and direct hours during the year is $2.4m and 30,000 hours respectively.
The company is planned to manufacture a new product, I-Phone (‘IP’) with estimated contribution of $600 per unit.
The manager wants to prepare the budgets for the coming January to March, assuming that the company will manufacture only IP to fulfill a confirmed special order for 3,000, 3,000 and 4,000 units for Jan, Feb and March respectively at $200 each. The only variable cost is direct raw material. To produce one unit of IP, the standard usage of raw material is 2 units at standard price of $70 per unit of IP. The actual sale and material purchase for last December is 2,500 units and 50,000 units respectively.
Noted: The Production Department is responsible for the planning, organising and control of the manufacturing process while the Procurement Department is responsible for the purchase of all raw materials.
Give your advice on the following issues:
Analyse and evaluating ABC’s financial performances by using the various management accounting technique, and make the possible recommendations in dealing with the financial problems and the price strategies in revising its price (3.2, 4.1, 4.2)
Part B: Budgeting Process:
- the major functions of budgeting process (3.1)
- the advantages and disadvantages in operating a budgetary control system (3.1);
Part C: Budgetary Planning:
- whether fixed or flexible budgets should be prepared for the coming January to March (3.1)
- based on information provided in question, prepare the monthly budgets as follows: (3.1, M3)
- sales budget
- cash collection budget from sales (assuming 40% of current month sales being paid within the same month with the remaining 60% payable in the following month)
- production budget (assuming monthly production units equals to monthly sales units)
- raw material purchase budget (assuming the company purchases the exact quantity of raw material in each month to meet the monthly production requirement)
- cash payment budget for raw material purchases (assuming payment being made in the month following the month of purchase)
- prepare the monthly cash budget (assuming that the only other item is cash payment of $300,000 in January for the purchase of production equipment and that the projected cash and bank balance as at 1 January is $20,000) (3.1, M3)
Part D: Budgetary Control:
- if the actual purchase and usage of raw material amounted to $435,600 in January, calculate the raw material variance (4.1)
- it is found that the actual purchase price of raw material is $66 per unit and the actual purchase and usage quantity is 6,600 units to produce 3,000 units of IP in January. Compute the raw material price and usage variances to analyse the raw material variance in question (4.1)
- prepare a cost reconciliation statement reconciling budgeted and actual raw material costs for the month of January (4.1)
- it is discovered that raw material was purchased in January from a new supplier not on the company’s approved vendor list. Report your findings to the manager in accordance with the responsibilities of the relevant departments and recommend possible corrective actions for the identified variances (4.1, 4.2, M3 and M4).
Prepare a proposal to advise the manager.
To achieve D3, you have to evaluate how the planning tools respond appropriately to solving the financial problems to lead the organization to sustainable success.