QUESTION 1. [35 marks]

Fox Books is a bookstore that has a caf as well as selling books and stationery. It currently allocates Administration, Selling and Other Operating Expenses using the Cost of Goods Sold of each product department. Fox Books wants to maximise the accurate pricing and cost management of each department. Management is questioning whether the accounting system is providing the best information for making cost decisions.

Fox Books - Department Information for 30 June 2024 Caf Books Stationery

Revenues $1,472,432 $7,440,960 $4,630,720

Cost of Goods Sold $1,113.370 $5,313,454 $3,444,622

Caf Cleaning Expense $36,500 - -

Number of Orders Placed 4,000 5,600 5,000

Number of Deliveries Received 3,200 2,800 3,400

Hours of Loading Inventory 20,000 30,000 28,000

Items Sold 736,216 372,048 347,304

The following Administration, Selling & Other Expenses are incurred:

Purchasing Department Expenses $949,000

Receiving Department Expenses $864,800

Inventory Loading Expenses $975,000

Customer Support Expenses $273,552 $3,062,352

Required:

a) Prepare an income statement for each department using Cost of Goods Sold to allocate Administration, Selling & Other Expenses. [9 marks]

b) Identify and explain a better method for allocating Administration, Selling & Other Expenses across the 3 departments. Use your proposed method of allocation to prepare alternative income statements for each department and compare them with the results in a). [18 marks]

c) Write a brief report to the management of Fox Books to summarise your recommendations for improvements to the accounting system, and how this information would be useful for management decisions. [8 marks]

QUESTION 2. [25 marks]

Nice & Natural manufactures muesli bars for health food stores. The management accountant, Lionel, is unhappy with the standard costing system used by the business. The standard and actual amounts for Direct Materials and Direct Manufacturing Labour for May were as follows:

Standard Muesli Bars Manufactured Actual Direct Material Costs 12,000 13,464

Direct Materials - Rice Flakes in Kilograms $60,000 $60,588

Direct Materials - Carob in Kilograms 360 410

Direct Manufacturing Labour Costs 24 28

Direct Manufacturing Labour Hours $54,000 $55,386 3,000

The standard costs are based on an independent survey conducted by an external consultant. Lionel had noticed that since the survey, unfavourable variances have been extremely rare. He has also observed that workers seem to have a lot of time to enjoy work breaks at the caf nearby. He is concerned that the production manager is aware of the spare time, however, he is unwilling to reduce the standard requirements because his performance looks better at the current standards.

Required:

a) Calculate the price and efficiency variances for Direct Materials - Rice Flakes and Carob, and Direct Manufacturing Labour in May. 3,060 [9 marks]

b) Discuss the types of actions that employees may have taken to reduce the accuracy of the standards set by the external consultant. Why would employees take those actions? [6 marks]

c) What actions should be taken by Lionel to correct the standards currently being used? [5 marks]

d) If Lionel can obtain industry benchmarks for the estimated costs, discuss the advantages and disadvantages of using industry information to calculate the variances in a). [5 marks]

QUESTION 3. [20 marks]

Darylyn Chocolate company produces Rockyroady chocolate squares which are sold in brightly decorated canisters. Cool Canisters' sales manager has approached Darylyn with an offer to supply canisters at $1.50 each. Currently, Darylyn assigns the following costs to production of canisters:

Direct Material $610,000

Direct Labour 11,000 Hours @ $ per Hour $495,000

Variable Overhead $20 per Direct Labour Hour $220,000

Fixed Overhead $50 per Direct Labour Hour $550,000

Total Cost $1,875.000

Number of Canisters 750,000

A conventional make-or-buy analysis suggests that Cool Canister's offer should be accepted, as the cost per canister would be more than $1.50. If Darylyn decides to buy the canisters, then $1,475,000 of total costs would be avoided, as $400,000 Fixed Overhead relates to Building Depreciation. The management accountant has requested that further detailed analysis should be conducted before a decision is made. The management accountant has also provided activity drivers that relate to both Variable and Fixed Overheads in the production of canisters as follows:

Product Specs 10 $600 per Spec

Supervisory Hours 2,000 $40 per Hour

Material Handling Hours 6,000 $8 per Hour

Purchase Orders 55 $250 per Order

Inspections 30 $300 per Inspection

Setups 15 $400 per Setup

Machine Hours 70,000 $2.50 per Hour

Required:

a) Explain how the $1,475,000 of cost savings was calculated using conventional make-or-buy analysis. [4 marks]

b) Determine the costs that will be saved by purchasing the canisters using the activity drivers. [6 marks]

c) Finalise the make-or-buy decision using the activity data. Should Darylyn buy the canisters? [4 marks]

d) If the conventional and activity-based analyses produced different conclusions, explain why. [6 marks