Management Accounting
You operate as a financial consultant and have been called into Balance Ltd, a traditional manufacturing company. Balance Ltd usually undertakes about 1,000 jobs a year produced to customer specifications. All jobs are priced by adding a 25% mark-up on cost to obtain the selling price.
Balance Ltd currently absorbs production overhead using machine hours.
Production overheads for the period total £650,000 and have recently been analysed into cost pools as follows:
Machinery %
60
Materials handling 23
Inspection 15
Sundries 2
100
Machinery
Machinery is a cost pool including all the costs relating to the running of the machinery. The pool includes depreciation, machine maintenance, power etc. The salaries of two members of staff who run the machines are included under this category. The two members of staff have salaries of £25,000 each. Both members of staff fill out time sheets allocating their time between jobs. In addition each machine’s time is logged to jobs, and total machine hours charged to specific jobs.
Materials handling
Materials handling is responsible for issuing all materials for the different jobs. A storeman and assistant are responsible for running the material stores department. Overheads include their salaries, fork lift truck, power etc. On receipt of materials a goods received note is issued, and when materials are issued to the factory floor for a particular job a stores requisition is required.
Inspection
The costs in this area are for the salary of a single inspector employed to inspect all jobs.
Sundries
Generally small expense items relating to the factory. Most expenditure can be supported by a petty cash voucher or a till receipt.
The financial director of Balance Ltd is considering replacing the existing traditional system with activity based costing but is unsure exactly what would be involved. He is also determined to keep costs to a minimum and does not want any new system to involve a lot of extra work or expenditure.
Required:
Prepare a report for the financial director which must address the following:
i) An appraisal of the existing traditional system. (25 marks)
ii) A broad outline of an ABC system with an explanation as to why it might be desirable. (15 marks)
iii) Your recommendations for ABC implementation and any problems you foresee bringing in ABC for Balance Ltd. (40 marks)
iv) Your advice on whether ABC is viable for Balance Ltd given the financial directors concerns. (10 marks)
In addition 10 marks will be awarded for the style and presentation of the report.
(Total 100 marks)
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