EVALUATE the appropriateness of 'COLA's current control system.
CASE STUDY: 'COLA' is a manufacturer, retailer, and installer of a Split AC for industrial buyers. It started business in 2001 and its market segment has been low to medium level groups. The Company produces three types of ACs - COLA, FANTA and SPRITE grade. Until recently, its business model has been based on selling high volumes of a standard AC, brand name 'HEAT', with a very limited degree of customer choice, at low profit margins. 'COLA"s current control system is focused exclusively on the efciency of its manufacturing process and it reports monthly on the following variances: material price, material usage and manufacturing labour efficiency. 'COLA' uses standard costing for its manufacturing operations. In 2018, 'COLA' employed 20 teams, each of which is required to install one of its 'HEAT' AC per day for 350 days a year. The average revenue per 'HEAT' AC installed is Rs 36,000. 'COLA' would like to maintain this side of its business at the current level. The 'HEAT' installation teams are paid a basic wage, which is supplemented by a bonus for every AC, they install over the yearly target of 350. The teams make their own arrangements for each installation and some teams work seven days a week, and up to 12 hours a day, to increase their earnings. 'COLA' usually receives one minor complaint each time a 'HEAT' AC is installed and a major complaint for 10% of the 'HEAT' AC installations. In 2016, 'COLA' had launched the new AC, brand name 'HEAT-Cool'. This AC is aimed at high-level corporates and it offers a very large degree of choice for the customer and the use of the highest standards of materials, appliances, and installation. 'COLA' would like to grow this side of its business. A 'HEAT-Cool' AC retails for a minimum of Rs100,000 to a maximum of Rs 500,000. The retail price includes installation. In 2017 the average revenue for each 'HEAT-Cool' AC installed was Rs 300,000. Currently, 'COLA' has 7 teams of 'HEAT-Cool' AC installers and they can install up to 240 AC a year per team. These teams are paid salaries without a bonus element. 'COLA' has never received a complaint about a 'HEAT-Cool' AC installation. 'COLA\"s business is generated from repeat orders, recommendations, and local press advertising. It employs three sales executives who earn an annual salary of Rs 300,000 each. It offers a six-month money back guarantee and this has to be fullled for 1% of its installations. 'COLA' has always been in prots but was shocked to see that in its results in 2017 it only earned 0.2% net prot on its turnover. In 2018, the company wanted to improve its protability however, the furnace operation was a bottle-neck in the process. The company is running at 100 % of capacity. The variable conversion cost is RS100 per process hour. The xed cost is Rs 4,800,000. The furnace operation is part of the total process for each of these three products. Thus, furnace hours are the part of process hours. In addition, the Cost Accountant was able to determine the following information about the three products: HEAT FANTA SPRITE Budgeted Units Produced 6,000 6,000 6, 000 Total process hours per unit 12 1 2 10 Unit Selling Price R53, 600 R53,400 125.1000 Direct Materiel cost per unit R52, 100 Rs 1,900 R51, 720 The company follows the standard cost system and manufactures its own Evaporator Coil for the ACs and the standard cost per unit is worked out as follows: _ _ Overheads are allocated based on direct labour hours. In the month of April 2019, there was no difference between the budgeted and actual selling price and there were no opening or closing stock during the period. There are no scarce inputs. The other details for the month of April 2019 are as under: Budgeted Actual Production and 2,000 Units 1,800 Units Sales Direct Materials 20, 000 K95. @ RS4 20,000 Kgs.@ R54 per kg per kg sou. Ine teams maKe tnelr own arrangements ror eacn Installation and some teams work seven days a week, and up to 12 hours a day, to increase their earnings. 'COLA' usually receives one minor complaint each time a 'HEAT' AC is installed and a major complaint for 10% of the 'HEAT' AC installations. In 2016, 'COLA' had launched the new AC, brand name 'HEAT-Cool'. This AC is aimed at high-level corporates and it offers a very large degree of choice for the customer and the use of the highest standards of materials, appliances, and installation. 'COLA' would like to grow this side of its business. A 'HEAT-Cool' AC retails for a minimum of Rs100,000 to a maximum of Rs 500,000. The retail price includes installation. In 2017 the average revenue for each 'HEAT-Cool' AC installed was Rs 300,000. Currently, 'COLA' has 7 teams of 'HEAT-Cool' AC installers and they can install up to 240 AC a year per team. These teams are paid salaries without a bonus element. 'COLA' has never received a complaint about a 'HEAT-Cool' AC installation. 'COLA"s business is generated from repeat orders, recommendations, and local press advertising. It employs three sales executives who earn an annual salary of Rs 300,000 each. It offers a six-month money back guarantee and this has to be fullled for 1% of its installations. 'COLA' has always been in prots but was shocked to see that in its results in 2017 it only earned 0.2% net prot on its tumover. In 2018, the company wanted to improve its protability however, the furnace operation was a bottle-neck in the process. The company is running at 100 % of capacity. The variable conversion cost is RS100 per process hour. The xed cost is Rs 4,800,000. The furnace operation is part of the total process for each of these three products. Thus, furnace hours are the part of process hours. In addition, the Cost Accountant was able to determine the following information about the three products: HEAT FANTA SPRITE Budgeted Units Produced 5,000 6,000 6.000 Total process hours per unit 12 1 2 10 Unit Selling Price R53, 600 R53,400 R53, 000 Direct Material cost per unit R52, 100 Rs 1,900 RS1, 720 The company follows the standard cost system and manufactures its own Evaporator Coil for the ACs and the standard cost per unit is worked out as follows: _ Overheads are allocated based on direct labour hours, In the month of April 2019, there was no difference between the budgeted and actual selling price and there were no opening or closing stock during the period. There are no scarce inputs. The other details for the month of April 2019 are as under: Budgeted Actual Production and 2,000 Units 1,800 Units Sales 20,000 Kgs.@ R54 Direct Materials 20,000 Kgs @ R54 per kg per kg 14,800 Hrs. @ R58 Direct Labour 16,000 Hrs. @ R58 per Hr. per Hr. Variable R540, 000 Rs44,400 Over has (18 Fixed Overheads Rs 48, 000 R548, 000
