Lusaka Pic Lusaka Plc is a large Lusaka Stock Exchange listed company. The company is a manufacturing company that produces a wide range of cosmetics products for both male customers and female customers. These cosmetic products include perfumes, body and hand lotions and hair creams. The cosmetic products are produced from the same type of aromatic oils, diluted alcohol, fragrances and petroleum jelly where applicable. The perfumes are produced using aromatics oils and diluted alcohol and they are packed in 100 millilitres (ml) bottles. Each 100 ml bottle of the male version of the perfume is produced by mixing 90 ml of aromatic oils with 10 ml of diluted alcohol. On the other hand, each 100 ml bottle of the female version of the perfume is produced by mixing 80 ml of aromatic oils with 15 ml of diluted alcohol and 5 ml of fragrances. Direct labour time required to produce a 100 ml bottle of each of the two versions of perfumes is 30 minutes. Body and hand lotions are produced from aromatic oils and fragrances and they are packed in 500 ml bottles. Each 500 ml bottle of lotions is produced by mixing 400 ml of aromatic oils with 100 ml of fragrances. Direct labour time required to produce a 500 ml bottle of the body and hand lotions is 15 minutes. Hair creams are produced by mixing petroleum jelly and fragrances. They are packed in 500 ml bottles. Each 500 ml bottle of the hair creams is produced by mixing 400 ml of petroleum jelly and 100 ml of fragrances. Direct labour required to produce a 500 ml bottle of the hair cream is 15 minutes. Aromatic oils are purchased by the company at a price of K2,000 per litre while diluted alcohol is purchased at a price of K3,500 per litre. Fragrances are purchased at a price of K1,800 per litre and petroleum jelly is purchased at a price of K1,000 per litre. Labour is paid for at the rate of K250.00 per direct labour hour. Lusaka Plc operates three production departments and two service departments as cost centres. Production of the cosmetic products is undertaken in the production cost centres. The service cost centres provide services to the three production cost centres. The perfumes are produced in production cost centre P1 while the body and hand lotions are produced in production cost centre P2 with the hair creams are produced in production cost centre P3. Lusaka Plc used a system of traditional absorption costing for the purposes of costing its products and reporting profits to management. At the end of each year, there are no inventories of finished cosmetic products to carry forward to the following year. Similarly, there are no inventories of raw materials or work in progress carried forward from one year to another. The following budgeted information for the year ended 30 June 2019 was prepared during the last budget period and was approved on 15 June 2018. Budgeted production volumes: Product Male version of the perfume Female version of the perfume Body and hand lotions Petroleum jelly Volume 300,000 litres 450,000 litres 200,000 litres 150,000 litres Budgeted production overhead costs: Production Cost Centres P1 P2 P3 Service Cost Centres S1 S2 K k Allocated overheads Apportioned overheads 29.800.000 60,705,000 91,500.000 22.500.000 23.000.000 32,450,000 31,400,000 41,200,000 8,750,000 5,890,000 Production Cost Centres Service Cost Centres P1 P2 P3 S1 S2 Basis of re-apportionment 30% 20% 45% 35% 25% 25% S2 N/A 20% 0% N/A The following actual results were reported for the year ended 30 June 2019: Product Volume Produced Direct labour hours Male version of the perfume 320,000 litres 81,000 hours Female version of the perfume 420,000 litres 106,000 hours Body and hand lotions 210,000 litres 104,000 hours Hair creams 140,000 litres 68,500 hours Actual production overheads for the year ended 30 June 2019 for each of the three production cost centres, after re-apportionment of the service cost centre overheads were as follows: Production department Actual overheads P1 65, 136,600 P2 98,900,000 P3 143,250,000 Production overheads are absorbed in each of the three production cost centres at a predetermined overhead absorption rate based on direct labour hours. However, the production director has argued that actual overhead absorption rates should be used instead. He has also stated these actual overhead absorption rates should be company-wide overhead absorption rates instead of being departmental overhead absorption rates. Lusaka Plc distributes its products to wholesalers throughout Zambia and there is sufficient profit being generated by the company in this way. As a result, there are no intentions to change the policy on how the products reach the customers. There is, however some considerable competition as most of the cosmetic products on the Zambian market are imported. Lusaka Pic needs to remain in the business and maintain its profitability. Senior management in Lusaka Plc now need to assess the performance of each of the cost centres based on the information relating to the financial year ended 30 June 2019. For this purpose, both budgeted information and actual information are provided above. Management will then need to review the company's operations based on the results of the performance of the company. Each of the company's departmental cost accountants will need to be informed about their main roles in the organization as all of them have recently been recruited from the University. Required: [6 Marks] (a) Re-apportion the overheads of the service cost centres S1 and 52 and calculate the predetermined direct labour hour overhead absorption rates to 2 decimal places. [15 Marks] (b) Calculate the amount of over absorbed or under absorbed overheads in each of the production cost centres P1, P2 and P3 and identify and explain TWO (2) causes of over or under absorption of production overheads. [15 Marks] NOTE: Up to 9 marks are available for calculations in part (b) (c) Explain TWO (2) reasons why Lusaka Plc prefers predetermined overhead absorption rates to overhead absorption rates based on the actual results. (d) Explain TWO (2) reasons why Lusaka Plc prefers departmental overhead absorption rates to company-wide overhead absorption rates. [6 Marks] (e) Calculate the actual production cost for each of the following: 100 ml bottle of the male version of the perfume [6 Marks] (i) 100 ml bottle of the female versions of the perfume [6 Marks] (iii) 500 ml bottle of the body and hand lotion [6 Marks] (iv) 500 ml bottle of the hair cream [6 Marks] (1) Calculate the following ratios for each of the production cost centres and comment on the performance of each cost centre in the year ended 30 June 2019: (0) Labour efficiency ratio [5 Marks] (ii) Labour capacity utilisation ratio [5 Marks] (iii) Production volume ratio [5 Marks] NOTE: Up to 9 marks and are available for calculations in part (f) (g) As Management Accountant for Lusaka Plc, prepare a memorandum to the departmental cost accountants explaining why information is important in Lusaka Pic and also explaining the qualities of useful information. [15 Marks] Marks for presentation and structure of the memorandum [4 Marks] [TOTAL: 100 MARKS] END OF ASSIGNMENT QUESTION PAPER Lusaka Pic Lusaka Plc is a large Lusaka Stock Exchange listed company. The company is a manufacturing company that produces a wide range of cosmetics products for both male customers and female customers. These cosmetic products include perfumes, body and hand lotions and hair creams. The cosmetic products are produced from the same type of aromatic oils, diluted alcohol, fragrances and petroleum jelly where applicable. The perfumes are produced using aromatics oils and diluted alcohol and they are packed in 100 millilitres (ml) bottles. Each 100 ml bottle of the male version of the perfume is produced by mixing 90 ml of aromatic oils with 10 ml of diluted alcohol. On the other hand, each 100 ml bottle of the female version of the perfume is produced by mixing 80 ml of aromatic oils with 15 ml of diluted alcohol and 5 ml of fragrances. Direct labour time required to produce a 100 ml bottle of each of the two versions of perfumes is 30 minutes. Body and hand lotions are produced from aromatic oils and fragrances and they are packed in 500 ml bottles. Each 500 ml bottle of lotions is produced by mixing 400 ml of aromatic oils with 100 ml of fragrances. Direct labour time required to produce a 500 ml bottle of the body and hand lotions is 15 minutes. Hair creams are produced by mixing petroleum jelly and fragrances. They are packed in 500 ml bottles. Each 500 ml bottle of the hair creams is produced by mixing 400 ml of petroleum jelly and 100 ml of fragrances. Direct labour required to produce a 500 ml bottle of the hair cream is 15 minutes. Aromatic oils are purchased by the company at a price of K2,000 per litre while diluted alcohol is purchased at a price of K3,500 per litre. Fragrances are purchased at a price of K1,800 per litre and petroleum jelly is purchased at a price of K1,000 per litre. Labour is paid for at the rate of K250.00 per direct labour hour. Lusaka Plc operates three production departments and two service departments as cost centres. Production of the cosmetic products is undertaken in the production cost centres. The service cost centres provide services to the three production cost centres. The perfumes are produced in production cost centre P1 while the body and hand lotions are produced in production cost centre P2 with the hair creams are produced in production cost centre P3. Lusaka Plc used a system of traditional absorption costing for the purposes of costing its products and reporting profits to management. At the end of each year, there are no inventories of finished cosmetic products to carry forward to the following year. Similarly, there are no inventories of raw materials or work in progress carried forward from one year to another. The following budgeted information for the year ended 30 June 2019 was prepared during the last budget period and was approved on 15 June 2018. Budgeted production volumes: Product Male version of the perfume Female version of the perfume Body and hand lotions Petroleum jelly Volume 300,000 litres 450,000 litres 200,000 litres 150,000 litres Budgeted production overhead costs: Production Cost Centres P1 P2 P3 Service Cost Centres S1 S2 K k Allocated overheads Apportioned overheads 29.800.000 60,705,000 91,500.000 22.500.000 23.000.000 32,450,000 31,400,000 41,200,000 8,750,000 5,890,000 Production Cost Centres Service Cost Centres P1 P2 P3 S1 S2 Basis of re-apportionment 30% 20% 45% 35% 25% 25% S2 N/A 20% 0% N/A The following actual results were reported for the year ended 30 June 2019: Product Volume Produced Direct labour hours Male version of the perfume 320,000 litres 81,000 hours Female version of the perfume 420,000 litres 106,000 hours Body and hand lotions 210,000 litres 104,000 hours Hair creams 140,000 litres 68,500 hours Actual production overheads for the year ended 30 June 2019 for each of the three production cost centres, after re-apportionment of the service cost centre overheads were as follows: Production department Actual overheads P1 65, 136,600 P2 98,900,000 P3 143,250,000 Production overheads are absorbed in each of the three production cost centres at a predetermined overhead absorption rate based on direct labour hours. However, the production director has argued that actual overhead absorption rates should be used instead. He has also stated these actual overhead absorption rates should be company-wide overhead absorption rates instead of being departmental overhead absorption rates. Lusaka Plc distributes its products to wholesalers throughout Zambia and there is sufficient profit being generated by the company in this way. As a result, there are no intentions to change the policy on how the products reach the customers. There is, however some considerable competition as most of the cosmetic products on the Zambian market are imported. Lusaka Pic needs to remain in the business and maintain its profitability. Senior management in Lusaka Plc now need to assess the performance of each of the cost centres based on the information relating to the financial year ended 30 June 2019. For this purpose, both budgeted information and actual information are provided above. Management will then need to review the company's operations based on the results of the performance of the company. Each of the company's departmental cost accountants will need to be informed about their main roles in the organization as all of them have recently been recruited from the University. Required: [6 Marks] (a) Re-apportion the overheads of the service cost centres S1 and 52 and calculate the predetermined direct labour hour overhead absorption rates to 2 decimal places. [15 Marks] (b) Calculate the amount of over absorbed or under absorbed overheads in each of the production cost centres P1, P2 and P3 and identify and explain TWO (2) causes of over or under absorption of production overheads. [15 Marks] NOTE: Up to 9 marks are available for calculations in part (b) (c) Explain TWO (2) reasons why Lusaka Plc prefers predetermined overhead absorption rates to overhead absorption rates based on the actual results. (d) Explain TWO (2) reasons why Lusaka Plc prefers departmental overhead absorption rates to company-wide overhead absorption rates. [6 Marks] (e) Calculate the actual production cost for each of the following: 100 ml bottle of the male version of the perfume [6 Marks] (i) 100 ml bottle of the female versions of the perfume [6 Marks] (iii) 500 ml bottle of the body and hand lotion [6 Marks] (iv) 500 ml bottle of the hair cream [6 Marks] (1) Calculate the following ratios for each of the production cost centres and comment on the performance of each cost centre in the year ended 30 June 2019: (0) Labour efficiency ratio [5 Marks] (ii) Labour capacity utilisation ratio [5 Marks] (iii) Production volume ratio [5 Marks] NOTE: Up to 9 marks and are available for calculations in part (f) (g) As Management Accountant for Lusaka Plc, prepare a memorandum to the departmental cost accountants explaining why information is important in Lusaka Pic and also explaining the qualities of useful information. [15 Marks] Marks for presentation and structure of the memorandum [4 Marks] [TOTAL: 100 MARKS] END OF ASSIGNMENT QUESTION PAPER