Background Washington Cedar Furniture Ltd

Cost Management Systems Major Assignment: Case Study
Paper , Order, or Assignment Requirements

Case Study: Background Washington Cedar Furniture Ltd manufactures a range of furniture for commercial and residential uses. Washington is divided into several departments including tables/desks, chairs, and storage. The following information relates only to the chairs department.

The chairs department currently offers three products: the executive meeting chair (for commercial purposes), the classic dining chair (for residential purposes), and the occasional chair (suitable for both commercial and residential purposes).

Annual sales are expected to be 44700 units. Sales for the period of August to December 2016 are provided below (Table 1). All commercial sales are on credit. Credit terms offer a 5% discount for payment in the month of sale. It is estimated that 30% of commercial customers take advantage of this. Commercial customers have the following established pattern of payment in addition to the discount customers: 35% in 31-60 days (month following sale), 20% in 61-90 days (the second month following sale), 10% 91-120 days (in the third month after sale, and the remainder (5%) is uncollectable. All residential sales are cash. Of the occasional chairs, 45% of sales are to commercial customers.

Table 1: Sales in Units and Dollars for August to December 2016

Exec Meeting Classic Dining Occasional Units Price Units Price Units Price August 2,500 $190 975 $175 450 $185 September 2,400 $190 850 $175 575 $185 October 3,500 $190 650 $175 650 $185 November 2,250 $195 725 $175 325 $190 December 1,875 $195 800 $175 400 $190

2

In addition to the sales, Washington Cedar Furniture Ltd holds a number of term deposits and investments which provide additional income. Table 2 outlines the additional revenues.

Table 2: Revenues from non-operational sources

Term Deposits Dividends Amount Interest Payment Amount Payment ANZ Secure $25,000 4% pa* Monthly CommBank TD $100,000 4.5% pa* Quarterly (next payment due Dec 31) BHP Billiton $12,750 Nov 1 Darlington Investments $15,445 Dec 15 Global Trading $9,325 Dec 30 * use simple interest in your calculations

Production of the chairs occurs in the same factory and annual production is expected to be 43800 chairs. Table 3 identifies the materials requirements and costs for each chair. These costs are not expected to change during the budgeted period.

Table 3: Budgeted Direct Materials – Inputs and Costs as at October 1, 2016

Exec Meeting Classic Dining Occasional Quantity* Cost** Quantity* Cost** Quantity* Cost** Cedar Timber 4 m $7.50 3.5 m $7.00 3.75m $7.00 Oak Timber 0.5 m $5.50 – – – – Pine Timber – – 0.5 m $4.50 0.5 m $4.50 Fabric 1.5 m $9.50 1 m $7.50 1 m $8.10 *metre **per metre

Beginning inventories of Direct Materials are shown below. For direct materials, the policy of target ending inventory is to be 25% of the current month’s production.

Table 4: Direct Materials Inventory – as at October 1, 2016

metres Cedar Timber (Executive) 695 Cedar Timber (Classic) 200 Cedar Timber (Occasional) 225 Oak Timber 550 Pine Timber (Classic) 225 Pine timber (Occasional) 200 Fabric (Executive) 650 Fabric (Classic) 450 Fabric (Occasional) 300

3

Finished Goods ending inventory policy is 30% of the current month’s sales. The following information is provided on the current ending inventory of finished goods.

Table 5: Finished Goods Inventory as at October 1, 2016

Exec Meeting Classic Dining Occasional 720 240 165

Direct labour for chairs is divided into four processes: cutting, assembly, finishing and packaging and it is expected that direct labour hours for 2016 to be 150000 hours. The following information is provided for all classes of direct labour for each of the chairs.

Table 6: Direct Manufacturing Labour – Inputs and Costs at as October 1, 2016

Exec Meeting Classic Dining Occasional Hours* Cost** Hours* Cost** Hours* Cost** Labour – Cutting 0.5 $25.00 0.35 $25.00 0.45 $25.00 Labour – Assembly 1.5 $27.50 1.45 $27.50 1.5 $27.50 Labour – Finishing 1.75 $25.00 0.75 $25.00 1.25 $25.00 Labour – Packaging 0.5 $18.00 0.5 $18.00 0.5 $18.00 * direct labour hours **per hour

A number of overheads are included in the manufacturing process. The following table provided an indication of the annual amounts for each of the product lines.

Table 7: Manufacturing Overheads

Amount Cost Driver Electricity $35,000 Direct labour hours Water $12,900 Factory Manager’s Salary $99,000 Administrative Costs (Salaries) $57,000 Indirect Materials – Cutting $15,000 Units produced Indirect Materials – Assembly $25,000 Units produced Indirect Materials – Finishing $18,000 Units produced Indirect Materials – Packaging $40,000 Units sold Insurance $69,000

4

In June of 2017, Washington Cedar Furniture Ltd received the following report from the management accountant on its performance over the past quarter.

Washington Cedar Furniture Ltd Budget Report for Quarter ending 30 June 2017

Actual Flexible Flexible Sales Static Results Budget Budget Volume Budget Variance Variance Units Sold Executive Meeting 3325 3500 Classic Dining 4620 4200 Occasional 2220 1850 Revenues Executive Meeting $713,212.50 $713,212.50 $750,750.00 Classic Dining $871,563.00 $889,350.00 $808,500.00 Occasional $510,378.00 $463,980.00 $386,650.00 Total Sales Revenues $2,095,153.50 $2,066,542.50 $1,945,900.00 Direct Materials Cedar Timber (Executive) $104,363.44 $99,750.00 $105,000.00 Cedar Timber (Classic and Occasional) $170,931.90 $171,465.00 $136,762.50 Oak Timber $9,875.25 $9,143.75 $9,625.00 Pine Timber $18,534.60 $15,390.00 $24,435.00 Fabric (Executive) $47,015.50 $47,381.25 $49,875.00 Fabric (Classic and Occasional) $56,368.50 $52,632.00 $46,485.00 Total direct Materials $407,089.19 $395,762.00 $372,182.50 Direct Labour Labour – Cutting $114,520.50 $106,962.50 $101,312.50 Labour – Assembly $450,495.00 $412,953.75 $388,162.50 Labour – Finishing $123,228.75 $130,981.25 $124,937.50 Labour – Packaging $31,358.25 $24,282.00 $23,490.00 Total Direct Labour $719,602.50 $675,179.50 $637,902.50 Variable Overhead $ 339,931.82 $289,165.45 $271,945.45 Total Variable Costs $1,466,623.51 $1,360,106.95 $1,282,030.45 Contribution Margin $628,529.99 $706,435.55 $663,869.55 Fixed Manufacturing Costs $ 236,500.00 $ 215,000.00 $215,000.00 Operating Profit $ 392,029.99 $ 491,435.55 $ 448,869.55

5

Required:

PART A: Operating Budgets (60 marks) Prepare the following budgets for Washington Cedar Furniture Ltd, for the quarter ending December 31, 2016.

Revenues Budget II. Production Budget III. Direct Materials Usage Budget IV. Direct Materials Purchases Budget V. Direct Manufacturing Labour Budget VI. Manufacturing Overhead Budget VII. Ending Inventories Budgets (Direct Materials and Finished Goods) VIII. Cost of Goods Sold Budget IX. Budgeted Income Statement
All budgets must be prepared on a monthly basis (that is, all budgets must show a monthly breakdown and totals where applicable). All budgets and supporting schedules must be neatly presented (students could use Excel workbook to do all the calculations).

PART B: Variance Analysis (40 marks) 1. Calculate the flexible budget variances and sales volume variances for the quarter ending June 30, 2017 based on the information provide in the table below in both dollars and percentages. 2. Write a report (750 words) which analyses the variances calculated in requirement 1 which must include the following:  Potential causes of any variance above 5% this includes both favourable and unfavourable variances  Make recommendation for action to address the potential causes of the significant variances, where this is in the control of Washington Cedar Furniture Ltd.

 

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