Assessment Brief 2020/21

Assessment Brief 2020/21

Question 1

1. Calculation of cost and profit by absorbing overheads based on labour hours

Calculation of cost per units and porfir per unit based on labour hours-
particulars	Lipstick	Lip-Balm	Lip-Gloss
selling price per unit	22	26	24
Less: cost
material cost per unit	5	10	10
labour cost per unit	15	10	10
set up cost per unit	2.17	1.45	1.45
receiving cost per unit	0.54	0.36	0.36
despatch cost per unit	0.27	0.18	0.36
machining cost per unit	1.17	0.78	0.78
total cost per unit	24.16	22.77	22.95
profit per unit	-2.16	3.23	1.05
working notes-
calculation of Total labour hours	Lipstick	Lip-Balm	Lip-Gloss
labour hour per unit	3	2	2
total units of production	30000	35000	3000
total labour hours used	90000	70000	6000
(labour hour per unit * total labour hours used)
combine labour hours used from all three products			166000
calculation of set up cost for each product
set up cost for Lipstick =	(total set up cost / total labour hours) * labour hours for Lipstick
	(120000 / 166000) * 90000
	65060
per unit set up cost for Lipstick =	total set up cost for Lipstick / no. of units produced
	65060 / 30000
	2.17
set up cost for Lip-Balm =	(total set up cost / total labour hours) * labour hours for Lip-Balm
	(120000 / 166000) *70000
	50602
per unit set up cost for Lip-Balm =	total set up cost for Lip-Balm / no. of units produced
	50602 / 35000
	1.45
set up cost for Lip-Gloss =	(total set up cost / total labour hours) * labour hours for Lip-Gloss
	(120000 / 166000) * 6000
	4337
per unit set up cost for Lip-Gloss =	total set up cost for Lip-Gloss / no. of units produced
	4337 / 3000
	1.45
calculation of receiving cost for each product
receiving cost for Lipstick =	(total receiving cost / total labour hours) * labour hours for Lipstick
	(30000 / 166000) * 90000
	16265
per unit receiving cost for Lipstick =	total receiving cost for Lipstick / no. of units produced
	16265 / 30000
	0.54
receiving cost for Lip-Balm =	(total receiving cost / total labour hours) * labour hours for Lip-Balm
	(30000 / 166000) *70000
	12651
per unit receiving cost for Lip-Balm =	total receiving cost for Lip-Balm / no. of units produced
	12651 / 35000
	0.36
receiving cost for Lip-Gloss =	(total receiving cost / total labour hours) * labour hours for Lip-Gloss
	(30000 / 166000) * 6000
	1084
per unit receiving cost for Lip-Gloss =	total receiving cost for Lip-Gloss / no. of units produced
	1084 / 3000
	0.36
calculation of Despatch cost for each product
Despatch cost for Lipstick =	(total Despatch cost / total labour hours) * labour hours for Lipstick
	(15000 / 166000) * 90000
	8133
per unit Despatch cost for Lipstick =	total Despatch cost for Lipstick / no. of units produced
	8133 / 30000
	0.27
Despatch cost for Lip-Balm =	(total Despatch cost / total labour hours) * labour hours for Lip-Balm
	(15000 / 166000) *70000
	6325
per unit Despatch cost for Lip-Balm =	total Despatch cost for Lip-Balm / no. of units produced
	6325/ 35000
	0.18
Despatch cost for Lip-Gloss =	(total Despatch cost / total labour hours) * labour hours for Lip-Gloss
	(15000 / 166000) * 6000
	542
per unit Despatch cost for Lip-Gloss =	total Despatch cost for Lip-Gloss / no. of units produced
	542 / 3000
	0.36
calculation of Machining cost for each product
Machining cost for Lipstick =	(total Machining cost / total labour hours) * labour hours for Lipstick
	(65000 / 166000) * 90000
	35241
per unit Machining cost for Lipstick =	total Machining cost for Lipstick / no. of units produced
	35241 / 30000
	1.17
Machining cost for Lip-Balm =	(total Machining cost / total labour hours) * labour hours for Lip-Balm
	(65000 / 166000) *70000
	27410
per unit Machining cost for Lip-Balm =	total Machining cost for Lip-Balm / no. of units produced
	27410/ 35000
	0.78
Machining cost for Lip-Gloss =	(total Machining cost / total labour hours) * labour hours for Lip-Gloss
	(65000 / 166000) * 6000
	2349
per unit Machining cost for Lip-Gloss =	total Machining cost for Lip-Gloss / no. of units produced
	2349 / 3000
	0.78

2. Calculation of cost and profit per unit by absorbing the overheads using activity based costing-

Calculation of cost per units and profit per unit based on labour hours-
particulars	Lipstick	Lip-Balm	Lip-Gloss
selling price per unit	22	26	24
Less: cost
material cost per unit	5	10	10
labour cost per unit	15	10	10
set up cost per unit	1.37	2.24	22.00
receiving cost per unit	0.39	0.45	0.91
despatch cost per unit	0.17	0.20	1.00
machining cost per unit	0.62	0.72	7.22
total cost per unit	22.55	23.62	51.13
profit per unit	-0.55	2.38	-27.13
working notes-
particulars		Lipstick	Lip-Balm	Lip-Gloss
set up cost per unit=
total set up cost Ruislip plc	120000
total set ups for Ruislip plc	25
set up cost per set up	4800
total number of set ups		10	14	1
total set up cost		48000	67200	4800
Number of units produced		35000	30000	3000
set up cost per unit=		1.37	2.24	1.6
particulars		Lipstick	Lip-Balm	Lip-Gloss
Receiving cost per unit=
total receiving cost Ruislip plc	30000
total Receiving’s for Ruislip plc	22
Receiving cost per Receiving	1363.6364
total number of Receiving’s		10	10	2
total Receiving cost		13636.364	13636.3636	2727.273
Number of units produced		35000	30000	3000
Receiving cost per unit=		0.39	0.45	0.91
particulars		Lipstick	Lip-Balm	Lip-Gloss
Despatch cost per unit=
total Despatch cost Ruislip plc	15000
total Despatch for Ruislip plc	50
Despatch cost per Despatch	300
total number of Despatches		20	20	10
total Despatch cost		6000	6000	3000
Number of units produced		35000	30000	3000
Despatch cost per unit=		0.17	0.20	1.00
particulars		Lipstick	Lip-Balm	Lip-Gloss
Machining cost per unit=
total Machining cost Ruislip plc	65000
total Machining’s for Ruislip plc	12
Machining cost per Machining	5416.6667
total number of Machining’s		4	4	4
total Machining cost		21666.667	21666.6667	21666.67
Number of units produced		35000	30000	3000
Machining cost per unit=		0.62	0.72	7.22

3. Evaluation of techniques used above and their respective results-

In the part (a) the cost and profit are calculated based on the overheads being absorbed as per the labour hours in such as case the total labour hours are distributed among all three category of product from which they are being apportioned. In such situation all the overheads are being apportioned among all three categories from which they are being calculated on per units basis based on labour hours according to the labour hours consumed by all three categories that is lipstick, lip-balm and lip-gloss. This process is followed in case of all overheads. After totalling all cost and reducing them from selling price per unit profit per unit is being calculated. The results indicate that the lipstick is having the per unit loss of -2.16 whereas the other two are in the profits of 3.23 and 1.05 respectively.

Similarly in the part (b) the overheads are being apportioned based on their respective cost drivers. In which the total overheads are being divided by the respective utilisation of cost drivers from which cost per usage of overheads has been calculated they are been multiplied by the respective units being produced based on their capacity. The calculation of per unit cost is then totalled and reduced from selling piece to get the profit per unit. The results indicate loss from lipstick of -0.55 and from lip-gloss of – 27.13 whereas has the profit of 2.38 from lip balm.

Hence it can be concluded that both the methods second method is better to absorb the overheads based on their respective drivers as this provides with the actual position for each category to reflect the correct image for the performance measurement. Since measuring using the labour cost is only provide the half picture where the application of other drivers are being ignored which are crucial for calculation and decision making as well.

D). Sensitivity analysis: -

Ruislip plc will use Sensitivity analysis, which is the financial modal of business to calculate that how will target variables affect the other variables of company that is known as input variables. Sensitivity analysis helps to sort out the uncertainties of organizations by providing different benefits to the decision makers of company such as all internal and external users and these decisions helps them for the future improvements for company. this analysis also helps to manage risk factors of business by providing different risk areas or departments. The Sensitivity analysis helps company to get rid of different uncertainties by analysing many possible outcomes of company with strong analysis of weak spots of company. it also helps to improve decision making process of management with the change of different variables of company. by knowing about the different changing variables, this analysis helps company to allot different resources in various departments of company according to their business needs. To get rid of the uncertainties of Ruislip plc will create Sensitivity analysis, which is not complicate to maintain direct labour, direct material of company and also helps to identify the impact of cashflow statement of company so that they can know about the uncertainties and additional cash outflows and reduce such expenses of company (Kami?ski, Jakubczyk and Szufel 2018).

Question 2-

1. data of standard material cost for 100 kgs of omega-

Input	Kg		Cost per Kg		Cost per Kg
of Omega
(£)			(£)
Alpha	40		2.00		80.00
Beta	60		5.00		300.00
Gamma	20		1.00		20.00
Total 120				400.00

Last month data for the actual production of omega being 4600 kgs-

Input	Kg		Cost per Kg		Total cost
(£)			(£)
Alpha	2200		1.80		3960.00
Beta	2500		6.00		15000.00
Gamma	920		1.00		920.00
Total 5620				19880.00

9. material usage variance-

calculation of material usage variance
material usage variance = (Standard Quantity – Actual Quantity) x Standard Price
			Alpha	beta	gamma
standard quantity			40	60	20
Actual quantity			2200	2500	920
standard price			2	5	1
Material usage variance'			-4320	-12200	-900
material usage variance in total =			-36000

2. Material mix variance-

material mix variance = Standard Cost of Actual Usage in Standard Mix – Standard Cost of Actual Mix
		SM × SP – AQ × SP
		(SM ? AQ) × SP
		-19712
standard mix for alpha		733
standard mix of beta		1250
standard mmix for gamma =			153

2. Material yield variance

material yield variance		standard cost per unit * ( actual yield - standard yield)
		(5620-4600 )*8
		8160

b) Standard costing-

The current system used for the assessing the performance is the variance analysis or the standard costing. The standard costing is the method used for keeping the track of all the expenses and cost of business (Paul, et al 2020). Through this process the expenses and the cost are being estimated for the future and based on which the comparison is made. This comparison is made between the actual performance and the estimated data which is also called budgeted performance. The deviation or the differences are being analysed to detect the reasons for such differences. Along with having the benefits for its usage this method also gas its disadvantages in its calculation and the reporting system that is used to assess the performance of the production manager.

Hence the major drawback of variance analysis us that it takes lot of time for examination of the results or the impact of variances over which the corrective actions are to be taken (Bargerstock, Shi 2016). Due to this high time the actions to be taken are also nor been taken on correct time due to which the application of decisions and the measures to be taken for controlling them are also delayed enormously. The standard costing is carried out by the staff of accounts at month end but cam be used when the faster or quick feedback is needed by the management fir making decisions. The overall implication of standard costing is also very expensive especially for small scale business houses. For such cases conducting detailed investigation for each particular cost and for each component might not be that logical. Since the analysis and estimation of standard costing is done according to the past or the prior data hence it is not necessary that this always fits in the current position too. The possibility of improvement in its operations with a standard limit is certain (Bargerstock, Shi 2016).

The variances are being analysed and taken into consideration based on their materiality which is of very subjective nature as this differs from person to person and business to business due to which judgement also varies this may even result in the conflict of interest. The preparation of whole budget is based on the present year’s financial data. The variation can be huge because of the difference in the past and the current situations. The variations can be manipulated from which it becomes difficult to estimate the current actual variations (Paul, et al 2020).

Question 3-

Zero-based budgeting is the methods used in which all kind of expenses are require to be justified for every period of accounting. The process which is involve in the zero based budget begins with the basic analysis and calculation which is also called Zero base. In this method each function, each cost, reach activity is requite to be analysed from zero. The budgets are being then prepared based on such analysed data for the period to come irrespective of the fact as to what the previous budget was and how much low or high is the current budget as per the prior one (Jordan, et al 2017).

Due to its nature of being oriented in detailed manner this method of ZBB has the rolling process which is to be conducted after every few years in which the functional areas are being reviewed by the managers on timely basis. This method is beneficial as the sudden rise or fall in the rates can be avoided which results in the rise or fall in cost and prices in blanket manner with that of previous budget. Although it consumes lot of time in the process more than the traditional method of costing takes. This method is beneficial in achieving the targets of revenues, production level in directly manner and the contribution achieved can be justifies in simple manner to the head of department and client as well.

Whereas in case of increment budgeting which is also called as the traditional method of budgeting in which the preparation of budget takes place after considering the Actual performance and the budget for present period to be its base. In this method the amount which are incremental are being added to the budget prepared for the new period. Hence the incremental amount are will consist of all kind of adjustments which will involve the impact of inflation, rise in sales cost and prices (Jordan, et al 2017). The increases adjusted involves all kind of increases and current budget is taken as the beginning point. In this method it is simple to prepares as well as allow analysis process to simplify for the junior members of staff also hence can be understood easily. This consumes less time than the ZBB and hence the cost of this method is also low. Because of its nature of constant approach toward the cost and activities of operations this avoid the conflict on interest among the managers with in an organisation. Through increment budgeting the variation and the changes can be easily be noticed and hence the corrective action can be taken on time for best results (Hijal-Moghrabi2019).

Since the ZBB needs all the cost that are needed it to be occurred shall be justified hence it would be considered as nor so appropriate for using it’s for the purpose on whole process of budgeting especially in the organisation of commercial nature. Hence instead of taking some much duration in the justification process of the expenses and to meet the production needs when so as such discretion van be taken in any manner. At such point of time the increment budgeting is by making the comparison in quick and the easy manner which is easily understandable. Whereas the increment budgeting gives rise to the efficiency at the same time along with slack in budget and inertial.

Hence it can be concluded that neither the method of budgeting gives the flawless tool for coordination of panning and even the controlling. In contrast to tis every method is also have some positive impacts which is to be recommend and provide the optimal solution stands between these two methods only (Jordan, et al 2017).

References-

• Bargerstock, A., C.P.A. & Shi, Y. 2016, "LEANING AWAY FROM STANDARD COSTING", Strategic Finance, vol. 97, no. 12, pp. 38-45.

• Hijal-Moghrabi, I. 2019, "Why Is it So Hard to Rationalize the Budgetary Process? A Behavioral Analysis of Performance-Based Budgeting", Public Organization Review, vol. 19, no. 3, pp. 387-406.

• Jordan, M.M., PhD., Yusuf, J.(., PhD. & Hooshmand, S., PhD. 2017, "BUDGETING BY PRIORITIES: BALANCING STABILITY WITH ECONOMIC RESPONSIVENESS", Public Finance and Management, vol. 17, no. 1, pp. 71-91.

• Kami?ski, B., Jakubczyk, M. and Szufel, P., 2018. A framework for sensitivity analysis of decision trees. Central European journal of operations research, 26(1), pp.135-159.

• Paul, D.D. & Cokins, G., C.P.I.M. 2020, "STANDARD COSTING AND ABC: A COEXISTENCE", Strategic Finance, vol. 101, no. 11, pp. 32-39.