Flosun plc makes and sells a range of products. Management has carried out an analysis of the total cost of production. The information in Appendix 3.1 reflects this analysis of budgeted costs for the six-month period to 30 June. The analysis has identified that the factory is organized in order to permit the operation of three production lines X, Y and Z. Each production line facilitates the production of two or more products. Production line X is only used for the production of products A and B. The products are manufactured in batches on a just-in-time basis in order to fulfill orders from customers. Only one product can be manufactured on the production line at any one time. Materials are purchased and received on a just-in-time basis. Additional information is available for production line X as follows:(i) Production line machine costs including labour, power, etc., vary in proportion to machine hours.(ii) Costs incurred for production scheduling, WIP movement, purchasing and receipt of materials are assumed to be incurred in proportion to the number of batches of product which are manufactured.Machine set-up costs vary in proportion to the number of set-ups required and are linked to a batch throughput system.(iii) Costs for material scheduling systems and design/testing routines are assumed to be incurred by each product in proportion to the total quantity of components purchased and the total number of types of component used, respectively. The number of different components designed/tested for products A and B are 12 and 8, respectively.

(iv) Product line development cost is identified with changes in product design and production method.At present such costs for production line X are apportioned 80 percent: 20 percent to products A and B, respectively. Production line maintenance costs are assumed to vary in proportion to the maintenance hours required for each product.(v) General factory costs are apportioned to each of production lines X, Y and Z in the ratio 25 percent: 30 percent: 45 percent, respectively. Such costs areabsorbed by product units at an average rate per unit through each production line.

Required:(a) Prepare an activity based budget for production line X for the six-month period to 30 June analysed into sub-sets for activities that are product unit based, batch based, product sustaining, production line sustaining and factory sustaining.The budget should show:(i) Total cost for each activity sub-set grouped to reflect the differing operational levels at which each sub-set is incurred/controlled.(ii) Average cost per unit for each of products A and B analysed by activity sub-set.(b) Discuss the incidence and use of each of the following terms in relation to Flosun plc, giving examples from the question to illustrate your answer:(i) Hierarchy of activities;(ii) Cost pools;(iii) Cost drivers.

(c) Prepare a sequential set of steps that may be included in an investigation of activities in order to improve company profitability.This should be a general list of steps and not specifically relating to Flosun plc.

Appendix 3.1Flosun plc ? Budget data six months to 30 June

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Product A Product B Material cost per product unit Production line X – machine hours per unit Production batch size (units) £60 £45 0.5 200 0.8 100 Total production (units) Components per product unit (quantity) Number of customers 9000 15000 20 12 10 5 Number of production line set-ups Production line X – maintenance hours 25 15 300 150 Production Factory Cost category line X£ total £ 294 000 Labour, power, etc. Set-up of machines Production scheduling WIP movement 40 000 29600 36 400 Purchasing and receipt of material Material scheduling system Design/testing routine Production line development 49500 18000 16000 25000 Production line maintenance 9000 General factory administration General factory occupancy 500000 268 000