Project description
Henry presented a list of cost estimates in the football manufacturing and trading business as below:
Resources required for production of each unit of Football
Football
Grade A Grade B Grade C
Production volume per month (unit) 440 900 2000
Material A (g) 500 400 250
Fiber (piece) 4 2 1
Labour hour 3 1 0.4
Number of cutting 15 10 5
Number of stitches 18 18 13
The cost of material A and fiber are RM0.20 per gram and RM28 per piece respectively. The wage
rate of the production worker is RM8 per hour. There will be a 10% normal loss of material A and no
losses in the other materials in the production process.
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Production overheads per month RM
Depreciation of plant & machinery 60,000
Technician overheads 2,400
Utilities expenses 1,200
Canteen expenses 4,560
Security expenses 5,400
Supervisors’ wages – Cutting Department 24,000
Supervisors’ wages – Stitching Department 16,000
Supervisors’ wages – Technician Department 6,000
Supervisors’ wages – Cleaning Department 3,000
Additional information: Cutting Stitching Teachnician Cleaning Total
Department Department Department Department
Plant and machinery net book value (NBV) (RM) 1,200,000 800,000 2,000,000
Floor area (sq ft) 3,000 2,000 600 400 6,000
Number of technicial services 50 40 10 100
Number of cleaning visits 45 50 5 100
The ratio of the production labour hours between cutting department and stitching department is 3:2.
Each production labour works only maximum 8 hours per day and 30 days in a month. Henry will
employ the number of production labour in the most cost efficient condition. Three technicians and
two cleaners will be employed to support the production operations. (Note: Reciprocal technique is
used in the allocation of production overheads.)
Required
(i) Compute the total cost per month for material A and fiber. (4.5 marks)
(ii) Calculate the total production labour cost per month. (2 marks)
(iii) Determine the number of production labours to be employed for each production department.
(5 marks)
(iv) Use activity based costing method to determine the unit cost and unit price for each grade of
football. (round up unit selling price to no decimal) (28.5 marks)
Show all workings for all the computation sections in the above.
Section B (12%)
(b) Henry wishes to commence footballs manufacturing and trading business. Henry wants to attain
reliable investment costs and benefits estimation before he decides to invest in the business. You are
required to discuss the factors to be considered in attaining reliable investment costs and benefits
estimation. (5 marks)
(c) The Human Resource manager comments that productivity has direct relationship with the labours
skill level. There Human resource manager proposes two possible options to improve productivity as
given below:
Option 1: Hire skilled labours
The production volume can be increased by 150% when the production labour hours remain the
same as current production condition. The expected wage rate in hiring skilled labour is double the
current wage rate.
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Option 2 Conduct internal training program for production labours
The first month production volume will increase by 10%, 15 % and 20% for grade A, grade B and Grade C footballs respectively. The production labours are expected to
improve their productivity continuously every month. The monthly training program expenses are RM20,000.
Required
i. Compute the first month costs and benefits for the current production condition and the two options. Show all workings. (18 marks)
ii. Recommend the option to be chosen based on (c)(i) results in the above. (2 marks)
iii. Human Resource manager insists to choose option 2. You are required to provide and discuss any four possible reasons in choosing option 2. (8 marks)
iv. The production manager disagrees with Human Resource managers opinion. You are required to provide and discuss any four possible reasons for NOT choosing option 2.
(8 marks)
(d) Henry intends to select option 2 in (c)(iv). The first year sales volume of grade A, grade B and grade C footballs are 5,808 units, 12,420 units and 28,800 units
respectively. The production labours productivity is expected to be improved yearly. Therefore Henry expects the sales volume and production volume of the footballs
increase 20% yearly. The normal loss of the material A for the production is expected to be reduced yearly. The estimated normal loss for year 1, year 2 and year 3 are
10%, 8% and 5% respectively. The material A cost will increase by 5% annually due to inflation. No changes in both the usage of the fiber for production of each type
of football and the cost of the fiber within 3 years. The production labours wage rate is expected to be increased by 8% yearly as incentive to motivate labours. All
production overheads are expected to be constant within 3 years except for the production labours training cost increases by 10% yearly.
Required
(i) Prepare first three yearly budgeted income statements. Show all workings. (10 marks)
(ii) The business accountant proposes to prepare both conservative budget and optimistic budget.
You are required to provide any four points to describe the reasons in preparing both conservative budget and optimistic budget. (9 marks)
You are required to report your learning experience in the process of attempting this assignment.
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