PART A CASE STUDY: ROAN COMPANY (40 marks)

Please Read the Following Case Study and Answer the Four Questions Following

The Case After the monthly senior management meeting of the top executives of Roan Company, the CEO, Paddy Murphy, is approached by both the Director of Operations (Ann) and the Associate Director for Research and Development (Jack). Both are looking very perplexed and are asking for Paddy's advice on two important issues. Both have prepared memorandums for Paddy's attention. Memorandum from Associate Director for R&D: Jack Jack is extremely concerned about a research project by ROAN Company which to date has cost the company 400,000. It is anticipated that, should the project be allowed to proceed, it will be completed in approximately one year when the results would be sold to a government agency for 1,000,000. If the project is abandoned now the findings to date could be sold to a rival company for 300,000. However, a contractual penalty for abandoning the original contract of 100,000 would have to be incurred. In a memorandum which he presents to Paddy, Jack has estimated the cost of completion as follows:

Item Note Amount Material A 1 150,000 Cost of research scientists 2 180,000 Depreciation of equipment 200,000 Project Insurance 3 25,000 Overheads 4 40,000 Cost of expert's report on the project 5 25,000 Material B 6 300,000 Total Cost of Completion 920,000

Note 1: This material is only of use for this specific project. It has just been received and cost 150,000 is extremely toxic and if not used on the project it has no resale value and if the project does not go ahead, this material would have to be disposed of by special means at a cost of 120,000.

Note 2: The research scientists working on the project are both highly skilled and very busy. The cost of 180,000 represents their wages for the coming year. However, if they were employed elsewhere in the company, they could generate 800,000 each year in extra sales. These extra sales would yield a contribution of 40% of sales revenue.

Note 3: 80% of project insurance represents an allocation of the overall insurance bill. Only 20% is specifically attributable to this project. Strictly Copyright Professor Vincent O'Connell, 2019 SAMPLE QUESTIONS

Note 4: 70% of overheads are directly attributable to the job while the remainder is an allocated cost.

Note 5: This has already been submitted but has not yet been paid. The company's management feels that the expert's charge is too high and are hopeful that they can get this cost reduced by 30% through the courts.

Note 6: Due to a worldwide shortage, this material, which originally cost 300,000, now has a resale value of 400,000.

Memorandum from Director of Operations: Ann Ann is new to the role of Director of Operations. Previously, she has operated in a service industry so she is still settling into her new role at Roan Company. She knows that Paddy has a background as a cost accountant. Consequently, she asks for his advice on how to interpret the data which she presents below. The firm's Cost Accountant is on vacation so no other source of advice is available to her. Although Paddy is very busy, he agrees to help. Paddy is aware that Roan Company operates within the pharmaceutical sector, and manufactures and sells a single product named GHE.

The company uses a standard cost system and the following is the standard cost data per unit of GHE: Direct Materials 4 kg @ 6 per kg Direct Labor 2 hours @ 8 per hour Variable Overhead 2 hours @ 4 per hour Fixed Production overhead costs were budgeted at 18,635 per month Budgeted Selling Price was 60 per unit For the month of August 2003, budgeted production and sales was 1,200 units of GHE The actual manufacturing costs for August 2003, when 1,100 units of GHE were produced and sold, are as follows:

Sales Revenue 68,200 Direct Materials (5,500 kgs) 35,750 Direct Labour (1,650 hrs) 11,550 Variable Overhead 10,200 Fixed Overhead 18,500

After both meetings are over, Paddy leaves his office and enjoys the cuisine at his local Indian restaurant. He is conscious that both Jack and Ann should be able to solve these problems without his assistance. However, he knows that they are both promising executives and he is willing to help them out on this occasion. Nonetheless, as he pays the bill, he resolves to talk toboth executives during the forthcoming week to ensure that the learning experience is optimized for all of this team. For this exercise, assume that you are the CEO, Paddy.

Required:

Question 1: Draft a memorandum from Paddy briefly addressing each of the issues raised by Jack with respect to his concern about the Research Project. (10 marks)

Question 2: Calculate whether or not Roan Company should proceed with the Research Project. Briefly comment on any other issues which may be relevant to the final decision. (15 marks)

Question 3 : Using the data provided by Mary, (i) Show the Original Budget and Flexed Budget for the GHE product (ii) Calculate the Sales Volume Variance and Flexed Budget Variance and the individual components of the Flexed Budget Variance. (10 marks)

Question 4: (i) Building on your work for Question 3, show any more detailed variance which you feel may help analyze the results with respect to the GHE product (ii) Explain the meaning of each of the variances you have calculated in Question 3 part (ii) and

Question 4 part (i). Comment on the organizational relevance of each of these variances. (15 marks) (Total: 50 marks)