Reference no: EM133001071

Case Details: Stylish Ltd sells two models of coffee tables: Casual and Deluxe.

Direct materials inventory and finished goods inventory are costed using the first-in first-out (FIFO) method. Unit costs of direct materials purchased, and unit costs of finished goods sold remain unchanged throughout the budget year. There are two types of direct materials namely XX and YY; XX is the material used as the legs of the table and YY is the materials used as the surface top of the table. The height of the table is one meter. Direct manufacturing labour workers are hired on an hourly basis and no overtime is normally allowed for. Frank Morton, one of the workers, however, frequently exceeds 40 hours per week that involved overtime payments. The manufacturing manager is generally happy with Frank's works, but the manager talks to Frank constantly about working more quickly. Frank's overtime causes the actual direct labour costs to exceed the direct labour cost budget almost every month (reporting period). Direct manufacturing labour-hours is the cost driver for the variable portion of manufacturing operations overhead. The fixed component of manufacturing operations overhead is tied to the manufacturing capacity of 300,000 direct manufacturing labour-hours that Stylish has planned for 2021. Setup labour-hours is the cost driver for the variable portion of machine setup overhead. The fixed component of machine setup overhead is tied to the setup capacity of 15,000 setup labour-hours that Stylish has planned for 2021. There are two cost drivers for manufacturing overhead costs - direct manufacturing labour-hours and setup labour-hours. Stylish allocates all (variable and fixed) manufacturing overhead costs using direct manufacturing labour hours and machine setup overhead costs using setup labour-hours. The manufacturing direct labour hours overhead costs budget for the year ending 30 June 2021 is $9,000,000 and the machine setup overhead costs budget is $3,000,000. Stylish Ltd applies activity-based budgeting whereby the number of 'Casual' tables to be produced in batch is 50 while the number of 'Deluxe' tables to be produced in batch is 40. The setup time per batch is 10 hours for 'Casual' table and 12 hours for 'Deluxe' table. Assessment 2 BACC2005 Non-manufacturing costs consist of product design, marketing, and distribution costs. All product design costs are fixed costs for 2021. The variable component of marketing costs equals the 6.5% sales commission on revenues paid to salesperson. The variable portion of distribution costs is $2 per cubic meter of tables moved.

The following data are available for the 2021 budget:

Direct material XX $7 per meter (same as 2020)

Direct material YY $10 per square meter (same as 2020)

Direct labour $20 per hour Product design costs $1,200,000 (same as 2020)

Fixed marketing costs $1,300,000 (same as 2020)

Fixed distribution costs $1,250,000 (same as 2020)

Content of each product (table):

Casual Table Deluxe Table Direct material XX 12 meter 12 meter

Direct material YY 6 square meter 8 square meter

Direct labour 4 hours 6 hours

Changes in inventory level in finished goods inventory:

Casual Table Deluxe Table Expected sales in units 50,000 10,000

Selling price $600 $800

Target ending inventory in units 11,000 500

Beginning inventory in units 1,000 500

Beginning inventory in dollars $384,000 $262,000

Changes in inventory level in direct material inventory:

XX YY

Beginning inventory 70,000 meter 60,000 sq. m.

Target ending inventory 80,000 meter 20,000 sq. m.

Stylish Ltd bases its budgeted cost information on the costs it predicts it will incur to support its revenue budget, taking into account the efficiency improvements it expects to make in 2021. Some suggested budgets that might be useful to prepare in table format are provided in the later pages of this assignment.

Requirements:

Question 1. Discuss the results of sensitivity analysis of the changes in the selling prices (Casual and Deluxe type) and costs of raw materials (XX and YY) have on the operating income of Stylish Ltd. The workings as well as the master budget (operating budget) needed for Stylish Ltd should be included at the back of the assignment as appendix and excluded in the word count.

Question 2. Suggest what might be done to solve the problem or improve the situation of Frank Morton.