Brick by Brick (BBB) is a building business that provides a range of building services to the public. Recently they have been asked to quote for garage conversions (GC) and extensions to properties (EX) and have found that they are winning fewer GC contracts than expected.
BBB has a policy to price all jobs at budgeted total cost plus 50%. Overheads are currently absorbed on a labour hour basis. BBB thinks that a switch to activity based costing (ABC) to absorb overheads would reduce the cost associated to GC and hence make them more competitive.
You are provided with the following data:
A typical GC costs $3,500 in materials and takes 300 labour hours to complete. A GC requires only one site visit by a supervisor and needs only one planning document to be raised. The typical EX costs $8,000 in materials and takes 500 hours to complete. An EX requires six site visits and fi ve planning documents. In all cases labour is paid $15 per hour.
Required:
(a) Calculate the cost and quoted price of a GC and of an EX using labour hours to absorb the overheads. (5 marks)
(b) Calculate the cost and the quoted price of a GC and of an EX using ABC to absorb the overheads. (5 marks)
(c) Assuming that the cost of a GC falls by nearly 7% and the price of an EX rises by about 2% as a result of the change to ABC, suggest possible pricing strategies for the two products that BBB sells and suggest two reasons other than high prices for the current poor sales of the GC. (6 marks)
(d) One BBB manager has suggested that only marginal cost should be included in budget cost calculations as this would avoid the need for arbitrary overhead allocations to products. Briefl y discuss this point of view and comment on the implication for the amount of mark-up that would be applied to budget costs when producing quotes for jobs. (4 marks)
Sticky Wicket (SW) manufactures cricket bats using high quality wood and skilled labour using mainly traditional manual techniques. The manufacturing department is a cost centre within the business and operates a standard costing system based on marginal costs.
At the beginning of April 2010 the production director attempted to reduce the cost of the bats by sourcing wood from a new supplier and de-skilling the process a little by using lower grade staff on parts of the production process. The standards were not adjusted to refl ect these changes.
The variance report for April 2010 is shown below (extract).
The production director pointed out in his April 2010 board report that the new grade of labour required signifi cant training in April and this meant that productive time was lower than usual. He accepted that the workers were a little slow at the moment but expected that an improvement would be seen in May 2010. He also mentioned that the new wood being used was proving diffi cult to cut cleanly resulting in increased waste levels.
Sales for April 2010 were down 10% on budget and returns of faulty bats were up 20% on the previous month. The sales director resigned after the board meeting stating that SW had always produced quality products but the new strategy was bound to upset customers and damage the brand of the business.
Required
(a) Assess the performance of the production director using all the information above taking into account both the decision to use a new supplier and the decision to de-skill the process. (7 marks)
In May 2010 the budgeted sales were 19,000 bats and the standard cost card is as follows:
In May 2010 the following results were achieved:
40,000kg of wood were bought at a cost of $196,000, this produced 19,200 cricket bats. No inventory of raw materials is held. The labour was paid for 62,000 hours and the total cost was $694,000. Labour worked for 61,500 hours.
The sales price was reduced to protect the sales levels. However, only 18,000 cricket bats were sold at an average price of $65.
Required:
(b) Calculate the materials, labour and sales variances for May 2010 in as much detail as the information allows. You are not required to comment on the performance of the business. (13 marks)