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Financial and Management Information Systems

25 Mar

Canney Ltd

 

Canney Ltd is a manufacturing organisation supplying specialised engineered products to a wide range of public and private sector throughout the UK.

 

You are a trainee in the finance office recently recruited by the company.

 

 

Management planning meeting:

 

On the 24th of every month (or nearest Monday) the business executive management team meets to plan trading and production for the following month.

 

The meeting commences with a review of the sales order book and a determination of the following months product sales volumes. The expected sales volumes inform the production planning process and decisions are made with respect to production resources and closing inventory requirements.

 

The agreed plan is the production schedule document. This is forwarded to the production departmental managers who will examine and compare their available resources against the requirement for production. Any problems (constraints) or other issues arising are reported back to the executive management team who will consider making adjustments to:

 

  • The production requirements
  • The available resources

 

At the start of the following month, the production process will commence with a view to meeting the objectives of the agreed production (action) plan

 

This process is described by the production planning flowchart (shown below):

 

 

Production Planning Flowchart

Start
24th of the Month (or nearest Monday):

 

Executive management planning meeting for the next month’s trading objectives:

  • Expected sales determination
  • Production output levels

for the following month.

Problems / constraints / other issues arising?
Agreed action plan document ready for the following month’s production process
N
Management adjustments to original plan data
Y
End
Plan document passed to functional production managers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canney Ltd – continued:

 

The production process:

 

The production process of Canney Ltd takes place through 3 production departments; machining, painting and assembly.

 

Machining department:

Direct materials are transferred from the direct materials stores to the machining department. These are transformed using direct labour employees and machine processes into machined goods. The total of the prime costs add the fixed production overhead (allocated and / or apportioned) is the total cost of machined goods transferred to the painting department. For the machining department, the direct labour employees are paid at a rate of £9.00 per hour and the variable machine cost is £6.00.

 

 

Painting department:

Incremental direct materials are transferred from the direct materials stores to the painting department. These are combined with the machined goods transferred in and are transformed using direct labour employees and machine processes into painted goods. The total combined costs add the fixed production overhead (allocated and / or apportioned) is the total cost of painted goods transferred to the assembly department. For the painting department, the direct labour employees are paid at a rate of £10.00 per hour and the variable machine cost is £3.00.

 

 

Assembly department:

Incremental direct materials and components are transferred from the direct materials stores to the assembly department. These are combined with the painted goods transferred in and are transformed using direct labour employees and machine processes into saleable finished goods. The total combined costs add the fixed production overhead (allocated and / or apportioned) is the total cost of the saleable finished goods transferred to the finished goods warehouse. For the assembly department, the direct labour employees are paid at a rate of £8.00 per hour and the variable machine cost is £4.00.

 

 

 

The production process is described in the production process flowchart below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canney Ltd – continued:

Canney Ltd – Production Process Flowchart

 

 

Start
Machining department:

§  Direct materials

§  Add Direct labour (£9.00 per hour)

§  Add Direct expenses (£6.00 per machine hour)

§  Add Fixed indirect production overhead costs absorbed

§  = Total cost of machined goods

(Transferred out to painting department)

 

Painting department:

§  Direct materials

§  Add machined goods transferred IN

§  Add Direct labour (£10.00 per hour)

§  Add Direct expenses (£3.00 per machine hour)

§  Add Fixed indirect production overhead costs absorbed

§  = Total cost of  painted goods

(Transferred out to assembly department)

 

Assembly department:

§  Direct materials

§  Add painted goods transferred IN

§  Add Direct labour (£8.00 per hour)

§  Add Direct expenses (£4.00 per machine hour)

§  Add Fixed indirect production overhead costs absorbed

§  = Total cost of  saleable finished goods produced

(Transferred out to finished goods warehouse)

 

Materials movements and internal transfer inspection processes
Materials movements and internal transfer inspection processes
Materials movement process

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Materials movements and internal transfer inspection processes
Finished goods warehouse
End

 

 

 

 

 

 

 

 

 

 

 

Note:

 

  • The costs of materials movements between departments and internal inspection checks are included in indirect production overheads.

 

  • The above flowchart is an outline process only and does not include control decision, documentation raising and filing requirements.

 

 

 

Canney Ltd – continued:

 

Goods receiving and locating / storage control process:

 

When goods are received to the business raw materials stores, they are first checked by the store keeper for quantity against a copy of the original purchase order document (this is forwarded to the raw materials stores at the time that the order is place – with all money values removed). If the quantity is incorrect (allowing for approved part-order deliveries) a ‘Quantity rejection note’ is prepared.

 

Goods that are acceptable by quantity are quality inspected for size, weight, colour etc. Where goods are found to be unacceptable by quality, a ‘Quality rejection note’ is prepared. Goods rejected by quantity or quality are located at the ‘Returns room’ ready for return to the supplier.

 

Acceptable goods are initially identified as either ’Panels’ or ‘Brackets’.

 

Panels:

 

  • Panels that are ‘Square’ are to be located at ‘P01’

 

  • If the Panels are not ‘Square’ are ‘Round’. ‘Round’ panels are further sub-analysed as ‘Clear’ or ‘Opaque’. Panels that are ‘Clear’ should be located at ‘P02’; otherwise the ‘Opaque’ panels should be located at ‘P03’.

 

Brackets:

 

  • Brackets that are ‘Large’ should be located at ‘B01’

 

  • Brackets that are not large are ‘Small’. ‘Small’ brackets are further sub-analysed as either ‘LHS’ or ‘RHS’. ‘LHS Brackets’ should be located at ‘B02’; otherwise the ‘RHS Brackets’ are to be located at ‘B03’.

 

After goods received have carefully and accurately been located, the store keeper will prepare a ‘goods received note’ (GRN). This will be forwarded to the finance office.

 

Required:

 

Task 1:

Prepare a flowchart to describe the goods receiving and locating / storage control process

 

 

Note:

Your flowchart should be prepared in a good style using the MS Word ‘Insert / Shapes / Flowchart’ facility (see answer book)

 

20 Marks

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canney Ltd – continued:

 

Trading (production and sales):

 

You should assume that today is Monday 23rd November 2016

 

 

Sales:

The company has the following sales orders to be delivered during December 2016

 

Order / product: Order 2109

‘Sun’

Order 2110

‘Moon’

Order 2111

‘Talia’

Quantity to be delivered (sales in units) 600 700 900
Selling price (per unit) £80 £20 £40

 

 

 

Production:

The production schedule for December 2016 (product quantities and production resources requirement) is shown below.

 

Order / product: Order 2109

‘Sun’

Order 2110

‘Moon’

Order 2111

‘Talia’

 
Finished goods:

Quantity to be produced

800 900 1,200  
 

Note:

At 1st December 2016 there will be no opening inventory of finished goods

 

 

Resources requirement for production:

 

Direct costs (variable costs):

         
Order / product: Order 2109

‘Sun’

Order 2110

‘Moon’

Order 2111

‘Talia’

 
 

Machining department:

       

Totals

Incremental materials cost £1,200 £600 £1000 £2,800
Direct labour hours (total) 60 100 60 220 hours
Machine hours (total) 120 200 100 420 hours
         
Painting department:        
Incremental materials cost £800 £1,000 £200 £2,000
Direct labour hours (total) 100 90 60 250 hours
Machine hours (total) 80 40 20 140 hours
         
Assembly department:        
Incremental materials cost £700 £800 £600 £2,100
Direct labour hours (total) 140 180 140 460 hours
Machine hours (total) 40 50 70 160 hours

 

Canney Ltd – continued:

 

Fixed indirect production overheads:

 

Indirect production overheads are fixed (unaffected by production activity levels) at £28,050 per month. This value has been allocated and apportioned to the 3 production departments as follows:

 

Production department: Machining Painting Assembly Total
Fixed costs (allocation / apportionment) £12,600 £6,250 £9,200 £28,050

 

Bases for absorption:

 

  • Machining department = Machine hours
  • Painting department = Direct labour hours
  • Assembly department = Direct labour hours

 

Note:

The quantity for absorption basis (for each production department) should be established using the total departmental resources requirement shown in the tables above.

 

 

Required:

 

 

 

Task 2:

Prepare (for each product and in total) the following planned values for December 2016:

 

  1. Prime costs

11 Marks

 

 

  1. Total (full) costs of production

14 Marks

 

 

  1. Finished goods closing inventories / cost of sales

7 Marks

 

 

  1. Gross profits (and gross profit margins)

3 Marks

 

 

 

Note to task 2:

The requirement of task 2 should be established using an absorption costing system

(as described in the production process flowchart)

 

The total task 2 mark above, includes marks allocated to short descriptive notes to workings

(<=100 words – see answer book)

 

These notes should be ‘short explanatory notes’ that will serve to define the terminology used and explain the workings (and results / outcomes) to a colleague who does not work in the finance office

 

 

 

 

 

Canney Ltd – continued:

Required

 

Task 3:

Prepare the following planned values:

 

  1. Contribution and contribution / sales ratio (for each product and in total) and the gross profit

(in total only – see note)

 

7 Marks

 

 

 

 

  1. Prepare a reconciliation to explain the difference between the total gross profits established using an absorption costing system (task 2 d.) and a marginal costing system (task 3 a.)

 

7 Marks

 

 

 

Note to task 3 a. & b.:

 

The requirement of task 3 should be established using a marginal costing system where:

 

  • All direct costs are classified as variable
  • All indirect production overheads are classified as fixed

 

 

The total task 3 mark above, includes marks allocated to short descriptive notes to workings

(<=100 words – see answer book).

 

 

These notes should be ‘short explanatory notes’ that will serve to define the terminology used and explain the workings (and results) to a colleague who does not work in the finance office

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canney Ltd – continued:

 

Justine Maguire, the company sales manager has commented that product ‘Moon’ (Order 2110) is not performing well and the company profits would increase if this product was removed from the range

 

Task 4:

 

  1. Re – calculate the gross profit (and gross profit margin) if product ‘Moon’ is removed from the production and sales schedule

 

Note:

It has been established that, if product ‘Moon’ was removed from the catalogue, specific fixed cost savings of £8,000 would be made

4 Marks

 

 

 

  1. Draft a memo to Maguire in reply to her comment (with clear explanatory supporting reasons to a non-accountant)

7 Marks

 

Note:

Your memo should be prepared in a good style (see answer book) and show effective skills in written communication and ‘quality of information’ aspects

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canney Ltd – continued:

 

The finance office (cost and management accounts) recently performed an ‘activity – based’ production systems analysis for the fixed production overheads. The result is the table below:

 

Cost

£

Cost driver Total cost driver quantity per period Indirect production overhead recovery rate

£

Set up costs 8,000 Set ups 100 80.00
Production scheduling 2,000 Set ups 100 20.00
Quality control 10,800 Inspections 2,400 4.50
Depreciation 5,760 Machine hours 720 8.00
Raw materials storage 1,490 Materials movements 1,490 1.00
Total: 28,050

 

A further analysis has produced the following indirect production overhead resource required for each product:

Activity – Based Resource (Cost driver quantity) Requirement (by product)

 

Order / product: Order 2109

‘Sun’

Order 2110

‘Moon’

Order 2111

‘Talia’

Total
Set ups 35 30 35 100
Inspections 700 500 1,200 2,400
Machine hours 240 290 190 720
Materials movements 650 250 590 1,490

 

Task 5:

 

  1. Explain ‘Activity – Based Costing (ABC)’ as an alternative to full absorption costing and discuss the potential benefits that ABC might bring to production and information systems of Canney Ltd

 

Note:

Your written explanations should be effectively communicated and should include notes on:

  • The reasons for the development of ABC
  • The ‘Activity – Based’ concept
  • The process of an ABC system development
  • The potential benefits (if any) you feel could be achieved by the introduction of an ABC system for Canney Ltd

10 Marks

 

  1. Recalculate the gross profits (by product an in total) after allocating fixed production overheads to products using an activity – based system

10 Marks

 

The task 5 b. mark include marks allocated to short descriptive notes to workings (<=100 words). These should be ‘short explanatory notes’ that will serve to identify (observe) the effects on each product (and in total) profit caused by the ABC system allocations.

 

END OF ASSIGNMENT

 

 

 

FMIS 2016/17 (Semester 2) – Marking Sheet

 

Name:                                                                                                Roll:

 

Task   MAX Mark Comment
01 Prepare a flowchart (Accurate/efficient/good style) 20    
2a. Calculation of prime costs (working) 6    
  Prime costs (notes) 3    
  Calculation of prime costs (per unit working) 2    
2b. Calculation of overhead absorption rates (working) 3    
  Calculation of product overheads 4    
  Full production cost (notes) 3    
  Calculation of full production costs (and per unit) 4    
2c. Calculation of cost of sales and closing inventory 4    
  Cost of sales / Inventory / Gross profits (notes) 3    
2d. Calculate gross profits (and gross profit margins) 3    
3a. Calculate contribution / CS ratio / Total gross profit 4    
  Marginal cost gross profit (notes) 3    
3b. Reconciliation of profits (workings) 4    
  Reconciliation of profits (notes) 3    
4a. Recalculate gross profit – ‘Moon’ is removed 4    
4b. Memo to Thomas – Product ‘Moon‘ deleted 7    
5a. Explain Activity – Based Costing (ABC) 10    
5b. Recalculate gross profits (and margins) using ABC 6    
  Marginal costing to ABC (notes) 4    
    100   %

 

Summary comment:

 

 

 

 

 

 
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Posted by on March 25, 2017 in academic writing, Agriculture

 

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