Farm Organic Ltd (FOL) provides organically certified drenches to organic farmers. These drenches treat intestinal and external parasites in sheep and cattle. The business is the brainchild of David Scott. David developed the products for the organic farming market. He has been producing the chemicals on a small scale to meet the organic farm demand. The demand has grown with many non-organic farmers now seeking his products. David borrowed money from a bank and has now set up operations in a bigger factory. He has purchased new automated equipment designed to streamline the operations. The factory has a small laboratory where David is working to develop organically certifiable sprays for the fruit and vegetable market. David has now hired you as his accountant. He needs monthly reports enabling him to manage cash flow and to track the profitability of the expanded business. Question 1: Value Chains (20 marks) You have used value chain analysis to help other businesses. Prepare a report for David that explains how value chain analysis will help him to make decisions about his growing business. Information on report writing is in the Resources section of this subject site. (500 words) Question 2 Cost of Manufacturing Statement (20 Marks) David has asked for a Cost of Goods Manufacturing Statement and Income Statement for the month of July. Use the following information taken from the books that David has been keeping to prepare the statement. $ $ Advertising expense 5,000 Interest expense 5,000 Sales travel expense 1,530 Machinery maintenance 250 Depreciation - factory machinery 1,600 Office Salaries 5,000 Depreciation - office machinery 600 Rates - factory 1,400 Direct Labour 6,000 Raw materials inventory 1/7/19 4,800 Factory power 150 Raw materials inventory 31/7/19 5,200 Factory rent 9,195 Raw materials purchases 53,200 Factory supplies 4,800 Sales revenue 158,500 Finished goods 1/7/19 11,200 Sales salaries 4,780 Finished goods 31/7/19 10,500 Telephone 500 Freight inwards materials 730 Work in process 1/7/19 2,250 Indirect labour 2,000 Work in process 31/7/19 2,500 Required: Prepare a cost of goods manufactured statement for the month ended 31 July 2019. This must be prepared in Excel and cut and pasted into your Word document. Include the data above in your data section of the spreadsheet. What was the companys cost of sales for the month ended 31 July 2019? What was the companys gross profit for the month ended 31 July 2019? Write a short (300 words) explanation for David about the limitations of a cost of goods manufactured statement for decision making. Question 3 Cost Allocation (20 Marks) FOL has 2 production departments, Sheep Drench and Cattle Drench, and 3 support departments, Administration, Materials Handing and Research. You have estimated that the Research department costs $350,000 pa to run and that 30% of the total cost of running this department is related to refining the Sheep (15%) and Cattle (15%) drenches. The remaining 70% is spent on developing new products. The Materials handling costs are allocated on the basis of the number of material movements. the Administration department costs are allocated on the basis of the number of employees. Allocate the support department costs in the following order; Administration, Materials Handling and Research. Direct costs Materials Handling Research Administration Sheep Drench Cattle Drench Materials & Labour 120,000 300,000 250,000 620,000 780,000 Indirect costs 15,000 50,000 10,000 25,000 25,000 Allocation base No. of material movements 30 150 120 No. of employees 2 2 3 2 1 Required Allocate the support department costs to the operating departments using the direct method. Allocate the support department costs to the operating departments using the step-down method. Allocate first the costs for the support department having the largest direct costs. Allocate the support department costs to the operating departments using the reciprocal method. Use either simultaneous equations or Excel Solver. Cut and paste your spreadsheet results and formula view into your word document. Question 4 Job Costing (20 Marks) FOL have been asked to prepare a special spray to eliminate an insect pest, Gargantua, recently identified at one orchard. David Scott has developed a special spray that kills the Gargantua insects. This will be a special job and will be made in the laboratory. FOL budgeted the following for the Research department. Overhead in the Research department is allocated on the basis of direct labour hours. Research Research overhead $ 50,000 Direct labour cost $ 225,000 Direct labour hours 3840 During March, the cost record for the Gargantua job shows the following: Research Production of Gargantua Direct materials requisitioned $10,500 $163,000 Direct labour cost $20,000 $5,500 Direct labour hours 250 30 Required What is the estimated overhead allocation rate that should be used in the Research department? What is the total overhead allocated to job Gargantua? The Gargantua job was for 150 units. What is the unit cost for this job? Actual overhead for the Gargantua job was $18,500. Calculate the over or under application of overhead. Prepare the journal entries to record the allocation of overhead and the over or under application of overhead. Gargantua was sold at the end of March to the Orchardists' Association for $350,000. What is the total profit and the profit per unit on the sale. Question 5 Process Costing (20 Marks) The following information relates to the operation of a Cattle Drench and Sheep Drench departments of FOL for February: Sheep Drench Cattle Drench Opening Inventory: 15000 units 30% complete 25000 units 25% complete Material cost $ 60,000 $ 80,000 Conversion cost $ 5,000 $ 7,500 Closing Inventory: 7500 units 1/3 complete 15000 units 20% complete Current costs: Materials $ 85,000 $ 90,000 Conversion $ 10,000 $ 15,000 Required Using a spreadsheet, calculate the cost of goods transferred out of each department using the weighted average cost method and the FIFO method. Copy and paste both the results and formula versions of the spreadsheet into your Word document. Prepare the journal entries to record the production costs for February. Assume that the costs of the two production departments are charged to separate work in process inventory accounts. Explain the difference between the costs calculated using the weighted average cost method and the FIFO method.