upiter Australasia Ltd has recently acquired the Kiewa Milk Co in north-east Victoria and you have been seconded there as part of your management accounting graduate role. The CEO of Kiewa Milk Co has mentioned the term 'production constraint' to you on a number of occasions and you are unsure what she is referring to. You decide to conduct your own research (which goes beyond the text) to find out what a 'constraint' is in a manufacturing environment.

Required:

Discuss the notion of production capacity in a manufacturing environment. Your answer should discuss the different meanings of theoretical capacity and practical capacity as they are applied in manufacturing firms.

Describe some of the constraints which may impact on the productive capacity of a manufacturing company. In your answer also address the 'relevant range' concept as it is applied in management accounting and as it relates to capacity constraints

Please ensure that you properly reference all sources (including websites) and avoid simply cutting and pasting.

Question 2Comprehensive Manufacturing Budget(40 marks)

This question builds on prior studies and relates to learning material and objectives from Topics 1, 2, 3 and 4. Links to specific resources provided for this question relating to Manufacturing Budgets and Excel spreadsheets are also available in the Assignment Resources section of the subject Interact site.

You have been asked to make 5 year budget forecast for the Kiewa Milk Dried Infant Formula canned product. The recently purchased Kiewa Milk Co utilises a traditional manufacturing cost flow inventory and accounting system.

Unit sales of this product have been rapidly increasing over the past three years with year on year growth of more than 20% per annum partly driven by Chinese Daigou shoppers who are satisfying the demand amongst the increasingly wealthy Chinese upper and middle class for high quality dairy products after several scandals involving Chinese-made produce. The Kiewa Milk Co has also been able to increase its per unit price of its infant formula by more than double the rate of inflation for each of the last three years. The marketing department are confident that these per annum increases will hold for the next five years.

The Strategic Planning Committee of Jupiter Australasia Ltdare finalising plans for the new division and have asked you to Make comprehensive 5 year budget for the Dried Infant Formula product line.

As at June 30^th, 2020 the following financial and trading data was provided:

2020 Financial Year data

Sales (Units)

27.65 million

Price (average 2020 price per unit received)

$2.300

Prime Costs (per unit)

Ingredients & Canning

$0.725

Direct Labour

$0.040

Other Variable Manufacturing Costs (per unit)

$1.250

Annual Fixed Manufacturing Overhead

$5,000,000

Inventory on Hand (at valuation):

Ingredients & Packaging (335,000 equivalent units)

$235,625

Finished Goods (325,000 units)

$727,500

All variable manufacturing costs including direct labour and ingredient costs are expected to increase annually at the rate of inflation. All manufacturing costs are variable and are assumed to vary directly with production (other than fixed manufacturing overhead). The current inflation rate of 2.0% is expected to hold over the 5 year budget period.

The Dried Infant Formula factory maintains target safety stock of raw materials inventory and tin can inventory amounting to the equivalent ofone (1) weekof the current year's budgeted unitproduction.Finished goods inventory levels are kept at the equivalent ofone (1) weekof the current year's budgeted unitsales. The Dried Infant Formula division does not utilise a Work in Process inventory account.

The Dried Infant Formula factory has been operating out of its site in the small town of Tangambalanga in the Kiewa Valley for almost 100 years and has undergone numerous upgrades. The manufacturing facility is currently operating at almost 80% of its estimated total practical manufacturing capacity of 35 million cans of baby formula per year.

Required:

(a)Five Year Budget(25 marks)

For the 5 year budget period prepare:

1. Sales, Production and Purchases budget
2. Budgeted schedule of Cost of Goods Manufactured (COGM)
3. Budgeted schedule of Cost of Goods Sold (COGS) and Gross Profit calculation

Please note that marks will be awarded based both on the accuracy of your answer and on your spreadsheet design and formula use. The solution should incorporate the use of the IF, ROUND and 'Absolute Referencing' functions in Excel. Use the IF formula to constrain unit sales to the production constraint. All 5 years of each budget should be shown side by side (1 column per year) for ease of comparison by management. All of the budgets should be presented on one worksheet together, working down the page commencing with the Sales, then Production budgets, COGM, through to Cost of Goods Sold and Gross Profit calculation.

You should be able to drag the formula across for the whole of the budget if the first years are properly constructed with a data input section and using absolute referencing. This makes the process much quicker and easier. An Excel help file and video which deals with the formulae required has been placed in the Assignment Resources folder in the subject Interact site to assist.

(b)The Jupiter Australasia Strategic Management Committee has developed plans to have the factory completely overhauled in the next year (2021) which will double the capacity of the factory. The cost of the upgrade will be incurred as an additional $4 million Fixed Overhead manufacturing cost per annum.

Using the flexibility of the excel model developed in part (i) calculate the impact on sales and gross profit if the option of upgrading the manufacturing facility is exercised and the practical production capacity of the factory is increased by 100% and an extra manufacturing cost of $2 million is incurred each year from 2022. (Submit results as a separate worksheet).

(5 marks)

(c)Given your findings from part (i) and (ii) report for the Strategic Management Committee of Jupiter Australasia recommending whether to take up the option to upgrade the production facility.In your report consider all of the strategic and financial implications to the firm of reaching its production constraint and any implications or opportunities arising from upgrading the facility and having extra productive capacity.Your grade will depend on the accuracy and depth of your analysis, and your capacity to identify strategic issues which management should consider when making their decision

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Question 3. Activity-Based Costing (ABC)(20 marks)

Jupiter Australasia Ltd owns Victory Mowers a manufacturer of gardening equipment which is sold domestically within Australia and to an increasing export market. Victory Mowers manufactures two different models of lawnmowers: the cheaper 'Lawnmaster' and the environmentally-friendly and more expensive 'Green Machine'. A dispute has arisen between senior management at Victory Mowers over the strategic direction of the company. The CEO of Victory, a former marketing executive, wishes to focus more strongly on developing the environmentally friendly 'Green Machine' as he believes it has a higher gross margin and is more profitable than the 'Lawnmaster'. The 'Green Machine' is sold as a premium product through specialist mower dealers while the mass produced 'Lawnmaster' is sold as a basic model through the Bunnings Hardware chain. In contrast to her CEO the divisional management accountant has argued that the standard costing system is not suited to these products and may produce misleading results.

The Strategic Management Committee of Jupiter Australasia Ltd has asked for an analysis of the costing system to provide advice regarding the two models. Currently, Victory Mowers operates a standard costing system where identifiable direct costs are charged to each product and manufacturing overheads are allocated using direct labour hours (DLH) as the sole cost driver.

The following data is provided for the 2020 financial year:

2020 Sales and Cost estimates

Lawnmaster

Green Machine

Forecast Sales (Units)

200,000

25,000

Selling price per unit($)

$200

$300

Prime Costs per unit

$100

$150

DLH per Unit

2.5

2.5

The activity costs budgeted for overhead for the 2020 financial year and related activity cost drivers were as follow:

OH Activity

OH Cost

Cost Driver

Amount of Cost Driver

Lawnmaster

Green Machine

Set Ups

$493,750

Number of Set ups

25

50

Laser Cutter

$1,100,000

Machine Hours

30,000

10,000

Machining

$2,100,000

Machine Hours

50,000

15,000

Assembly

$1,250,000

Labour Hours

50,000

25,000

Packing

$1,800,000

Number of Orders

1000

500

Required:

(a) Using the current standard costing method of applying overhead using direct labour hours develop a spreadsheet to calculate for each model the expected:

i.Gross Profit per unit,

ii.Gross Profit margin ($GP/$Sales),

iii. Total Gross Profit per Model, and

iv. Total Firm Gross Profit.

(8 marks)

(b) Using the overhead activity and cost data provided conduct the same analysis utilising Activity Based Costing (ABC) techniques to allocate activity-based costs and again calculate for each model the expected:

i.Gross Profit per unit,

ii.Gross Profit margin ($GP/$Sales),

iii.Total Gross Profit per Model, and

iv. Total Firm Gross Profit.

(8 marks)

(c) What advice would you give the Strategic Planning Committee and the management of Victory Mowers regarding the appropriate costing system and the comparable profitability of the two products? Provide an analysis explaining the reasons for the different outcomes achieved between using Standard Costing overhead allocation and ABC overhead allocation.

(4 marks)

Question 4. Standard Costing and Variance Analysis(20 marks)

This question builds on prior studies and relates to learning material and objectives from Topic 5.

Whilst undertaking your recent analysis of costing at Victory Mowers you noticed some anomalies in the variance reporting on the standard costing system.

Budgeted costs for the 'Lawnmaster' mower for the previous month were as follows:

Standard Amount per output unit

Standard Price

per input unit

Direct Material (Pressed steel lineal metres)

50cm (per unit)

$70 (per metre)

Direct Labour

2.5 hrs (per unit)

$30 (per hr)

The firm produced 11,000 units during the last month and actual direct labour hours worked amounted to 28,200 hours at a cost to the firm of $851,000. Manufacturing of 11,000 mowers during the month consumed 6,500 linear metres of pressed steel which was purchased for $390,000.

Required:

For the Victory Mowers previous month of operations:

(a)Calculate (i) the Direct Material Price (Rate) variance, (ii) the Direct Material Quantity (Usage/Efficiency) variance, and (iii) the Total Direct Material variance

(b)Calculate (i) the Direct Labour Price (Rate) variance, (ii) the Direct Labour Efficiency variance, and (iii) the Total Direct Labour variance

(c)Describe how there may be a variance interaction (trade-off) effect when a favourable Direct Material Price variance is recorded at the same time as an unfavourable Direct Material Quantity (Usage) variance and an unfavourable Direct Labour Efficiency variance. How should such variances be investigated?