Topic: Life Symphony Enterprises (LSE)

Aim of the coursework:

The assessment has the following Learning Outcomes to be met:

  1. Understand concepts, tools and techniques of management accounting in different contexts.
  2. Evaluate, assess and apply traditional and contemporary costing systems in practice.
  3. Develop analytical and critical judgements to evaluate relevant and irrelevant information and contribute in planning, organising and decision making in managing organisational resources.
  4. Critically evaluate scope of management accounting in organisational contexts and explore alternatives to make optimal use of production resources.

Common instruction:

  1. Candidates are allowed to make reasonable assumptions, especially when advices or recommendations would be provided. All assumptions should be clarified. It is candidates’ liability to ensure that their assumptions do not contradict any information provided/instructed in the coursework task.

Case study:

Life Symphony Enterprises (LSE)produces health and beauty products with manufacturing and distribution facilities all over the UK. The company currently employs 1,000 employees with an annual turnover of £30m. Sally Mason is the Group Management Accountant of the firm and her primary role includes supporting other staff working in variousdivisions in making decisions on cost management; divisional performance evaluation and operational priorities. This week, she has received several queries from various offices. You, as a promising intern, has been appointed to assist her in various investigations. In your interview for this position, you had demonstrated your knowledge in various management accounting issues, for instance, cost classifications, behavioural analysis, cost reporting under marginal and variable costing, traditional costing system, Activity-based costing systemand variance analysis. Sally is really looking forward to working with you and on your fifth day in the job, she has handed you email trails, notes and conversation with her colleagues. You have arranged all materials in order and found the following:

  1. On 10thFebruary, 2020 John Beecroft from the group’s Hull Division sent her an email asking for some clarification on cost calculation. The division estimates overhead costs as £12 per machine hour. John observed that in the last few months, the estimatedoverheadcostscould not predict the product cost well. John sent the following 8 occurrences as evidence:
Machine hoursActual Overhead costs (£)
1,00010,700
1,50015,700
1,25013,200
2,10021,700
1,87519,500
1,68017,500
2,25023,200
1,72517,950

Sally’s note suggests that counting overheads as a variable cost probably cause the inaccurate estimates though she put several interrogative signs (???) suggestingfurther investigation.

Write an email/ note on behalf of Sally to John explaining the possible causes of distorted overhead cost per machine hour by exhibiting an application of any management accounting technique that may provide a better result.(10 marks)

  • Sally has just forwarded an urgent email from the production manager- Marina Stantonof York Division for you to reply. Marina prepared a draft Profit and Loss account for twoyears- 2019 and 2020 ending on 31st December for the internal purposes; however, the net profit figures widely vary with the one prepared for external auditor. Marina is looking for any possible explanations of the profit differences. She also does not understand why profit figures fall in 2020 in the profit statement prepared for internal purposes than the external ones when the number of sales units are expected to be higher than those of 2019. 

You are unable toaccess both statements (internal and external) Marina prepared since your access privilege is restricted. Sally and Marine are both attending a regional meeting in which the performance of York division will be discussed and you cannot reach anyone of them by phone. You have managed to reach out Marina’s secretary who has sent you some figures based on which Marina was working on.

                                                2019 (in units)                         2020 (in units)

Units produced                        5,000                                       7,000

Opening inventory                  1,500[1]                                      ?

Closing inventory                    500                                          1,000

Costs:                                                  (£)                                            (£)

Direct material                                    40/ unit                                    42/ unit

Direct labour                           30/ unit                                    33/ unit

Variable manufacturing o/h     10/ unit                                    12/ unit

            Variable selling& admin o/h     5/ unit                          6/ unit

Fixed manufacturing o/h                                 220,000 per year

Selling and administrative o/h                         100,000 per year

The group’s policy is to make 60% contribution margin ratio and it uses FIFO inventory system across its divisions.

Compose a reply to Marina addressing her queries. You should engage appropriate management accounting tool, technique and/or concept to reach your conclusion and explain the techniques to Marina briefly. The detailed analysis with the two profit and loss statements (internal and external) can be sent to Sally and Marina as attachments to your reply so that they can verify your calculation and include them in Marina’s presentation in the regional meeting.                                                  (20 marks)

  • Among the papers Sally handed you earlier, you have found some estimated data on a newmanufacturing divisionat Newcastle which is at the final approval stage from EU cosmetic legislation to commence production. The Senior Management Team of the group is currently looking for a suitable accountant for the pre-opening assignments and Sally has been assigned to set upthe costing systemfor the time being.Sally has collated the following information based on her experience with other similar division in the group.
  1. This division will produce different beauty products and costs will be allocated to jobs. Like the other existing divisions of the group, the Newcastle division will have five departments- two manufacturing (Processing and Sealing) and three service departments (maintenance, recreation and Estate). Recreation department’s overhead costs will be apportioned equally between manufacturing departments. Other service departments’ costs will be apportioned in the following manner:
 ProcessingSealingRecreation
Maintenance40%50%10%
Estate50%35%15%
  • For the year to 30th April, the departments’ (cost centre) expenses and other relevant information Sally estimated are as follows: 
 Total costs (£)ProcSealMainCanEstate
Indirect wages200,000 (approx.)  Living wages 20/21 for above 25 years+ 20% premiumLiving wages 20/21 for above 25 yearsLiving wages 20/21 for above 25 years
Indirect material300,00015%20%40%15%10%
Utility900,000     
Machine depreciation300,000     
Mortgage600,000     
Factory supervisor’s salary75,000     
Indirect labour hours   10,0004,0006,750
Direct material cost1,500,00011,500 kgs3,500 kgs   
Machine hours 50,00080,00020,000  
Floor space (in sq metre) 7,0005,0001,0008001,200
Direct labour hours3,000,000120,00030,000   

Sally is hoping you would prepare a report with a detailed explanation of the available costing system you are planning to use and exhibiting the calculation of manufacturing overhead absorption rate and how that rate will be used to calculate product cost. In your report, you may also include your suggestion for a better costing system and the requirements to implement it in the new division. You are allowed to make up some imaginary information as example to clarify the proposed system. Also, any research findings would be helpful to convince the board of directors.       

  • In addition to the above, Sally is asking you to calculate the cost of first order- (J001) to be manufactured in order to conduct testing and get certificates from the compliance authority. The following information has been collected from the operation manager who is working on this pre-opening project.
 ProcessingSealing
Direct material100 kgs30 kgs
Direct labour300 hours150 hours
Machine hours120 hours200 hours

How do the different costing systems you suggested in your report influence cost calculation of J001? Explain their differences as well. 

  • Do you believe that the costing system would be entirely different from the above if Newcastle division would produce single, homogeneous product that would flow through a continuous production process? How much would be per unit cost then? You are allowed to make reasonable assumptions and figures to clarify how the new system might work. (Hints: Assume that instead of several health and beauty products, if the division only produces hand sanitizers in 100 ml cosmetic bottles, what would be the costing system? How would you calculate cost per product when the annual manufacturing costs provided in the 3(b) will be incurred for producing 200,000bottles?Presentation and clarification of tentative cost calculation are key here.)                                                                                                   (45 marks)
  • Sally is reviewing last month’s performance of Leeds division due to large variances flagged up in the system. Sally has asked you to analyse the variances and identify possible causes. You should make reasonable assumptions to apply appropriate management accounting tools or techniques to investigate the issues and identify responsible individuals/ departments who should be held responsible. In addition, you should suggest different ways managers could improve the division’s performance by providing evidence from existing research.

The division produces premium day cream and the standard cost of 100 ml cream in cosmetic tubesis provided below:

Cost categoryStandard quantityStandard cost per 100 ml
Direct materials: Material A Material B  0.5 kg 0.25 litres  £25 £15
Direct labour2 hours£40
Variable manufacturing overhead30 minutes£25
  1. The company targets to sell 48,000 cosmetic tubes per year at a price of £180 per tube.
    1. Fixed manufacturing overheads are applied on the basis of direct labour hours. The budgeted fixed overhead of the division including common costs is £1,800,000 annually at a planned activity level of 96,000 direct labour hours per year.
 QuantityTotal revenue/ costs (£)
Production and sales4,200 tubes747,600
Direct material purchased: Material A Material B  2,200 kg 1,125 litres  121,000 66,375
Direct material used: Material A Material B  2,000 kg 1,050 litres 
Direct labour8,800 hours180,400
Variable manufacturing overhead2,050 hours106,600
Fixed manufacturing overhead 180,000
  1. The actual data retrieved at the end of the month is as follows

                                                                                                            (25 marks)


]Product cost under absorption costing in 2018: Variable cost of goods manufactured £72 and fixed manufacturing overhead was £44

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