MEISHA, LTD: COST MANAGEMENT ANALYSIS PAPER

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MEISHA, LTD: COST MANAGEMENT ANALYSIS PAPER

CASELET 1F

SEMESTER 2

A.Y. 2019-2020

STRATEGIC COST MANAGEMENT

Jerald James G. Montgomery, CPA

 

Submission Date: on or before June 12, 2020
Where to submit: jeraldjames1997@gmail.com
Note: Please answer religiously and cautiously. Do not cheat or share answer sheets. Remember that I have the means to know if your answers have been copied elsewhere.
Put your name, year and section, and task description on the file name.

 

MEISHA, LTD: COST MANAGEMENT ANALYSIS PAPER

This Case aims to focus on:

 Basic financial statements: from interpretation to analysis

 The usefulness of these statements to aid cost management decisions

 Techniques used for costing and pricing decisions

Assessment method: Individual Report

Word length: 1200 words (minimum)

The following knowledge, skills and aptitudes must be refined and utilized:

 Critically examine the needs of different users (internal & external) of accounting information.

 Display critical understanding of the role of budgeting within a business.

 Calculate business costs by applying the theory of cost behaviour and break-even analysis and evidence this by writing a business report.

Assignment Brief for Assessment 1 – Business Accounting

This assessment is in two parts. Part one is assessing the use of financial information for planning and decision-making. Part two looks at the use of financial information for control purposes. You are required to present your work in a report format. A suggested structure/outline is included at the end of the assessment paper.

 

PART ONE: Information for Planning and Decision-Making

Meisha, Ltd.

Meisha, Ltd. is a very successful company that has its headquarters in Vigan, Ilocos Sur, and specialises in the manufacture and sale of health products. It has developed a new product called ‘’isprikitik”. At the beginning of the year 2020 the management of the company approached its bankers, JJGM International, for a loan facility to enable them to buy the equipment that will be used to produce the new product in larger quantities. The bank is interested in how the company can control the costs associated with the new product as well as generate enough sales revenue in order to make decent profit.

The bank has accordingly asked the company to submit its sales revenue and production costs budgets over a three-month period together with a breakeven analysis for study. The bank requires a margin of safety percentage minimum of 20% to be met by the company in order to progress the loan application.

Meisha, Ltd. reliably budgets to produce and sell 3,000 units of the new product in the first three months of its introduction, and has estimated its variable production cost per unit in much detail shown in the standard cost card below. The company plans to sell each unit of the product for PHP 130. It estimates that the product’s specific fixed cost within the relevant range will be PHP 70,000.00.

Standard variable production cost per unit of product ‘isprikitik ’:

Cost elements

Quantity/Hours, Price/Rate (PHP ), Cost per unit (PHP )

Direct material

10 kg per unit

PHP 5 per kilogram

= PHP 50

Direct labour

2 hours per unit

PHP 20 per direct labour hour

= PHP 40

Variable production overheads

2 hours per unit

PHP 2.5 per direct labour hour

= PHP 5

Variable production cost per unit

= PHP 95

Contribution per unit

= PHP 35

Selling price

= PHP 30

The equipment to be purchased has the capacity to produce 5,000 units of the product every quarter (three months). Beyond this level of activity there will be the need to expand capacity and the specific fixed cost will increase by PHP 30,000.

 

Your role in Meisha, Ltd.:

You are a newly employed management accountant of Meisha . The finance director of the company, Mrs. Ash Wang, has assigned you all tasks relating to the application for the required loan, and has accordingly asked you to perform the relevant analysis and to compile the necessary reports that will be forwarded to JJGM International for consideration.

Required:

You are to prepare a draft report addressed to the finance director, Mrs Ash Wang , for review. An outline of the required report has been suggested as an appendix to this if you may want to use it, but you are free to use any report structure that you deem appropriate. There are two parts of the main report, part one and part two. Use your answers in questions 1 and 2 below to complete Part One of the main report.

Question 1

(a) Using information in part one of the case study as above, perform the necessary calculations and use your answers to complete the following CVP analysis table.

Activity level (units)

Fixed Costs (FC)

(PHP )

Total Variable Costs (TVC)

(PHP )

Total Costs (TC)

(PHP )

Sales Revenue (SR)

(PHP )

Total Contribution

(PHP )

Total Profit

(PHP )

0

Breakeven

Budgeted

Maximum Capacity: 5,500

(b) Calculate the margin of safety percentage

(c) Prepare a Breakeven chart using data you have provided in (a) above

(d) Prepare a budget for variable production costs to show the budgeted cost for (i) direct materials, (ii) direct labour, and (iii) variable production overheads.

(e) Include a pie chart or bar chart to show the values and percentages of budgeted direct material costs, budgeted direct labour costs and budgeted variable production overhead costs.

Question 2

With reference to the analysis you have performed in question 1 above answer the following questions:

(a) State the assumptions underlying the breakeven (CVP) analysis.

(b) Explain how the theory of cost classifications and cost behaviour has been applied in your calculations/analysis shown in the table in Question 1 (a).

(c) Explain how the management of Meisha, Ltd. can use the results of your analysis (both CVP analysis and the variable production cost budgets) in planning and decision-making. Use information from the case and your analysis to support your discussion.

(d) Explain how reliable the result of your CVP analysis is for users of the information, including (i) the management of Meisha, Ltd., (ii) the company’s bankers (JJGM International), and (iii) potential suppliers.

 

 

PART TWO: Information for Performance Evaluation and Control – six months after the loan application

Assume we are now in January 2020. The company, Meisha ’s application for a loan was successful, and it started its operations four (4) months ago. Below are the actual results for the first three months (October, November and December, 2019) of producing and selling product ‘isprikitik’.

Actual information (October, November and December, 2019):

Production/Sales

3,500 units

Direct material usage

11 kilograms per unit of product

Direct material price

PHP 5.5 per kilogram of direct material

Direct labor hours

2 hours per unit of product

Direct labour rate

PHP 17 per direct labour hour

Variable production overhead

PHP 2.40 per direct labour hour

Market report compiled shows that a competitor of Meisha, Ltd. called ‘BigMovers’ also introduced a similar product into the market. The competitor’s product uses the same material that Meisha uses to produce isprikitik. The production manager of Meisha in charge of isprikitik received intelligence suggesting that the material used in producing isprikitik would be in short supply in the near future, but thought that he could use an alternative cheaper material. The managing director, however, rejected the idea of a cheaper material. Instead, she approached the suppliers of the required material and entered into an agreement with them to make Meisha, Ltd. the buyer of choice. This means that the supplier would always, firstly, meet the orders of Meisha, Ltd. before any other orders could be met. In this regard Meisha, Ltd. agreed to pay PHP 0.50p more for each kilogramme of the required material.

A slowdown in other sectors of the economy caused a lot of workers to be made redundant, making job search very competitive. This resulted in many job seekers offering to accept a reduced rate of pay, which the production manager duly took advantage of by offering to pay a lower rate per hour.

Your role:

The finance director has asked you to prepare a budgetary control statement to show any variances arising from activities in respect of product isprikitik, and to investigate the causes of any significant variances. The investigation requires that your variance analysis is much detailed to be able to identify control points for management action. The investigation should reveal what variances can be attributed to the decisions and actions of the production manager.

Required:

You are required to prepare a part two to the draft report to be addressed to the finance director. Use your answers in question 3 below to complete this part of the report.

Question 3:

Use information in part two of the case study to perform the following:

(a) Prepare a budgetary control statement to show direct material cost variance, direct labour cost variance, variable production overheads cost variance, and total variable production cost variance.

(b) Calculate the following detailed variances that can be used to investigate/explain the sources of the variances you have calculated in the budgetary control statement and comment on them.

– Direct material usage variance

– Direct material price variance

– Direct labour efficiency variance

– Direct labour rate variance

– Variable overhead expenditure variance

General Guidelines:

  1. Task Guidelines:

 The report will be individually and digitally assessed.

 Start with an introduction and end with a conclusion.

 Include subheadings to distinguish between different parts of the discussions.

 Show BE charts relevant to the study in the main report.

 Show calculations in the appendices.

 Include references in the appendices part.

  1. Course work submission requirements:

 Use APA reference for both in-text and final reference list.

 Word count is excluded for Overview, headings and introduction of

the course works.

 Give proper highlights /captions in every paragraph in each answer to make it clear

  1. Important notes regarding the submission:

You will be allowed to submit EVEN after the submission deadline. Note, however, that I will abide to the set of guidelines for this medium of learning.

Recommended Resources:

  1. Utilize the cost and management study notes which I have prepared for you (the one I have sent at the start of online class).
  2. Visit this link for guidance https://www.smartsheet.com/ultimate-guide-to-cost-management-and-templates
  3. Online reading material https://corporatefinanceinstitute.com/resources/knowledge/accounting/cost-behavior-analysis/
  4. Cost Projection statement and analysis https://mymanagementguide.com/cost-projection-statement-and-analysis/
  5. https://www.adb.org/sites/default/files/institutional-document/34142/files/fmtgn-preparing-presenting-cost-estimates.pdf
  6. SUGGESTED REPORT STRUCTURE/OUTLINE
  7. A) Title page

From:

To:

Subject:

Date:

  1. B) Introduction

 Reference to remit

 Purpose of analysis

 Scope of analysis/report

 Highlights from report

  1. C) Part One: Information for Planning & Decision-Making

CVP Analysis:

Commentary & Discussions:

 Purpose of Break Even Analysis

 Assumptions

 Interpretation or implications of the analysis to management and the bank

 How the theory of cost behaviour has been applied in the analysis (use information from the analysis in support).

Schedule/Table of Costs, Sales, Contributions & Profits

Breakeven chart

Variable Production Cost Budgets (for 3000 units)

Commentary & Discussions:

 Purposes/uses of a budget

 Assumptions

 Interpretation or implications of the analysis to management

Budget Summaries (Table/Schedule)

Charts: bar charts or pie charts

(NB: percentages may be shown in table and charts)

Limitations of Analysis

CVP Analysis

 Limitations – based on relaxing assumptions, etc.

 Implications of limitations for management, bankers, potential suppliers

Variable Production Cost Analysis

 Limitations – based on assumptions, etc.

 Implications of limitations for management

  1. D) Part Two: Information for Performance Evaluation & Control

Actual Variable Production Costs & Variances

Commentary & Discussions:

 Purposes of Budgetary Control Statements and Variance analysis

 Interpretation (adverse/favourable variances) and implications for management

Budgetary Control Statement

Schedule/Table of Variances

Charts – Pie/Bar Chart

Investigation and Interpretation of Significant Variances

 Causes of different types of variances, theoretically

 Significant variances in the analysis

 Causes of the significant variances based on the case study information.

 Any useful comment(s).

  1. E) Conclusions & Recommendations
  2. F) Appendices

 References

 Workings/calculations

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