# COST AND MANAGEMENT ACCOUNTING Essay

This essay has a total of 3672 words and 25 pages.

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COST AND MANAGEMENT ACCOUNTING

QUESTION 1
Wen Ltd produces three types of products, Silky, Dryee and Oilie.
factory resources to produce them. The following information is available on each of the
products:

Silky Dryee Oilie

Sulfate (grams) 50 70 80
Bottle (container cost) \$0.05 \$0.10 \$0.15
Direct labour (hrs) 0.25 0.25 0.50

The material Sulfam costs \$0.10 per gram and direct labour is paid at \$15 per hour.
Variable factory overheads are absorbed at two thirds of the direct labour cost.

Fixed overhead for the year relating to production is estimated at \$40,500.

For the year 2006, it is expected the following to be sold:
Silky 9,980, Dryee 7,500 and Oilie 5,000.

The selling price per bottle of each type of product is expected to be:
Silky \$14.00, Dryee \$15.80 and Oilee \$22.65

It is expected that in the year 2006, supplies of Sulfate will be limited to a total of 1
million grams of sulfate, as there is a shortage of supply from the local suppliers due to
the high demand.

Required:

(a) Assume that no alternative supplies of sulphate can be located in 2006 and a
minimum of 2,500 bottles of each product must be produced during the year to meet the
contracts already signed, calculate the number of bottles of each product that should be
produced in order to maximise profit and state the amount of this profit.

Optimum production schedule
Silky Dryee Oilie
Selling price 14.00 15.80 22.65
Variable material 5.05 7.1 8.15
Variable labor 3.75 3.75 7.5
Total Variable cost 11.3 13.35 20.65
Contribution per bottle 2.7 2.45 2.00
Grams 50 70 80
Contribution per gram 0.054 0.035 0.025

Variable material
Silk =50 X 0.1 0.05 = 5.05
Dryee =70 X 0.1 0.10 = 7.1
Oilie = 80 X 0.1 0.15 = 8.15

Variable Labor
Silky = 15 X 0.25 = 3.75
Dryee = 15 X 0.25 = 3.75
Oilie = 15 X 0.50 = 7.5

Silky = 3.75 X 2/3 = 2.5
Dryee = 3.75 X 2/3 = 2.5
Oilie = 7.5 X 2/3 = 5

Contribution per bottle
Silky = 14.00 ¨C 11.3 = 2.7
Dryee = 15.80 ¨C 13.35 = 2.45
Oilie = 22.65 ¨C 20.65 = 2.00

Contribution per gram
Silky = 27/50 = 0.054
Dryee = 2.45/70 = 0.035
Oilie = 2.00/80 = 0.025

Grams for minimum production
Silky = 50 X 2,500 = 125,000
Dryee = 70 X 2,500 = 175,000
Oilie = 80 X 2,500 = 200,000

Total gram ¨C grams for minimum production
= 1,000,000 ¨C (125,000 ¨C 175,000 ¨C 200,000)
= 1,000,000 ¨C 500,000
= 500,000

Silky
50 X (9,980 ¨C 2,500) = 374,000
500,000 ¨C 374,000 = 126,000
Dryee
70 X (7,500 ¨C 2,500) = 350,000
350,000 > 126,000
126,000/70 = 1,800

Total contribution
= 2.7 X 9,980 2.45 X (2,500 1,800) 2.00 X 2,500
= 26,946 10,535 5,000
= 42,481

Net profit = Total contribution ¨C Fixed overhead
= 42,481 ¨C 40,500
= 1,981

Bottle of Dryee = 2,500 1,800 = 4,300

The number of bottles of Silky that should be produced is 9,980.
The number of bottles of Dryee that should be produced is 4,300.
The number of bottles of Oilie that should be produced is 2,500.
The amount of the maximize profit is \$1,981.

(b) Assume that there is no limitation on the supply of sulphate and that there is no
requirement to produce 2,500 bottles of each product but the direct labour is limited to
6,000 hours in 2006.

Calculate the number of bottles of each product that should be produced for the year and
the maximum profit arising from this production level.

Optimum production schedule
Silky Dryee Oilie
Selling price 14.00 15.80 22.65
Variable material 5.05 7.1 8.15
Variable labor 3.75 3.75 7.5
Total Variable cost 11.3 13.35 20.65
Contribution per bottle 2.7 2.45 2.00
Direct labor 0.25 0.25 0.50
Contribution per labor hour 10.8 9.8 4.00

Contribution per labor hour
Silky = 2.7/0.25 = 10.8
Dryee = 2.45/0.25 = 9.8
Oilie = 2.00/0.50 = 4.00

The number of bottle of each product that should be produced
Silky = 0.25 X 9,980 = 2,495
Dryee = 0.25 X 7,500 = 1,875
6,000 ¨C 2,495 ¨C 1,875 = 1,630
Oilie = 0.5 X 5,000 = 2,500
1,630 < 2,500
1,630/0.5 = 3,260

Maximum profit
= 2.7 X 9,980 2.45 X 7,500 2.00 X 3,260 ¨C 40,500
= 26,946 18,375 6,520 ¨C 40,500
= 46,951 ¨C 40,500
= \$11,341

The number of bottle of Silky that should be produced is 2,495.
The number of bottle of Dryee that should be produced is 1,630.
The number of bottle of Oilie that should be produced is 3,260.
The maximum profit arising from this production level is \$11,341.

(c) Suggest possible ways which the business could limit the effects of a shortage of
material and labour (five possible reasons required for each limiting factor).

How to limit the effects of a shortage of material
Substitutes
We can try to find substitutes for shortage materials in some cases. If we can not find
enough materials from production, finding substitutes is a good way to solve the problem.
For example, we can offer pineapple juice instead of shortage apple juice in the
restaurants.

More stocks
To prevent from a shortage of materials, more stocks is a good way. The producer can buy
more materials when the price is low and he can use these materials when the price of
materials rises. For example, in winter, people need overcoats which are made from duck
feather, so the producers for overcoats can buy more duck feathers in autumn to prepare
for winter consumption.

More suppliers
We can try to buy materials from new suppliers. Suppliers can¡¯t supply us enough
materials, so we should find some new suppliers who can sell us more materials. For
example, if the suppliers in China can¡¯t satisfy us, we can try to find other suppliers
in other Asian countries, like Korea, Japan etc.

Reduction
We should do new products made from materials which are easy to get and reduce the
production of products made from materials hard to find. For example, if milk is hard to
get and water is easy to get, we can reduce the production of yogurt and increase the
production of minerals.

Fewer inferiors
We try our best to improve the quality of our products and reduce the rate of inferiors.
Fewer inferiors can help us make full use of our materials and reduce the cost of
materials. For example, when we make china, be sure to make each one become a product with
good quality. In this way, we can make the same amount of products with fewer materials
than before.

How to limit the effects of a shortage of labor
Work overtime
One way to limit the effects of a shortage of labor is to ask the employees to work
overtime. For example, if one project needs 80 hours to finish and there are only 8 people
who works 8 hours per day in the company, in order to finish the project as quickly as
possible, we can ask the employees to work 10 hours per day. In the way, we can finish the
project in 8 days.

Training
In order to make full use of the shortage labor, the limited number of employees in the
company should take some training so as to limit the effects of a shortage of labor. For
example, in an international big company, all the employees should speak English fluently,
so that they don¡¯t need translators anymore. If some employees can¡¯t speak English
well, they should take some training to help them improve English.

We can use machines instead of workers as more as possible in the shortage of labor. For
example, if there are few workers who can make cars, we can use machines to do make cars
and teach these few workers how to control machines.

Reduce the working processes
One way to solve the problem of limited labor is to reduce the working processes. One
project ought to be finished by as less people as possible. For example, the materials we
bought for car production ought to be sent to the factory on time and not put in the
store. In this way, we don¡¯t need store keepers anymore.

Reduce idle time
Reduction in idle time can limit the effects of a short of labor. Idle time normally
results from poor production scheduling, machine breakdowns and materials shortages. For
example, if one material might be in shortage in summer, we should try to get more
materials in spring to reduce the idle time due to materials shortages.