Exercise 6: Stringer Ltd

Exercise 6: Stringer Ltd

Stringer Ltd operates a forecasting system for the Income statement, an extract of data for the first two months are given:

Period 1Period 2

Production in units 8,000 11,000

Direct Materials120,000165,000

Production Labour 35,000 44,000

Administration Overheads 33,000 33,000

Required:

Forecast Period three costs for the above categories using production levels of 10,000.

Which costs are fixed?

Admin Overhead

Which are Variable Materials / Labour

Step 1 Work variable costs per unit.

Material Cost = 120,000 / 8000 = 15

Labour = 4.375 per unit

Admin Overhead is fixed = 33,000

Period 3

Production in units10,000

Direct Materials150,000

Production Labour 43,750

Administration Overheads 33,000

Max cost incurred = 226,750

Hi Lo Method

Semi Variable Costs

8000 production = Labour 35,000

11,000 production = Labour 44,000

Difference = Labour cost = 9,000

Difference in production = 3,000

Additional labour 9000 / 3000 = 3 per unit

Period 3

Production in units10,000

Direct Materials150,000

Production Labour 41,000

Administration Overheads 33,000

Overall expected cost = 224,000

8000 production = 35,000 = 8000 x 3 = 24,000 + 11,000

11,000 production = 44,000 = 11,000 x 3 = 33,000 + 11,000

Lecture Example 2 Limiting Factor

A B C

Selling price 165 172 156

Materials (8 per kg) 40 32 16

Labour (15 per hour) 15 30 15

Variable production overhead 12 6 12

Fixed production overhead 48 24 48

Profit 50 80 65

Total Labour Hrs Required 2000 4000 800

PROBLEM IS 4500 hours REQUIRE 6800 to meet production targets.

Contribution per unit

A B C

Selling price 165 172 156

Materials (8 per kg) 40 32 16

Labour (15 per hour) 15 30 15

Variable production overhead 12 6 12

Contribution 98 104 113

Rank by Contribution 3 2 1

Contribution per Limiting Factor 98 52 113

Rank by Limiting Factor 2 3 1

Profit if Production Plan followed.

Produce 800 C . Use 800 Labour Hours

Produce 2000 A. Use 2000 Labour Hours

Used 2800 Labours. Remain 1700. Required to make all B = 4000.

Max production product B = 850 units.

Final production Plan = 800 C + 2000 A + 850 B

A B C

Contribution 98 104 113

Production 2000 850 800

Total Contribution 196,000 88,400 90,400

Total Contribution 374,800

If we followed contribution plan.

A B C

Contribution 98 104 113

Production 0 1850 units 800units

Total Contribution 0 192,400 90,400

Total Contribution 282,800.

By maximising the limiting factor, we produced excess of = 92,000

Lecture Example 3 Forecasts + Budgets

Division G has had the following levels of expenditure for the first two quarters of the year as follows:

Results Quarters 1 and 2

Q1 Q2

Sales Units 9,00014,000

Production Units10,00013,000

Direct Materials130,000169,000V

Production Labour 74,000 81,500V

Production Overhead 88,000109,000V

Administration Overhead 26,000 26,000F

Selling Overhead 29,700 36,200V

Total Cost347,700421,700

Despite a projected increase in activity, the cost structures in quarters 1 and 2 are expected to continue during quarter 3 as follows:

The variable cost elements behave in a linear fashion in direct proportion to volume. However, for production output in excess of 14,000 units the unit variable cost for production labour increases by 50 per cent. This is due to a requirement for overtime working and the extra amount is payable only on the production above 14,000 units.

The fixed cost elements are not affected by changes in activity levels.

The variable elements of production costs are directly related to production volume.

The variable elements of selling overheads are directly related to sales volume.

Required:

Forecast all costs for Quarter 3. The activity levels during quarter 3 were:

Units

Sales 14,500

Production 15,000Identify Fixed and variable costs

Variable Costs per unit

130k / 10 = 13

169k / 13 = 13

Variable cost per unit of materials = 13

Production labour

74k / 10 = 7.4

81.5k / 13 = 6.26

Semi Variable???

Variance 7500 cost difference / 3000 production increase.

2.5 per unit.

Fixed = 49,000 (e.g. 49k + 10k x 2.5 = 25. Total 74k)

Production overhead

21,000 increase (88 to 109k)

Production 3k increase

7 per unit.

10,000 x 7 = 70000 variable overhead

Total 88,000

Fixed element = 18,000

Selling overhead

6500 increase5000 increase in production

1.3 per unit

Total cost 29700.

Variable = 9,000 x 1.3 = 11,700

Fixed element 18,000.

Forecast for Q3

Q1 Q2Q3

Sales Units 9,00014,000 14,500

Production Units10,00013,00015,000

Direct Materials130,000169,000195,000

Production Labour 74,000 81,50090,250

Production Overhead 88,000109,000123,000

Administration Overhead 26,000 26,00026,000

Selling Overhead 29,700 36,20036,850

Total Cost347,700421,700471,100

Materials 13 x 15,000 = 195,000

Production Labour 49,000 + (2.5 x 15,000) = 86500

Over time 1000 units at overtime. 2.5 x 1.5 x 1000 =3750

Total production labour 86500 + 3750

Production overhead 18,000 + (15,000 units x 7) = 123,000

Sales overhead 18,000 + (14,500 x 1.3) = 36850

Lecture Example Bonanza Ltd

Budget

Activity Level 70% Activity Level 90% Activity Level 100%

Sales 7,000 9,000 10,000

Sales Revenue 420,000 540,000 600,000

Direct Materials 140,000 180,000 200,000

Direct Labour 165,000 195,000 210,000

Variable Overhead 42,000 54,000 60,000

Fixed Costs 160,000 160,000 160,000

507,000 589,000 630,000

Profit (Loss) (83,000) (49,000) (30,000)

Selling p/u = 60

Materials p/u = 20

Variable overhead = 6

Labour

12500 hrs = 153,750

20,000 hrs = 210000

7500 hrs difference increase in cost of 56,250

56250 / 7500 =7.5 per hour

12500 at 7.5 = 93,750

Total 153,750

Fixed cost = 60,000

Functional Budgets Mazda Five

Prepare the following functional budgets for the period:

Sales

Production (in cases)

Materials usage (in kg)

Materials purchases (in kg and )

Labour hours and cost

Sales Budget

Oatmeal biscuit Ginger biscuit

Sales (cases) 6,000 3,000

Selling price per case 375 500

Total Revenue 2,250,000 1,500,000

= 3,750,000

Production Budget

Oatmeal biscuit Ginger biscuit

Sales (cases) 6,000 cases 3,000 cases

Opening Stock 400 cases 350 cases

Required Closing Stock 700 cases 500 cases

Sales + closing opening = Production required 6,300 cases 3150 cases

Material Usage Budget

Oatmeal biscuit Ginger biscuit

Sales + closing opening = Production required 6,300 cases 3150 cases

Flour usage 12.5kg 17.5kg

Sugar Usage 10kg 15kg

Total Flour 12.5 x 6300 = 78,750kg 3150 x 17.5 = 55,125kg

133,875 kg Flour

Sugar Total 10kg x 6300 = 63,000 kg 15kg x 3150 47,250kg

110,250 kg Sugar

Material Purchases

Flour Sugar

Opening Stock 1,500 kg 900kg

Required Closing Stock 1,200 kg 1,300kg

Planning to use in production 133,875kg 110,250kg

Closing Stock + Required Production Opening

= Purchases required 133,575kg 110,650kg

In Currency terms 213,720 199,170

Total material purchases 412,890

Labour Hours and Cost

Oatmeal biscuit Ginger biscuit

Sales + closing opening = Production required 6,300 cases 3150 cases

Mixing 2 hours per case 1.5 hours per case

Total Hours mixing 12,600 hours 4725 hours

Total Mixing hours cost 176,400 66,150

242,550

Shaping 2.5 hours per case 3 hours per case

Total hours shaping 15,750 hours 9450 hours

Cost 283,500 170,100

453,600

Total Labour Cost 242,550 + 453,600 = 696,150