examination of the case study that follows with a view to advise the HTZ Group on issues that would help improve on the efficiency and performance of the business. Read the case study and then answer the questions that follow. Case Study HTZ Group is large conglomerate with a variety of subsidiaries in a number of industries. Marginal, absorption costing and pricing decisions CTX Furnishers (a subsidiary of HTZ Group), is a medium-sized company that manufactures high quality self-assembly furniture from raw materials, utilising highly skilled labour within a computer-controlled manufacturing facility. The company produces a range of furniture, and, because of the lead time to receive delivery of its raw material, has a finished goods inventory policy of holding an average of two weeks' worth of estimated sales in inventory. d. as a consequence, this finished goods Customer demand is seasonal, and, as a consequence. level fluctuates throughout the year. An absorption costing sv attribute all manufacturing costs. The following data relate Furnisher's products for four periods. 3 000 Variable cost per unit Selling price per unit 5 500 Fixed cost per period 600 000 Normal activity is 500 units and production and sales for the four periods are as follows: Sales Production Period 1 Units 500 500 Period 2 Units 400 500 Period 3 Units 550 450 Period 4 Units 450 500 There were no opening inventories at the start of period one. CTX Furnishers is planning to launch a new range of multi-purpose furniture next year, which home owners can use as a dining table, computer table and a study station for kids. This product is called "fait tout" and a pricing strategy is currently being considered. The product will be unlike any other product that is available at present and will improve the efficient use of space considerably. Most residents in the area live in flats with limited space. CTX Furnishers anticipates that its advantage in the market place will only last three months, before competitors develop a similar product. The prototype of "fait tout" required a substantial amount of time to develop, so the company needs to recover its considerable research and development costs as soon as possible. The company has developed a manufacturing process for this product, which has resulted in a reduction in the time taken to produce each unit (in comparison to the first units produced). This time reduction is expected to continue for a short period once mass production started; thereafter a constant time requirement per unit is anticipated. Quality and costs CTX Furnishers has identified the importance of quality as being a critica element to succeed. The Managing Director of CTX read a report thay Insinuated that many successful organisations that operate in nig competitive business environments have adopted the philosophy "performance through quality". The diagram Quality", illustrates the alternative paths (as business could take from a starting point A. The diagram that follows, entitled "Costs and live paths (as depicted by the arrows) that a Costs and quality Cost per unit (R) Service/product quality The activities of traditional management accounting have had their scope broadened by the development of a variety of techniques that incorporate a growing recognition of the cost and quality issue in the management decision- making process. GRIX, a small subsidiary of the HTZ Group, is engaged in the production of plastic components for plumbing-related services. Sub-totals, on a spreadsheet of budgeted overheads for a year, reveal the following: Production Department Assembly Department General factory overheads 1 600 2 500 500 850 1 050 1 750 Variable overhead R000s Fixed overhead ROOos Budgeted activity Machine hours (000s) Practical capacity Machine hours (000s) 800 600 1 200 800 stion of general factory overheads, it is agreed For the purpose of the rear accrue in line with the machine how that the variable overheads ory fixed overheads are to be reallocated on the each department. Generalta e-hour capacity of the two departments. basis of the practical machine mpany practice to establish selling prices by It has been a long-standing nanufacturing cost of between 25% and 35%. applying a mark-up on the fun for one new product, which is in the final stage A possible price is being sought et for this product is estimated at 200 000 of development. The total mo ch indicates that the company could expect to ne market. It is hoped that the product will competitors' products, which are currently units per annum. Market research obtain and hold about 10% of the offer some improvement over competitors products, which marketed at between R90 and R100 each. apartment have determined that the direct The Product Development Department have determined that Fach unit of the product will take two labour material content is R9 per unit. Each unit of the product will hours (four machine hours) in the Production Department and three hours (three machine hours) in Assembly. Hourly labour rates are R5.00 and R5.50 respectively. Management estimate that the annual fixed costs which would be specifically incurred in relation to the product are: supervision, R20 000; depreciation of a recently acquired machine, R120 000; and advertising, R27 000. It may be assumed that these costs are included in the budget given above. Given the state of development of this new product, management do not consider it necessary to make revisions to the budgeted activity levels for any possible extra machine hours involved in the manufacturing process. Traditional and activity-based costing GRIX produces and sells two different types of plumbing components for the domestic market. Its basic model consistently returns a profit, but over the last year the company has become concerned about potential losses occurring on its luxury model. The Production Director believes that no further cost savings can be made on labour and materials, and he is concerned that the luxury model may therefore have to be abandoned. Sales and direct costs is were expected to be 's production costs are production overheads. During the year 40 000 basic and 20 000 sold, at R70 and R100 each respectively. made up of direct materials, direct labour Direct costs for each product are as follows: nd 20 000 luxury models were espectively. The company's produc fect labour and fixed product Basic Luxury 10 Direct materials Direct labour (@R20 per hour) Total direct cost per unit trol method, as all products are The company uses a just-in-time inventory con made to order. Costing system The company operates a basic absorption costing system. The fixed production overhead is a general production overhead (it is not product specific). The total budgeted fixed production overhead is R2 400 000, and it is absorbed using a labour hour rate. Administration costs Fixed administration costs total R540 000 for basic components and R600 000 for luxury components. These include the costs of specific marketing campaigns: R200 000 for basic and R400 000 for luxury. The company is considering changing to an activity-based costing system. The company has analysed the budgeted fixed production overheads and has found that the costs for various activities are as follows: Machining costs Set up costs Quality inspections Stores receiving Stores issues Total R'000 600 900 180 420 300 2 400 The analysis also reveale is also revealed the following information: Basic Machine running time (ho Components per product Number of component de Luxury 0.25 500 30 000 "Of component deliveries during the year Inspections per production run Number of issues from stores 0.25 500 20 000 125 15 000 50 15 000 1.1 statements for CTX Furnishers for each of the Prepare the operating statement periods one to four, based four based on absorption costing and marginal costing principles. (10) 1.2 Comment briefly on the resul the results of CTX Furnishers, which were obtained in each of the periods (periods one ds (periods one to four) and in total by the two systems; state the reasons for the differences in profits. (10) 1.3 CTX Furnishers currently uses the absorption costing method. Between absorption and marginal cost approaches to pricing, state which one would best suit CTX Furnishers and why? (7) 1.4 Explain two (2) alternative pricing strategies that may be adopted by CTX Furnishers when launching the new product "fait tout". (8) 1.5 Recommend a pricing strategy to CTX Furnishers for its new product and explain how the adoption of your chosen strategy would affect the sales revenue, costs and profits of this product over its life cycle. (10) 1.6 You are expected to explain the probable business consequences to CTX Furnishers for pursuing the alternative paths available and arriving at points B to F. Identify the path that is most likely to bring business success in this particular case. (6) 1.7 You are expected to explain to CTX Furnishers how contemporary management accounting/management techniques such as total quality management, just-in-time, value analysis, activity-based costing and the balanced Scorecard could contribute towards the analysis of the relationship between costs and quality. (18) 1.8 produce a standard cost card for each product and the budgeted operating statement an absorption costing format for GRIX. (8) 1.9 Calculate the budgeted production cost of GRIX for each product, using activity-based costing, and calculate the impact this will have on the profits of each product. (18) examination of the case study that follows with a view to advise the HTZ Group on issues that would help improve on the efficiency and performance of the business. Read the case study and then answer the questions that follow. Case Study HTZ Group is large conglomerate with a variety of subsidiaries in a number of industries. Marginal, absorption costing and pricing decisions CTX Furnishers (a subsidiary of HTZ Group), is a medium-sized company that manufactures high quality self-assembly furniture from raw materials, utilising highly skilled labour within a computer-controlled manufacturing facility. The company produces a range of furniture, and, because of the lead time to receive delivery of its raw material, has a finished goods inventory policy of holding an average of two weeks' worth of estimated sales in inventory. d. as a consequence, this finished goods Customer demand is seasonal, and, as a consequence. level fluctuates throughout the year. An absorption costing sv attribute all manufacturing costs. The following data relate Furnisher's products for four periods. 3 000 Variable cost per unit Selling price per unit 5 500 Fixed cost per period 600 000 Normal activity is 500 units and production and sales for the four periods are as follows: Sales Production Period 1 Units 500 500 Period 2 Units 400 500 Period 3 Units 550 450 Period 4 Units 450 500 There were no opening inventories at the start of period one. CTX Furnishers is planning to launch a new range of multi-purpose furniture next year, which home owners can use as a dining table, computer table and a study station for kids. This product is called "fait tout" and a pricing strategy is currently being considered. The product will be unlike any other product that is available at present and will improve the efficient use of space considerably. Most residents in the area live in flats with limited space. CTX Furnishers anticipates that its advantage in the market place will only last three months, before competitors develop a similar product. The prototype of "fait tout" required a substantial amount of time to develop, so the company needs to recover its considerable research and development costs as soon as possible. The company has developed a manufacturing process for this product, which has resulted in a reduction in the time taken to produce each unit (in comparison to the first units produced). This time reduction is expected to continue for a short period once mass production started; thereafter a constant time requirement per unit is anticipated. Quality and costs CTX Furnishers has identified the importance of quality as being a critica element to succeed. The Managing Director of CTX read a report thay Insinuated that many successful organisations that operate in nig competitive business environments have adopted the philosophy "performance through quality". The diagram Quality", illustrates the alternative paths (as business could take from a starting point A. The diagram that follows, entitled "Costs and live paths (as depicted by the arrows) that a Costs and quality Cost per unit (R) Service/product quality The activities of traditional management accounting have had their scope broadened by the development of a variety of techniques that incorporate a growing recognition of the cost and quality issue in the management decision- making process. GRIX, a small subsidiary of the HTZ Group, is engaged in the production of plastic components for plumbing-related services. Sub-totals, on a spreadsheet of budgeted overheads for a year, reveal the following: Production Department Assembly Department General factory overheads 1 600 2 500 500 850 1 050 1 750 Variable overhead R000s Fixed overhead ROOos Budgeted activity Machine hours (000s) Practical capacity Machine hours (000s) 800 600 1 200 800 stion of general factory overheads, it is agreed For the purpose of the rear accrue in line with the machine how that the variable overheads ory fixed overheads are to be reallocated on the each department. Generalta e-hour capacity of the two departments. basis of the practical machine mpany practice to establish selling prices by It has been a long-standing nanufacturing cost of between 25% and 35%. applying a mark-up on the fun for one new product, which is in the final stage A possible price is being sought et for this product is estimated at 200 000 of development. The total mo ch indicates that the company could expect to ne market. It is hoped that the product will competitors' products, which are currently units per annum. Market research obtain and hold about 10% of the offer some improvement over competitors products, which marketed at between R90 and R100 each. apartment have determined that the direct The Product Development Department have determined that Fach unit of the product will take two labour material content is R9 per unit. Each unit of the product will hours (four machine hours) in the Production Department and three hours (three machine hours) in Assembly. Hourly labour rates are R5.00 and R5.50 respectively. Management estimate that the annual fixed costs which would be specifically incurred in relation to the product are: supervision, R20 000; depreciation of a recently acquired machine, R120 000; and advertising, R27 000. It may be assumed that these costs are included in the budget given above. Given the state of development of this new product, management do not consider it necessary to make revisions to the budgeted activity levels for any possible extra machine hours involved in the manufacturing process. Traditional and activity-based costing GRIX produces and sells two different types of plumbing components for the domestic market. Its basic model consistently returns a profit, but over the last year the company has become concerned about potential losses occurring on its luxury model. The Production Director believes that no further cost savings can be made on labour and materials, and he is concerned that the luxury model may therefore have to be abandoned. Sales and direct costs is were expected to be 's production costs are production overheads. During the year 40 000 basic and 20 000 sold, at R70 and R100 each respectively. made up of direct materials, direct labour Direct costs for each product are as follows: nd 20 000 luxury models were espectively. The company's produc fect labour and fixed product Basic Luxury 10 Direct materials Direct labour (@R20 per hour) Total direct cost per unit trol method, as all products are The company uses a just-in-time inventory con made to order. Costing system The company operates a basic absorption costing system. The fixed production overhead is a general production overhead (it is not product specific). The total budgeted fixed production overhead is R2 400 000, and it is absorbed using a labour hour rate. Administration costs Fixed administration costs total R540 000 for basic components and R600 000 for luxury components. These include the costs of specific marketing campaigns: R200 000 for basic and R400 000 for luxury. The company is considering changing to an activity-based costing system. The company has analysed the budgeted fixed production overheads and has found that the costs for various activities are as follows: Machining costs Set up costs Quality inspections Stores receiving Stores issues Total R'000 600 900 180 420 300 2 400 The analysis also reveale is also revealed the following information: Basic Machine running time (ho Components per product Number of component de Luxury 0.25 500 30 000 "Of component deliveries during the year Inspections per production run Number of issues from stores 0.25 500 20 000 125 15 000 50 15 000 1.1 statements for CTX Furnishers for each of the Prepare the operating statement periods one to four, based four based on absorption costing and marginal costing principles. (10) 1.2 Comment briefly on the resul the results of CTX Furnishers, which were obtained in each of the periods (periods one ds (periods one to four) and in total by the two systems; state the reasons for the differences in profits. (10) 1.3 CTX Furnishers currently uses the absorption costing method. Between absorption and marginal cost approaches to pricing, state which one would best suit CTX Furnishers and why? (7) 1.4 Explain two (2) alternative pricing strategies that may be adopted by CTX Furnishers when launching the new product "fait tout". (8) 1.5 Recommend a pricing strategy to CTX Furnishers for its new product and explain how the adoption of your chosen strategy would affect the sales revenue, costs and profits of this product over its life cycle. (10) 1.6 You are expected to explain the probable business consequences to CTX Furnishers for pursuing the alternative paths available and arriving at points B to F. Identify the path that is most likely to bring business success in this particular case. (6) 1.7 You are expected to explain to CTX Furnishers how contemporary management accounting/management techniques such as total quality management, just-in-time, value analysis, activity-based costing and the balanced Scorecard could contribute towards the analysis of the relationship between costs and quality. (18) 1.8 produce a standard cost card for each product and the budgeted operating statement an absorption costing format for GRIX. (8) 1.9 Calculate the budgeted production cost of GRIX for each product, using activity-based costing, and calculate the impact this will have on the profits of each product. (18)