Reference no: EM131707222

Question 1 - The Singapore Orchestral Society (SOS) members rehearse and prepare for a one week concert every year. These shows run once in the evening from Monday to Friday and then twice on Saturday (afternoon and evening shows).

The show lost money last year and members had to contribute to make up the difference. For the coming year, the Show Manager is hoping that this problem will not recur. He collected the following financial information to forecast the profits:

(i) The cost for renting the theatre is $40,000 per week.

(ii) The cost of printing the programme booklet is $4,500 for 5,000 copies.

About 80% of the audience will buy this programme booklet priced at $2 per copy.

(iii) SOS also has to pay the following costs for using the theatre:

Stage manager            $750 per week

Lighting manager         $550 per week

Box Office staff           6 staff paid $35 each for each show

Other staff                  8 staff paid $25 each for each show

(iv) The theatre has a maximum capacity of 800 seats. The attendance rate is estimated as below:

• Monday and Tuesday evenings are only 50% full.
• Wednesday and Thursday evenings, increases to 60%
• Friday and both shows on Saturday, fully sold out

(v) SOS has to incur a one-off cost of $8,800 for the preparation of the sets/stage scenery and costumes.

(vi) Advertising cost is estimated to be $6,250, covering posters and other advertising costs.

(vii) SOS likes to keep the ticket prices as low as possible so that all sections of the general public can attend the show. Last year's show tickets were priced at $12.00 each.

However, the bad financial outcome has led the Show Manager to consider a $4 increase in ticket price for this year's show.

(viii) The members of SOS like to have a big party after the last show. This is estimated to cost $1,525 in food and drinks. After last year's shortfall, the Show Manager wants to compensate the members by ensuring that SOS pays for the party from the income of this coming year's concert.

Required:

(a) If the Show Manager's financial data are accurate, what will be the forecasted income for the coming year?

(b) Ignoring the contribution from programme booklet sales, calculate how far can SOS allow the audience numbers to decline before an overall loss is incurred?

(c) The cost-volume-profit model depends on a number of key assumptions. Outline the assumptions made when you calculated (b) and assess if they are realistic.

Question 2 - Winter Fashion is a small manufacturing company that produces a range of woollen jackets sold under the brand names of AIR, BOD and CAT. The Managing Director is concerned about the loss from the CAT brand after reviewing the below forecasted results for April 2016, prepared by the management accountant.

	AIR	BOD	CAT	Total
	$'000	$'000	$'000	$'000
Sales	1000	960	320	2280
Variable costs				0
Direct material	350	300	100	750
Direct labour	50	80	30	160
Variable overhead	200	180	110	490
Fixed overhead	300	270	100	670
	900	830	340	2070
Profit/(loss)	100	130	-20	210

The following information is also available:

(i) Although there are other materials required for the manufacture of the woollen jackets, the main material is wool, purchased directly from China.

April's shipment of wool supplies may be delayed. This may adversely affect its production schedule.

(ii) The Purchasing Manager believes that he will be able to increase the current wool stockholding of 61,000 kg by a delivery of another 31,000 kg in mid-April to cope with production schedule.

(iii) Production Manager advises that the manufacturing process of the different products use different quantities of wool, as detailed below:

Wool (kg) per jacket AIR 5

BOD 4 CAT 1

(iv) The Sales Manager confirms that the current unit prices of the products are:

Selling price

per jacket $

AIR     100

BOD   120

CAT    80

(v) The Managing Director believes that results can be improved immediately through stopping the manufacture of the CAT product. Neither the Sales Manager nor the Production Manager agrees with his view, but they are uncertain as to why they disagree.

Required:

(a) Based on the April's forecast results, rank the products in terms of contribution margins per kg of wool.

(b) From the ranking results of part (a), should the company discontinue production of the CAT brand jackets?

(c) Given April's available wool supply issue, recommend the optimal production mix for jackets to achieve the highest profit.

(d) What will be your advice to the Managing Director in view of the unreliable wool supply and how to stay competitive in the winter jacket sales market so to achieve its forecasted profit?

Question 3 - Precision Tools Company produces specialist callipers for the construction trade. The company has adopted a standard costing system, providing variance analysis of all variable costs and sales revenue.

The standard cost of one unit of the callipers is as follows:

Direct materials		$
Raw material M3	5 kg at $8 per kg	40
Raw material W4	2 kg at $9 per kg	18
Direct labour	10 hours at $7.50 per hour	75
Variable overheads	10 hours at $8 per direct labour hour	80
		213

The company's annual budgeted sales is 40,000 units of callipers, sold at $365 each, evenly spread over the year.

For the most recent financial year, the company has achieved the following results:

		$
Sales	(38,500 units at $330 each)	12,705,000
Direct materials
Raw material M3	198,000 kgs at $7.65 per kg	1,514,700
Raw material W4	76,000 kgs at $9.20 per kg	699,200
Direct labour	390,000 hours at $7.42 per hour	2,893,800
Variable overheads		3,200,000
		8,307,700
Contribution margin		4,397,300

The management of the company is unsatisfied with the operating performance for this period and is very disappointed that there are considerable differences between budgeted and actual performance levels.

Required: Draft a management report showing variance analysis of all materials variances, labour variance and total labour variance. As part of the report, interpret the variance computed and identify which variance is of concern. What are possible explanations for those variances and what should be done?

Question 4 - BC Apparels Company has the option to use variable costing and absorption costing methods.

The Management Accountant Company has compiled the following information:

Fixed costs
Fixed overheads	$60000
Fixed selling and administrative costs	$80000
Unit selling price	$50
Cost per unit:
Direct materials	$10
Direct labour	$6
Variable overhead	$2
Variable selling expenses	$12
Beginning inventory (units)	1500
Units produced	15000
Units sold	12000

Required:

(a) Calculate the following using variable costing:

(i) Per unit production (manufacturing) cost.

(ii) Number of units in ending inventory.

(iii) Cost of ending inventory.

(iv) Cost of goods sold.

(b) Prepare a contribution margin income statement for BC Apparels Company using variable costing.

(c) Explain the difference and reasons any change, if any, in the operating profits between the two costing methods?

(d) Under Generally Accepted Accounting Principles (GAAP), the absorption accounting costing method is required for external reporting. Discuss the benefits of using this method for the purpose of external reporting.