BUSN2110 Group Project 19S2 PDF

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BUSN2110: Managerial Accounting – 19S2 Group Project – Product Accounting Background Veedub Limited (“Veedub”) is a company based in Perth and listed on the Australian Stock Exchange. It initially listed in 2009 and, since then, has grown steadily, including the acquisition of two businesses – Tigwan Pty Ltd (“Tigwan”), based in Brisbane, and Tooreg Pty Ltd (“Tooreg”), which is based in Adelaide. Tigwan was purchased in mid-2015 and Tooreg in late-2018. All three businesses service the motor vehicle industry, as follows:

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Veedub has established itself as the provider of choice for low-cost, high quality accessories, primarily for German manufactured vehicles, undercutting the vehicle manufacturers’ prices by up to 50%. Most of the goods sold are imported from various manufacturers in Korea. Tigwan has a similar business model, but focusses on off-road vehicles, with a particular emphasis on electronic instrumentation imported from a new factory in Vietnam. By way of contrast, Tooreg manufactures two types of patented high-quality resin-based lenses for off-road vehicle spotlights – the simple T1 and the more complex T2. These lenses are designed to replace existing glass lenses, which could be subject to cracking and breakage in more extreme off-road conditions.

The Managing Director of Veedub, May Day, is concerned that the Tooreg business does not appear to be making the desired profits, and local management in Adelaide are struggling to explain the reasons for these results. She has asked the CFO, Dan Rico, to examine the situation, with a particular focus on establishing the “true costs” of manufacturing the two lens types which will, in turn, provide management with valuable information on possible pricing changes. Existing Tooreg costing processes When the business was acquired, Tooreg had a very rudimentary system of accumulating costs relating to the manufacture of the two types of lenses. All direct material and labour costs were accumulated in a single cost pool and averaged over the total number of lenses produced. For the previous year ended 30 June 2019, the cost per lens was calculated as follows:

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Direct materials Direct labour Total direct costs

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Lenses produced – T1 - T2 Total lenses produced

60,000 15,000 75,000

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Cost per lens (both T1 & T2)

$34.60

The selling prices were set, as follows: - T1 (Cost + approximately 60%) - T2 (Cost + 120%)

$55.00 $76.00

$1,800,000 $ 795,000 $2,595,000

($2,595,000/75,000)

The higher mark-up on the T2 lens was determined by market acceptance, due to it being a niche product, as opposed to the more generic T1. These prices were seen to be competitive in the marketplace and, consequently, sold well; however, this did not appear to translate into strong profitability. The group CFO, Dan Rico, has recently hired you as the group Management Accountant and sets you the task of determining a more meaningful method of allocating costs to the two lens models (T1 and T2). Dan stresses that, with the acquisition of Tooreg, the Veedub group is “new to manufacturing” and wishes to “get it right”. Required Dan has requested that you prepare two alternative costing scenarios, based on Tooreg’s data for the past financial year ended 30 June 2019. This information has been provided in Appendix 1, attached. Further information relating to the manufacture of the lenses is included in Appendix 2, attached. You are required to determine the “true” individual costs of the T1 and T2 models: 1. Using a Single Indirect Cost Pool method of allocating overheads; and 2. Using an Activity Based Costing method. You are then required to recommend one of the two methods to Dan, giving your reasons as to why it might be more appropriate to Tooreg’s business.

Appendix 1 Tooreg Pty Ltd Summary of Income and Expenditure for the year ended 30 June 2019 $000 Sales (all production sold) -

Model T1 Model T2

Total sales

3,300 1,140 4,440

Cost of sales -

Direct materials Direct labour

1,800 795

Total cost of sales

2,595

Gross profit

1,845

Indirect manufacturing costs

2,385

Administrative and marketing overheads Loss for the year, before tax

670 (1,210)

Notes The indirect costs consist of salaries paid to supervisors, engineers, manufacturing support, and maintenance staff – all supporting the direct manufacturing labour. 2. Tooreg used 30,000 total direct manufacturing labour hours during the financial year to make the T1 models; and 9,750 direct manufacturing labour hours to make the T2 models. 1.

Appendix 2 On further investigation, you are provided with the following information relating to the distinct processes used in the design, manufacture and distribution of the lenses: o Design products - the design department is responsible for product-sustaining activities, primarily ongoing product and mould design and modification activities. o Set up moulding machines to ensure that the moulds are properly held in place and parts are properly aligned before the manufacturing starts. o Operate moulding machines to manufacture lenses. o Clean and maintain the moulds after lenses are manufactured. o Prepare batches of finished lenses for shipment. o Distribute lenses to customers. o Administer and manage all processes at Tooreg. From discussion with floor managers, the following facts are ascertained: o Design Department indirect costs increase with more complex moulds. o Indirect setup costs increase with setup hours. o Indirect costs of operating moulding machines increase with moulding machine hours. o The moulding equipment is cleaned after each batch run. Whilst the hourly cost remains constant, the cleaning process generally takes slightly longer for the more complex T2 moulds. o Shipping costs incurred to prepare batches for shipment increase with the number of shipments. o Distribution costs increase with the size of packages delivered. o The demand for Administrative resources increases with direct manufacturing labour hours. Other useful information gathered is summarised as follows: Design area used Total design costs included in indirect overheads

T1 lens 30 sq m

$450,000

T1 lens Quantity of lenses produced Number of lenses produced per batch Setup time per batch Total setup cost included in indirect overheads

T2 lens 70 sq m

60,000 240 2 hours

T2 lens

Total

15,000 50 5 hours $300,000

T1 lens Moulding machine hours per batch Total moulding machine costs included in indirect overheads

36

Cleaning hours per batch Total moulding machine costs included in indirect overheads

Cubic feet delivered Total despatch costs included in indirect overheads

T2 lens 4.8

Total 5 $270,000

T1 lens 100

T2 lens 100

Total $81,000

T1 lens 45,000

T2 lens 22,500

Total $391,500

T1 lens Total administration costs included in indirect overheads

Total $637,500

T1 lens

Number of shipments Total shipment preparation costs included in indirect overheads

T2 lens 12.5

T2 lens

Total $255,000...