manegement accounting

topic: relevant costing

Question 2 Background Kraftwars use traditional methods to produce handcrafted products in earthenware and in wood. The business has four products in its product range: dinner sets, tea sets, blanket boxes and stools and it has experienced a steady growth in turnover since it was established 5 years ago. Kraftwars take particular pride in the quality of customer service which they offer. However, due to the level of training and skill required for the production of their products, Kraftware are finding it increasing difficult to recruit and retain sufficient skilled labour to meet the growing demand for their products. The most recently available performance reports relate to Quarter 1. Financial Data The following data has been extracted from the business' Quarter 1 performance report. Tea Sets Dinner Sets Blanket Boxes Stools Volume Produced and Sold 1,750 1,120 1,900 2,100 Selling price per unit (C) 400 500 250 215 Variable costs per unit (): Materials 76 97 79 35 Skilled Labour(@25 per hr) 125 175 75 100 Semi-skilled Labour (@12 per hr) 24 18 36 12 Fixed overheads per quarter 198,250 Sales and Production Mix Quarter 3-Skilled Labour Restrictions The management team are currently preparing the production schedule for Quarter 3. They expect that selling prices and costs will be the same as for Quarter 1. Management anticipate that despite unlimited sales demand for the business' products, production will be limited by the shortage in skilled labour. It is expected that the hours of skilled labour available in Quarter 3 will equal those utilised in Quarter 1. Production scheduling is further restricted by the differences between earthenware and woodwork skills. Skilled labourers, who previously worked on the earthenware products (tea sets and dinner sets), may work on either of these products in the future, but not on the wooden products (blanket boxes and stools). Similarly, the hours of skilled labour previously utilised in the production of the wooden products may be scheduled for either of these products in the future, but not for the carthenware products. Sales and Production Mix Quarter 3 - Minimum Output Levels Management recognise the immediate financial significance of pursuing the optimal production mix. However, they also believe that Kraftwars must produce and sell at least 300 units of each of its four products in order to maintain an adequate presence in the market. Requirement Prepare a report for management in which you (a) Propose an optimal production mix for Quarter 3 and quantify how this would increase profitability relative to the profits from the mix produced and sold in Quarter 1. You must support your comments with suitable calculations. 15 marks