Contribution analysis and costing systems Essay

Module Code: C370

Assignment: TMA02

Word Count: 1,850

Question 3-72 ( a )

Contribution Margin Income Statement

We need to first cipher the figure of bottles of vino green goodss by A Votre Sante ( AVS ) :

We foremost calculate the output of the grapes ( pound ) :

Chardonnay Grapes

Generic Grapes

Pounds Harvested

100,000

60,000

Loss in Processing

10 % ( 10,000 )

5 % ( 3,000 )

Output

90,000

57,000

Therefore from the output, we can set up the figure of bottles of vino produced:

Chardonnay Estate

Chardonnay Regular

Blanc

de Blanc

Entire

Chardonnay Grapes

72,000

18,000

0

90,000

Generic Grapes

0

9,000

48,000

57,000

Entire pound of grapes

72,000

27,000

48,000

147,000

No. of bottles ( lb/3 )

24,000

9,000

16,000

49,000

We now move on to the part margin income statement which gives us the part border and net income:

Gross saless

$

$

Chardonnay-Estate

528,000

Chardonnay-Regular

144,000

Blanc de Blanc

176,000

Entire Gross

848,000

Product/Variable Costss

Grapes

124,000

Bottle, labels, corks

122,500

Harvest Labour

14,500

Crush Labour

2,400

Indirect Materials

6,329

Liquor revenue enhancements

147,000

Gross saless committees

98,000

Barrelss

4,725

Entire Variable Costss

519,454

Contribution Margin

328,546

Fixed Costss

Admin. rent & A ; office

20,000

Depreciation

8,100

Lab disbursals

8,000

Production office

12,000

Gross saless director

30,000

Supervisor

55,000

Utilities

5,500

Waste intervention

2,000

Wine maestro

15,000

Administrative wage

75,000

Entire Fixed Costss

230,600

Net income

97,946

( 24,000 x 22 )

( 9,000 x 16 )

( 16,000 x 11 )

( 85,500 + 38,500 )

( 49,000 x 2.5 )

( 160,000/80 x 7.25 )

( 300 x 8 )

( 1.55/12 x 49,000 )

( 49,000 x 3 )

( 49,000 x 2 )

( 63 barrels [ 1 ] x 300/4 )

Average gross for one bottle of vino = $ 848,000 / 49,000 = $ 17.31 per bottle

Average net income for one bottle of vino = $ 97,946 / 49,000 = $ 2.00 per bottle

Question 3-72 ( B )

This inquiry requires us to cipher the no. of bottles of the extra Chardonnay vino. This extra Chardonnay vino will ensue in a decrease of the no. of bottles in the blanc de blanc vino. Therefore, we will necessitate to cipher the entire addition from selling the new Chardonnay and deduct the loss resulted from non selling the blanc de blanc vino, which will give us the net addition from selling the extra Chardonnay vino. To cipher the maximal monetary value to pay per lb for the Chardonnay grapes, we so cipher 15 % of the return on gross revenues for the extra Chardonnay vino and deduct the net addition from this figure to acquire the extra addition AVS receives. We so split this by the entire available lbs of grapes ( i.e. 20,000 ) to acquire the maximal monetary value AVS would be able to pay per lb.

New Chardonnay

Chardonnay Grapes

18,000

Generic Grapes

9,000

Entire pound of grapes

27,000

No. of bottles ( lb/3 )

9,000

Chardonnay Grapes

Pounds Bought

20,000

Loss in Processing

10 % ( 2,000 )

Output

18,000

Extra Addition from new Wine

$

$

Gross saless

126,000

Costss

Generic Grapes

6,079

Bottle, labels, corks

22,500

Indirect Materials

1,163

Liquor revenue enhancements

27,000

Gross saless committees

18,000

Barrelss

975

Wine maestro

5,000

Entire Costss

80,717

Addition from new vino

45,283

Loss from Blanc de Blanc

Gross saless

33,000

Costss

Generic Grapes

6,079

Bottle, labels, corks

7,500

Indirect Materials

388

Liquor revenue enhancements

9,000

Gross saless committees

6,000

Entire Costss

28,967

Loss from vino

4,033

Net Addition

41,250

15 % Return on gross revenues

18,900

Extra Internet Addition

22,350

( 9,000 x 14 )

( 9,000 x 0.6754 )

( 9,000 x 2.5 )

( 1.55/12 x 9,000 )

( 9,000 x 3 )

( 9,000 x 2 )

( 13 barrels x 300/4 )

( 3,000 x 11 )

( 3,000 x 2.5 )

( 1.55/12 x 3,000 )

( 3,000 x 3 )

( 3,000 x 2 )

( 126,000 x 15 % )

Therefore the maximal sum that AVS would pay for a lb of Chardonnay grapes = $ 22,350 / 20,000 pound =$ 1.1175 per lb

Question 3-72 ( degree Celsius )

Factors to see back uping the purchase of the extra Chardonnay grapes include:

  • The grapes are already crushed and harvested, hence, AVS merely has to purchase the juice of the grapes. This saves clip and money and enables AVS to pass more quality clip on vino doing instead than reaping and suppression,
  • If the quality of the grapes to be purchased is superior, it may give an added inducement to purchase them.
  • There is a possible to increase and diversify the figure of providers. This diversifies the hazard involved in the sense that if one provider is unable to sell grapes for a given period, there are other providers that AVS can’t attack.
  • Added production will assist the fixed costs become more dispersed over a greater figure of units of production, therefore increasing net incomes.
  • There is a possible to increase market portion of AVS by providing more bottles of vino to the market. This may make more dealingss with new purchasers and expand AVS’ web of purchasers.
  • AVS may desire to purchase the grapes so that its rival does non purchase the grapes, hence perchance cut downing the rivals market portion.

Factors to see rejecting the purchase of the extra Chardonnay grapes include:

  • There would be a deficiency of control over the harvest home and oppressing procedure and may take the juice of the grapes to non be of the criterions accepted by AVS.
  • If the quality of grapes is inferior, there may be no inducement to purchase them.
  • Extra gross revenues prognosiss possibly unpredictable and the extra vino produced may non sell and hence may non happen into net incomes.
  • This may be a erstwhile new vino merchandise and would be new to the market. Therefore, AVS may necessitate to increase selling costs to make consciousness in the market. Furthermore, it may do confusion in the consumer market if purchasers are non cognizant of the new merchandise and therefore may non purchase the merchandise.
  • AVS will non be cognizant of how dependable the provider is and would be put on the lining purchasing the grapes from him.
  • There may non be adequate capacity to manage the excess bottles of vino in the bottling and labelling section. Thus seting a strain on the resources of AVS.

Question ( I )

Harmonizing to Cooper ( 1987, 1989 ) , there are eleven symptoms bespeaking possible jobs of ill designed or disused bing systems. These are:

  1. Front line directors ; such as production and selling directors, want to drop apparently profitable merchandise or service lines.
  2. Net income borders are difficult to explicate.
  3. Hard-to-make merchandises show large net incomes.
  4. Departments have their ain cost systems.
  5. The accounting section spends a batch of clip on particular undertakings.
  6. You have a high-margin niche all to yourself.
  7. Competitors’ monetary values are unrealistically low.
  8. Customers do non mind monetary value addition.
  9. The consequences of commands are difficult to explicate.
  10. Seller commands are lower than expected.
  11. Reported costs change because of new fiscal accounting ordinances.

In respects to AVS’s bing system, sing that the Chardonnay-Estate is the premium vino trade name of AVS, and it produced in the largest measure compared to its other merchandises might bespeak that AVS has a high-margin niche to itself. This could besides intend that since it is a luxury merchandise, clients may non mind monetary value additions. Therefore, the Chardonnay-Estate could be said to be monetary value inelastic in demand.

The fact that AVS is bring forthing three different types of vinos utilizing different activities to bring forth each one might besides be an index that their current costing system may hold become disused. It might be better to switch to an activity-based costing system ( ABC system ) . This might give AVS a better image of the costs of its merchandises.

The Chardonnay-Estate is besides arguably the hardest merchandise to do for AVS and it is besides the most profitable merchandise. Therefore it could be viewed as a symptom of an disused costing system since it may be under-cost utilizing the current system.

Last, the net income borders for AVS may be difficult to explicate due to the three different merchandises. It may go harder to place the net income borders for each merchandise.

Question ( two )

All these symptoms of the disused costing system of AVS may intend that the system needs to be redesigned and changed. This is because of the fact that AVS is bring forthing three different types of vinos utilizing different activities to bring forth each one might besides be an index that their current costing system may hold become disused. It might be better to switch to an activity-based costing system ( ABC system ) . This might give AVS a better image of the costs of its merchandises. Furthermore, since there may be about four to five different symptoms of an disused costing system being used by AVS, and non merely one, it may bespeak that the bing system of AVS has become disused and needs to be abandoned.

However, the symptoms above may non bespeak that AVS is in problem sing its costing system. The symptoms may be explained by the markets in which it does concern in. For illustration, the fact that the Chardonnay-Estate that is produced by AVS, may be one-of-a-kind and the lone one available in the market, this gives it a spot of a monopoly position and hence justifies the high monetary value and the fact that a monetary value addition would non impact the consumers.

Therefore, in my sentiment, the best manner to make up one’s mind whether to abandon a costing system or non to, is to run a pilot with a redesigned system and compare the consequences. If the consequences vary widely, so the old system has become disused and needs to be abandoned. If the consequences are similar, there might be nil incorrect with the old system.

Question ( three )

The cost information of AVS helps it in pricing of its merchandises. It enables the direction to be informed on how much the merchandises cost to do and how much border they should maintain on cost. This pricing determination is critical for any direction since it holds the key to the hereafter of the company. Furthermore, it besides helps the direction in cognizing how expeditiously they are running their concern and what capacity the concern is runing at. Costing information besides helps directors maintain a grip on the costs of the company and it encourages them to introduce and convey out ways in which to be more efficient and aid cut costs and hence better the profitableness of the company. Costing information besides helps the company in finding what merchandises are making the best and what merchandises should be dropped from the production line. It helps the company dressed ore on the merchandises it is best at.

Mentions

Atkinson, A. , Kaplan, R. , Matsumara, E. & A ; Young, S. ( 2012 )Management Accounting, Sixth Edition, Harlow UK: Pearson Education.

Chan, S. and Lee, D. ( 2003 ) “An empirical probe of symptoms of disused bing systems and overhead cost structure” ,Managerial Auditing Journal, 2 ( 18 ) , p.81–89.

Collier, P. ( 2012 )Accounting For Directors: Interpreting Accounting Information for Decision-Making, Fourth Edition, Chichester UK: John Wiley & A ; Sons Ltd.

Cooper, R. ( 1987 ) “Does you company necessitate a new cost system? ” ,Journal of Cost Management, Spring, p.45-9.

Cooper, R. ( 1989 ) “You need a new cost system when…” ,Harvard Business Review, January-February, p.77-82.