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

Rota 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 Rota Mills decided to use Good Numbers to assist with their management decision making. Rota 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 colors. 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)1,0004,0002,0007,000 bolts Direct material cost $8,00024,00020,00052,000$Direct labor cost $6601,3209202,900$Direct labor hours336646145 hours Machine hours5001,3331,5003,333 hours Number of set-ups for dye color changes10302060 set-ups Inspection time83333167583 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, Rota Mills used a costing system focused on processes. It allocated direct materials to each product separately but allocated direct labor 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 labor 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 Rota 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 Rota Mills manager use the ABC information to improve operations? (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 RT jeans as $72.00, as follows:

Quantity Price $Unit Cost per pair of jeans $Denim fabric meters 210/ metre 20.00 Direct labor hours 220/hour 40.00 Variable factory overhead 0.410/hour 4.00 Fixed factory overhead 0.420/hour 8.00 Total standard cost

72.00

The fixed overhead rate is based on an estimated 600 units per month. Direct labor 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 made565 Jeans Purchase of 1200 metres of denim13,200$Number of metres used1,150 metres Direct labor costs (1200 hours)24,500$Variable factory overhead costs2,750$Fixed factory overhead costs4,020$Selling and administrative costs3,770$

Divine Denim's 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 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 production cost variance report for April. (5 marks)
6. prepare 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 describequestions Helen, the owner of Divine Denim, might have about April's 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

PolyesterSilk Selling price95225 Direct materials4095 Direct labor 525 Variable overhead 515 Product line fixed costs 1040 Corporate fixed costs 2525 Average Margin per unit 1025

The Rota brocade production line ishighlyautomated. As a result, changes in production will have no impact on labor costs. The direct labor 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 month's. (3 marks)
2. Calculate the break even sales volume (in units produced and sold) for polyester brocade. In other words, what is the sales volume at which Rota 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 Corker 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 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)