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Question 2 (20 Marks) Simon and Ishmael both have a talent for the production of modern jewelry. After testing the market, they decided to
Question 2 (20 Marks) Simon and Ishmael both have a talent for the production of modern jewelry. After testing the market, they decided to form a small private company and pool their resources together. In addition to their existing ranges, they decided to introduce a line of ethnic jewelry, which has become very popular. After a year's operation, their product ranges have become so popular that they decided to employ a third staff member, Julia, to be responsible for the ethnic range and to assist with general office administration. At the end of last financial year, they were disappointed to find that their operating profit had dropped by approximately 20% since the previous year. They realized that should this trend continue, they would be forced to downsize and maybe close down altogether. These three friends heard that you have recently completed your module in cost and management accounting, and approach you to help them turn their business around. You notice that the company uses no specific costing methods to control the purchase and use of material, nor is there any system to deal with overheads. In some cases, you notice that emergency inventory has been purchased from a selection of suppliers at a higher price per unit than that of their usual suppliers. You also notice that selling prices are regularly adjusted to suit the demand at the time. In some cases, overheads have not been included in the cost per unit. You conclude that there are practically no control systems present, and while you realize that the entire inventory system needs overhauling. As such, you decide to implement a standard costing system mainly to control raw material purchases and use, and overheads. REQUIRED: As a Management Accountant, write a short Memo to the three friends in 2.1. which you explain how you would implement this system showing the three friends the use of variances to calculate the differences between budgeted and actual information. The following should be considered in your short Memo: An introduction clearly relating to the given case study. A clearly articulated focus area of the subject matter. A conclusion, concisely summarizing the given case study. You are expected to embrace appropriate academic writing style, by using the appropriate language. MARKS 20 Total marks for Question 2 //END// 20
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