Absorption and Variable Costing Case Study - Support Department Cost Allocation - Accounting and Finance Assignment Help

Assignment Task:

Case Study 1: Absorption and Variable Costing 

New Zealand Manufacturing Ltd (NZM) is a multinational business selling metal products used in the assembly of many cars, trucks, and planes. NZM has over 20 manufacturing divisions worldwide and is listed on the New Zealand and Australian Stock Exchanges. NZM has consistently reported annual earnings growth rates of 12% or more for each of the last 10 years. 

Division managers at NZM receive an annual bonus of 30% of their annual salary if their plant net profit before tax (NPBT) increases 12% or more over the previous year’s NPBT. Division managers who increase NPBT more than 5% but less than 12% receive a bonus of 5% of their annual salary. Division managers who do not achieve a 5% increase in NPBT receive no bonus. Instead, they receive a visit from the “NZM corporate consulting team.” 

Syd Steel is manager of the Brisbane, Australia, division, which manufactures crankshafts for sale to automobile manufacturers. Steel has just received a 30% bonus for the year ended 31 December 2019. However, Felicity Figures, head of the NZM corporate consulting team has some concerns about Steel’s performance and collects the following information on the Brisbane division for 2019: 

Beginning inventory 0 crankshafts Production 490,000 crankshafts Ending inventory 45,000 crankshafts Sales 445,000 crankshafts Selling price $69 per unit Variable costs per crankshaft: 

Direct materials $17 Direct labour $8 Manufacturing overhead $13 Variable marketing $3 Fixed costs 

Manufacturing overhead $7,350,000 Marketing $1,000,000 

Actual production of 490,000 crankshafts was equal to budgeted production for the year. Assume also that all actual costs were equal to the master budget. NPBT for the Brisbane division in 2018 was $4,090,000. 

All auto companies require suppliers to deliver on a just-in-time basis (that is, just before the crankshafts are required for assembly). The last six months of 2019 saw a reduction in the orders auto companies placed for crankshafts. 

Required: 

a) Prepare an absorption costing income statement for 2019 to compute the Brisbane division NPBT. 

b) Prepare the income statement for 2019 using variable costing. 

c) Explain why you think Felicity Figures has concerns about Syd Steel’s performance. 

d) What recommendations do you have for NZM regarding the performance reporting and bonus system? Explain. 

Case Study 2: Support Department Cost Allocation 

Murihiku Products Limited has two manufacturing departments: Fabrication and Assembly. The firm also has two support departments: IT and Maintenance. The company uses departmental overhead rates with machine hours the allocation base in the fabrication department and direct labour hours the allocation base in the assembly department. Budgeted annual machine hours for the fabrication department are 10,000 and budgeted annual direct labour hours for the assembly department are 16,000. 

Estimated usage of the support departments’ output is as follows: 

User Departments Support departments IT Maintenance Fabrication Assembly IT (technician hrs) 600 1,200 1,200 Maintenance (labour hrs) 150 700 150 

The budgeted annual overhead cost for each department is: 

IT Department $95,000 Maintenance Department $45,000 Fabrication Department $260,000 Assembly Department $275,000 

The company is aware that there are three alternative methods for allocating support department costs to production departments and that the choice of method makes a difference to the departmental overhead rates and ultimately the costing of products produced by the business. 

Required: 

a) Demonstrate the impact of support department allocation methods on departmental overhead rates by calculating the departmental overhead rates after using: 

i. Direct method 

ii. Step down method (you are to determine the correct sequence) iii. Reciprocal services method to allocate the support department costs. 

b) To illustrate the impact of the different allocation methods on product costs use the rates 

calculated in a) above to determine the overhead allocated to a product that uses 22 machine hours in the fabrication department and 14 direct labour hours in the assembly department. Comment briefly on the results of your calculations. 

c) Which support department cost allocation method would you recommend for Murihiku Products Limited? Explain 

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