You have been approached for your advice on the proposed introduction of an incentive scheme for the direct operatives in the final production department of a factory producing one standard product. This department, the Finishing Shop, employs 30 direct operatives, all of whom are paid £8 per hour for a basic 40-

hour week, with a guaranteed wage of £320 per week. When necessary, overtime is worked up to a maximum of 15 hours per week per operative and is paid at time rate plus onehalf.

It is the opinion of the personnel manager that no more direct operatives could be recruited for this department. An analysis of recent production returns from the Finishing Shop indicates that the current average output is approximately 6 units of the standard product per productive man-hour. The work study manager has conducted an appraisal of the working methods in the Finishing Shop and suggests that it would be reasonable to expect operatives to process 8 units of the product per man-hour and that a piecework scheme be introduced in which the direct operatives are paid £1.40 for each unit processed. It is anticipated that, when necessary, operatives would continue to work overtime up to the previous specified limit, although as the operatives would be on piecework no premium would be paid.

Next year’s budgeted production for the factory varies from a minimum of 7000 units per week to a maximum of 12000 units per week, with the most frequent budgeted weekly output being 9600 units. The expected selling price of the product next year is £11 per unit and the budgeted variable production cost of the incomplete product passed into the Finishing Shop amounts to £8 per unit. Variable production overheads in the Finishing Shop, excluding the overtime premium of the direct operatives, are budgeted to be £0.48 per direct labour hour worked, and it is considered that variable overheads do vary directly with productive hours worked. Direct material costs are not incurred by the Finishing Shop. The fixed overheads incurred by the factory amount in total to

£9000 per week.

Stocks of work in progress and finished goods are not carried.

Required:

(i) Calculate the effect on the company’s budgeted weekly profits of the proposed incentive scheme in the Finishing Shop.

(Calculation should be to the nearest £.) 15 marks

(ii) Explain the reasons for the changes in the weekly budgeted profits caused by the proposed incentive scheme. 7 marks ACCA Level I Costing