ACC2222 LALA Ltd Manufactures Two Types of Shoes (Ballet and Bella)

Part A

LALA Ltd manufactures two types of shoes (Ballet and Bella) and it is located in Park Royal, London. Both types of shoes go through three distinct stages of production processes, namely cutting, sewing and finishing. The finance team has allocated and apportioned the annual budgeted production overheads as follows: 

 Cost centre        Annual budgeted production overheads

Cutting                    £X

Sewing                    £Y

Finishing                 £Z

The cutting process is mainly mechanised, the sewing process is mainly manual labour and the finishing process is unit-based. It is estimated that the total production of Ballet shoes for the year is 25,000 units and for the Bella shoes is 15,000 with 40,000 machine hours and 20,000 labour hours available for the year. 

“Ballet shoes” is one type of shoes produced by the Company. One unit of “Ballet shoes” requires the following prime cost: 

Direct materials £12

Direct labour: Cutting – 6 minutes @ £2 per hour £0.20

Sewing – 30 minutes @ £10 per hour £5

Finishing – 3 minutes @ £4 per hour £0.20

One unit of “Ballet shoes” requires 1.6 machine hours. 

Assuming the role of company’s management accountant, during the board meeting of last week, you proposed the implementation of the activity-based costing (“ABC”) approach for the next budgetary period. If the company adopts the ABC approach, the details relating to the planned production overheads are as follows:                                                

Required: -

In facilitating the directors’ decision in the implementation of the ABC approach for the company’s next budgetary period, as the management accountant, you are required to write a report to the board of directors explaining the main features and advantages of the ABC approach over the traditional costing approach. When writing your report, you should consider the following:

• Discuss key features (with appropriate example) of ABC method

• Discuss key advantages of ABC method as compared to traditional costing approach. 

• Include calculation of full cost per unit of “Ballet shoes” using traditional costing approach and activity-based costing (“ABC”) approach respectively. Compare the results, and discuss the possible reason/reasons for that difference, and what would be negative outcome/outcomes if the company choose to continue with traditional costing approach.

Part B

Alpha Ltd manufactures and sells a fan heater. At the current level of output of X units, the required direct material is £8 per unit and direct labour is £Y per unit, annual fixed costs are £Z and unit selling price is £25.

Last week, a new customer approached the Company for a one-time special order of T units of its product for £23 each. The company realize that they have reached maximum production capacity and in order to meet this special order, they need to expand their capacity. This expansion will incur additional fixed costs of £5,000 while other costs would remain unchanged. This expansion has also some negative impacts on environment and employees’ health and wellbeing.

Required: -

As the management accountant of Alpah ltd, you are required to write a report to Chief Financial Officer (CFO) presenting annual net profit, break-even point and margin of safety based on the current level of output and comment on your results. Likewise, using your management accounting knowledge and incremental profit analysis, appraise the offer of the new customer in deciding whether to accept or reject the one-time special order (include all relevant calculations). Your report to directors should take into consideration the financial as well as non-financial factors.

Part C

Outhwaite Benson Limited manufactures a wide range of gardening equipment. It has recently a new design of compost bin. A market research project was undertaken in which the prototype was demonstrated to a large number of gardeners at show gardens around the country. Results of market research have been very promising. In addition, the company’s marketing directors has used her contacts to have the new design prominently featured in a prime-time television gardening programme. The programme is due to appear in three months’ time, and the company expects to receive a large number of orders very soon afterwards. The directors have decided that they must gear up production to be ready for anticipated demand for the new product. The production director has investigated the available machines, and has decided that the choice comes down to two alternatives, Machine A and Machine B. Machine A requires £X investment cost with no residual value at the end of four years while Machine B requires £Y investment cost with £T residual value at the end of four years.

The projections for the two proposals are shown below: 

Outhwaite Benson Limited requires a minimum return (Cost of Capital) of Z% per annum.

Required: 

As the company’s management accountant, you are required to write a report to company’s directors and advise them which machine Outhwaite Benson Limited ought to choose. When writing your report, you need to include full computation of payback period, accounting rate of return, and net present value. You also need to bear in your mind that the sales director estimates that demand will be greatest in the first two years and Machine B might not be able to produce sufficient items to meet demands in the first two years. However, the directors decide they would, nevertheless, like to consider the purchase of Machine B because it requires less capital outlay and has residual value at the end of useful life.