Question 1 Activity Based Costing for Kota Mills (25 marks)

Kota Mills supply Divine Denim with the organic denim used in their production. After discussions with Helen about the service she was getting from Good Numbers, the manager of Kota Mills decided to use Good Numbers to assist with their management decision making. Kota Mills produces three different weights of denim using two departments. In Department 1, machines weave the cloth. In Department 2 the cloth is dyed a variety of colours. Information for the combined use of resources in both departments for the three types of fabric is outlined below.

Bolts are 20 metres each. All fabric is inspected during production. Robotic equipment inspects the fabric for obvious flaws as the bolts are wound up. Each bolt spends about 5 minutes in the inspection process.

	Denim
	8 ounce	13 ounce	16 ounce	Total	units
Monthly production in units (bolts of fabric)	1,000	4,000	2,000	7,000	bolts
Direct material cost $	8,000	24,000	20,000	52,000	$
Direct labour cost $	660	1,320	920	2,900	$
Direct labour hours	33	66	46	145	hours
Machine hours	500	1,333	1,500	3,333	hours
Number of set-ups for dye colour changes	10	30	20	60	set-ups
Inspection time	83	333	167	583	hours

Combined overhead costs for the two departments follow:

Cost to operate and maintain machines	$ 40,000
Set-up costs	$ 11,000
Inspection costs	$ 6,996
Total	$ 57,996

Previously, Kota Mills used a costing system focused on processes. It allocated direct materials to each product separately but allocated direct labour and conversion costs as if they were incurred equally across the units produced. Under this costing system, the overhead cost for Department 1 is $19,332 and for Department 2 it is $38,664. Direct labour hours and costs in Department 1 are 55 hours at $1,100, and the remaining are in Department 2. Direct materials for Department 1 are $15,000 for 16 ounce denim, $16,000 for 13 ounce denim, and $6,000 for 8 ounce denim. The remaining direct materials are added in Department 2. No beginning or ending inventory or abnormal spoilage is recorded for Kota Mills this period.

Required:

1. Set up a spreadsheet to perform the calculations in ii. and iii. below. Use a data input section and cell referencing. (2 marks)
2. Use conventional process costing to allocate the direct materials and conversion costs per department to total bolts produced. Develop a cost per bolt for each type of fabric. (Hint: You will need to first calculate the equivalent cost per bolt for conversion costs for each department.) (3 marks)
3. Using activity-based costing (ABC), develop a cost per bolt. (12 marks)
4. Compare the process costing and ABC results. Identify the products with overstated costs and those with understated costs. Explain why the costs are misstated under traditional process costing. (5 marks)
5. How could the Kota Mills manager use the ABC information to improve operations? (max 200 words) (3 marks)

Presentation: Cut and paste your spreadsheet results and formula view into your word document. The formula view should include the column letters and the row numbers.

Question 2 Variance analysis for Divine Denim (25 marks)

Helen has been using a standard cost system developed by Good Numbers and calculates the standard cost of a completed pair of RTW jeans as $72.00, as follows:

	Quantity	Price $	Unit	Cost per pair of jeans $
Denim fabric meters	2	10	/metre	20.00
Direct labour hours	2	20	/hour	40.00
Variable factory overhead	0.4	10	/hour	4.00
Fixed factory overhead	0.4	20	/hour	8.00
Total standard cost				72.00

The fixed overhead rate is based on an estimated 600 units per month. Direct labour is nearly a fixed cost in this business. Selling and administrative costs are $4500 per month plus $2 per pair of jeans sold. The following information is for production during April:

		Units
Number of pairs of jeans made	565	Jeans
Purchase of 1200 metres of denim	13,200	metres
Number of metres used	1,150	metres
Direct labour costs (1200 hours)	24,500	$
Variable factory overhead costs	2,750	$
Fixed factory overhead costs	4,020	$
Selling and administrative costs	3,770	$

Divine Denims policy is to record materials price variances at the time materials are purchased. Use a spreadsheet to perform calculations.

Required:

As an accountant working for Good Numbers use a spreadsheet to:

1. prepare a flexible cost budget for the month of April. (3 marks)
2. calculate all common direct cost variances. (3 marks)
3. calculate all common factory overhead variances. (3 marks)
4. calculate a total variance for the selling and administrative costs. (3 marks)
5. prepare a production cost variance report for April. (5 marks)
6. prepare a report that sums all the variances necessary to prepare the reconciling journal entry at the end of the period. Explain how you would close the total variance; that is, identify the account or accounts that would be affected, and whether expenses in the accounts will be increased or decreased to adjust the records for the total variance. (3 marks)
7. use information in the April production cost variance report (part v. above) to identify and describe questions Helen, the owner of Devine Denim, might have about Aprils production costs. (5 marks)

Presentation: Cut and paste your spreadsheet results and formula view into your word document. The formula view should include the column letters and the row numbers.

Question 3 Relevant costs (25 marks)

Kota Mills produces two types of brocade, silk and polyester. Last month 450 bolts of the polyester brocade and 4,000 bolts of the silk brocade were produced and sold. Average prices and costs for the two products for last month were:

	Brocade
	Polyester	Silk
Selling price	95	225
Direct materials	40	95
Direct labour	5	25
Variable overhead	5	15
Product line fixed costs	10	40
Corporate fixed costs	25	25
Average Margin per unit	10	25

The Kota brocade production line is highly automated. As a result, changes in production will have no impact on labour costs. The direct labour employees are all permanent and 40 hours per week checking the quality on the production line.

All costs, other than corporate fixed costs listed under each product line, can be avoided if either product line is dropped. Corporate fixed costs totals $125,000 per month. Corporate fixed costs of $10,000 can be avoided if the polyester were dropped. Corporate fixed costs of $15,000 can be avoided if the silk brocade is dropped. The remaining $100,000 can only be avoided by going out of business.

Haywood Mills has offered to supply the polyester brocade at a cost of $55 per bolt.

Required:

1. Calculate the total contribution margin for each product, assuming the sales mix is the same as last months. (3 marks)
2. Calculate the breakeven sales volume (in units produced and sold) for polyester brocade. In other words, what is the sales volume at which Kota should be financially indifferent between dropping and retaining the polyester brocade? (3 marks)
3. Calculate whether the Haywood Mills offer should be accepted on financial grounds. (4 marks)
4. Discuss at least five qualitative factors that would affect the decision to keep, drop or outsource the polyester brocade. (15 marks)

Presentation: Cut and paste your spreadsheet results and formula view into your word document. The formula view should include the column letters and the row numbers.

Question 4 Lean Thinking Divine Denim (25 marks)

Helen Croker has been discussing production costs with others in the garment industry. Lean thinking was a term other producers have been discussing as a way of controlling costs. Climbing costs are eating away at Helen's profits, so to reduce costs she thought of moving production offshore. Going offshore will make it more difficult to maintain quality while keeping production onshore enables her to contribute to her local community. She has come to you, a partner in Good Numbers, asking for some information about lean thinking.

Required:

Prepare a report for Helen which describes the concept of lean thinking. In this report identify a business discovered through your internet searches that has adopted lean thinking. (7 marks)

Using the business you identified as a case study:

1. explain how lean thinking has been implemented and used. (9 marks)
2. outline the benefits achieved by adopting lean thinking. (9 marks)

(max 1,200 words)