PLEASE USE DATA IN EXHIBITS TO ANSWER QUESTIONS IN PROMPTS. There is a known discrepancy between article context and exhibit.

Q 1: Calculate total manufacturing overhead rate using company's existing costing system using data in Exhibit 4.

Q2: Calculate total manufacturing overhead rate for each department under the proposed costing system using data from Exhibits 4 & 5.

Q3: Using companys existing costing system, calculate total cost to manufacture each of five jobs detailed in Exhibit 6.

Q4: Using companys proposed costing system, calculate total cost to manufacture each of five jobs detailed in exhibit 6 & 7.

Q5: How would you use the data in Exhibit 8 to modify the proposed costing system?

Q6: Would you recommend that the company adopt the proposed costing system? Explain your answer.

E Exhibit 4: Typical Monthly Overhead Costs Source: Company Data. (the numbers have been disguised) Exhibit 5: Manufacturing Expenses Per Department Source: Company Data. (the numbers have been disguised) Exhibit 6: Sample Customer Order Data of Varying Manufacturing Complexity ...here, we can see the details of the time taken to produce each piece. For AS's order to produce 1,512 customised pillowcases, the time taken by per piece is 0.5,3,0.6 and 0.6 minutes in cutting, stitching, inspection and packing, respectively. If we compare this to CI 's order of a similar size to produce plain pillowcases, the time taken is 0.4,2,1 and 1 minutes in each department. Intuitively, this makes sense. One would expect customised pillowcases to be more time and resource consuming than plain standard ones. A similar phenomenon can be seen when comparing the time taken for CI's pillowcase order against the flat sheets order... I'm confident that the new method will resolve the cost allocation distortion we are currently facing. Another team member, somewhat agitated at the discussion, raised the following point: ...we are already considerably overworked with all sorts of costing demands coming from all sides. As I understand, we ran at close to full capacity last month, and sales continue to go up each month. I don't understand why this costing exercise is an immediate concern when monthend is upon us. We all know the urgencies associated with month-end. Shouldn't we focus on that right now? WAY FORWARD The meeting ended with an agreement that Asad and his team would share detailed calculations for selecting different customer orders under both the existing and proposed costing methods. Shahzeb thought this would be useful in illustrating the impact of the proposed change. He was also hopeful about Asad's plan and believed that it would solve the costing and subsequently the pricing anomaly. However, he recognised that even with this proposal, there were certain complexities that needed to be dealt with. For example, when an order was received, the work seldom commenced immediately. Time was needed for managing, scheduling and addressing the customisation requirements of the customers. Exhibit 8 gives details of the efficiency of some of the different orders. For example, for orders by customer AS, an efficiency of 49% in the stitching department meant that 51% of the total available time for this department was idle time. Thus, an identical order could theoretically have different costs because one was manufactured more efficiently than another. Shahzeb decided to share his thoughts with Asad so that this could be incorporated into the calculations he was working on. manufacturing overheads were directly traceable to each of the four processing departments whilst others we common expenses incurred to run the entire manufacturing facility, not individually traceable to each departmer Out of a total of PKR 34 million 2 of manufacturing overheads, PKR 14.8 million were treated as direct costs f each department, whilst the balance was indirect costs (see Exhibit 4). Direct labour costs were not treated as separate category but were instead clubbed into the direct manufacturing overheads and allocated to products a part of the overhead allocation. The total manufacturing overhead was allocated to each product based on the number of meters of cloth used f product costing. According to this method, products that required a greater amount of cloth, such as bed sheet were expensive to produce compared to pillowcases that used relatively fewer meters of fabric. The overhe allocation rate per meter was computed by dividing the total manufacturing overhead by the total meters of clo used in a particular month. Exhibit 4 shows the overheads and the total meters of cloth used in a typical mont Whilst this method appeared reasonable on the face of it, Shahzeb highlighted to his team the key deficiency this methodology: The problem I see with the current system of allocation is the mismatch between the fabric consumption vis a vis the actual effort and resource utilisation of each product. Our product portfolio is such that items requiring lesser fabric such as pillowcases, often consume far more effort, for example, in terms of cutting, stitching, and individual buyer customisations (frills, embroidery, etc.). This is not reflected in our current costing method... Shahzeb further reinforced his point by sharing the details of a typical customer order (see Exhibit 6): We can see a range of customer orders here. There are differences in terms of design, the quantity of pieces, the number of meters of fabric required as well as the sales value of each order. Let's take, for example, customer CI's order of 1,400 pillowcases. This requires 1,834 meters of fabric, whereas, for the same customer, 340 flat sheets require 1,105 meters of fabric. Therefore, on average, each pillowcase requires 1.3 meters of fabric, whilst each flat sheet requires 3.25 meters. This will result in a skewed overhead allocation per piece towards flat sheets; although they are relatively straightforward to manufacture but far more time and effort goes into manufacturing pillowcases. Proposed Costing System After considerable discussion and debate, Asad proposed that a better method for allocating overhead might the number of machine or labour minutes spent manufacturing a certain category of products. This method wou potentially provide some nexus between effort and cost (assuming more time meant more effort) and hopeful ensure that even small products requiring less fabric would be allocated overhead which were more in line wi their resource consumption. He proposed using cost per minute (CPM) measure instead of the traditional cost p meter. Under the new costing method, the overhead rate would be computed based on total manufacturing overhe divided by the total number of minutes (machine and labour) for each department. In the first step, the tot indirect expenses were to be distributed across each of the four departments based on the number of minutes each department (see Exhibit 5). After that, departmental allocation rates were to be used. The cutting an stitching departments were machine intensive; hence machine hours were considered suitable while the packil and inspection departments were more labour intensive; therefore, labour hours would be used. In order illustrate the method to his teammates, Asad shared the data given in Exhibit 7 and used the same example quot by Shahzeb earlier. Exhibit 7: Manufacturing Time Per Customer Order Source: Company Data. (the numbers have been disguised) Exhibit 8: Average Departmental Efficiency Per Customer Order Source: Company Data. (the numbers have been disguised) Exhibit 1: Competitor Prices Source: Company Data. (the numbers have been disguised) Exhibit 2: Production Process - Cut order is given by Production manager -All the fabric parts are joined and sewn sequentially as per the buyers requirement - On every stage of production - Goods are packed into cartons and dispatched of products from bed sheets, duvet covers, pillowcases to table napkins, runners, aprons, shower curtains and others. The accessories category was further divided into two groups, shoes and miscellaneous. Shoes included formal, casual, and party wear for both men and women. Miscellaneous accessories include bags, clutches, scarves, jewellery, mobile covers and sunglasses. The miscellaneous products were not produced in large quantities, and most of them were outsourced. Home Textile Division The home textiles division of STML contributed more than 15% of the company's revenue in 2018.1 Most of the division's sales were exports to Europe and the United States. It was a highly competitive sector, facing many local and international competition, especially from China and India. Rapidly changing trends in the market meant that the STML product range was continuously evolving. The company was required to be innovative and launch the latest designs and styles to ensure it remained ahead of the competition. Although positioned at the higher end of the market (see Exhibit 1), the tough competition meant that STML needed to be highly focused on costs and prices. Products ranged from simple cuts and designs to more detailed and intricate variants. This diversity in specifications meant that manufacturing the products placed varying demands on resources regarding skill level and technology. The home textiles division consisted of four sequential manufacturing departments: cutting, stitching, inspection, and packing. The orders were processed in a sequential manner (see Exhibit 2). Firstly, the cutting department receives the order from the production manager. Following this, the cutting ratio was received from the merchandiser. Marker making was done to ensure the efficient layout of pattern pieces for fabric and distribution sizes prior to receiving the fabric from the store. The fabric was inspected for possible defects by the quality control department and was then spread in a correct lay height and ply tension. The marker was then placed on the top of the layer. Cutting of the fabric took place within the marker. After this, each piece was numbered to avoid confusion and checked with the marker to ensure cutting accuracy. All the pieces were sorted, bundled, and sent to the stitching department. In the stitching department, product analysis was carried out to decide how a piece will be sewed. Then production targets were made according to the shipping schedule provided. After this, the machine layout was set up based on the daily target quantity. The operator layout was then set up on the basis of machine quantity. The next step rested with the quality control department, which checked the product. Line balancing also took place to ensure the flow line of production. All the cutting parts were then sent to the operator, where they were joined together. Online quality control checks and audits were done throughout the sewing stage. In the end, all the products were counted and sent to the inspection department. The inspection department at STML was continuously involved in each step of production. Initially, the raw material was inspected. Then, inspection took place during the cutting and stitching stage. Lastly, the final product was thoroughly inspected to minimise the defects and returns. Packing was the last step of the process, after which the products were dispatched to the customers. When goods were received in the department, shipping marks were made according to the purchase orders. Buyers provided specifications for cartons, and quality control ensured that they were of the correct size and quality. The inspection department also checked the net and gross weight before bulk production. Finally, the cartons were made, and goods were placed in them. They were labelled and then dispatched. Existing Costing System The existing costing system at STML categorised overheads in three types, i.e. manufacturing, selling and head office expenses (see Exhibit 3). The cost of each customer order was calculated as the sum of three different types of costs: the direct material costs, other direct costs and manufacturing overheads. As the name suggests, direct material costs were related to the cost of raw material used in production. Other direct costs included freight Shahzeb, the manager of cost accounting services of Sapphire Textile Mills Ltd. (STML), glanced anxiously over the list of tasks for the day. He was heading the finance department of the home textiles division of STML. Month-end closing for June 2018 was approaching, and the monthly accounts needed to be submitted at the earliest. Other critical matters were also playing in his mind, particularly costing. The company's Chief Executive, Azam Ahmad, was concerned about the pricing strategy. Although sales were showing an upward trend, customers were asking for price cuts, and Azam had asked the chief financial officer of STML, Muhammad Imran, to review the costs and related pricing to analyse the profitability of recent orders. Imran had, in turn, requested Shahzeb to provide updated costing information for different product lines. Shahzeb felt that he needed to review the existing costing system and, in particular, revisit the overhead allocation method. He was concerned that it was no longer suitable and needed to be updated but needed time to investigate this further. He decided to call a meeting with his team to discuss the way forward. SAPPHIRE TEXTILE MILLS LIMITED The Sapphire Group was a Pakistani industrial conglomerate largely focused on the textile industry. It was a family business established in the 1960 s by four brothers to cater to customers' needs by providing good quality fabrics and textiles. A vertically integrated textile group, the company's segments included spinning, weaving, processing, printing and home textile products. The Group had an annual turnover of over USD 1 billion, with an asset base of over USD 500 million. It held a spinning capacity of 120,632 spindles, 3,120 rotors, 292 looms and 215 stitching machines. Having diversified into the power generation sector, its subsidiaries include Sapphire Retail Limited, Sapphire Wind Power Company Limited, Tricon Boston Consulting Corporation (Pvt.) Limited and Sapphire Tech (Pvt.) Limited. However, 9095% of the revenue still came from textile-related products. Exports accounted for almost 70% of the total revenue, with the major chunk going to Europe. STML was the flagship company of the Sapphire Group and one of the lead players in the textile composite sector. STML was declared a public limited company in 1969 in Pakistan with shares listed on the Karachi Stock Exchange. STML enjoyed more than 10% market share in the listed sector sales and had one of the most modern and organised textile production setups with more than 50 years of textile know-how and a well-established infrastructure of textile management and skilled labour. The manufacturing units of the company were located in Sindh and Punjab. Its products were exported to over 35 destinations globally, and the company employed more than 16,000 people. The rise of textile-related conglomerates like Nishat, Kohinoor, Liberty, Kamal, Masood, and Lucky increased the competition in the marketplace. There were also rumours that the government will reverse the tax rebate leniency available to the textile exporters. Energy crises in Pakistan and talks of withdrawal of duty-free access to European markets were also threatening the already thin margins. STML held a wide product portfolio grouped into three main categories: clothing, home, and accessories. The clothing line catered to both genders but mostly focused on womenswear. The company offered formal, informal, ready to wear, prt--porter, unstitched, printed and embroidered clothes. They also offered different fabric