The SMT approved a proposal to develop a portable grill model. The ‘Explorer’ portable charcoal grill model has been designed, but the selling price has yet to be determined. The budgeted cost per unit has yet to be finalised as well.
Question 1 : Activity Based Costing
Question 2: Profit / volume Chart & Capitalisation of Capital Expenses
Question 3: Zero Based Budgeting
Question 4 : Sensitivity analysis & choosing a supplier
Question 5: Online KPIs & Relevant Costing
Requirements: 2500 words
BUSM107 COURSEWORK
FINANCIAL ANALYSIS AND MANAGEMENT ACCOUNTING COURSEWORK
DEADLINE: 4th SEPTEMBER 2023 ON QMPLUS
Instructions:
Please read carefully the case study Fireworks provided as pre-seen material on BB and answer the following questions. Deadline: 4th September 2023.
Requirements: Please answer the following questions regarding the case study, using the material from the lectures/seminars of BUSM107. Special attention will be given to answers so they include the content from the lectures. There are 5 questions and each question needs to be answered in your report in 500 words. Overall, the word count is 2,500 words +/- 10% and this excludes any references.
Question 1 : Activity Based Costing
The SMT approved a proposal to develop a portable grill model. The ‘Explorer’ portable charcoal grill model has been designed, but the selling price has yet to be determined. The budgeted cost per unit has yet to be finalised as well.
You have the following conversation with Savita Sharma, Finance Manager:
“The SMT is meeting later this week to discuss the Explorer model’s selling price and cost per unit.
The Explorer grill is closest in size to our ‘Sparkler’ charcoal grill. However, after analysing the proposed production plans for the Explorer model, it would appear that more is involved in creating it. Ben Bruce, Finance Director, is eager for the finance team to start implementing different costing methodologies. Ben has suggested that we consider using activity-based costing (ABC) for this costing exercise.
Could you draft a report that I can present to Ben which explains:
How an ABC approach would change how we absorb fixed production overheads and the impact that this would have on product costs. Please illustrate your explanation with reference to the summary of the Steel Pressing & Welding process for both products which I have printed off for you (Exhibit 1). (sub-task)”
Exhibit 1 – High-level summary of the Steel Pressing & Welding process for all grill models:
Other information relating to the production process:
Note – An additional inspection is carried out for the Explorer model as the trimming must be done correctly in order for the model to fold up correctly. The model’s ability to fold into a suitcase-like shape is one of its stand-out features as a portable grill.
Question 2: Profit / volume Chart & Capitalisation of Capital Expenses
It is 1 July 2022. Over the past few months, FireWorks’ Senior Management Team (SMT) has been actively meeting to discuss ways to diversify the company.
You have the following conversation with Savita Sharma, Finance Manager:
“The SMT has been discussing the possibility of providing grill cookery classes in Beeland. The idea is that the classes would be one-day events where a chef will teach attendees how to grill different varieties of meat and vegetables using FireWorks’ grills. Catherine Wheeler, Managing Director, approved this proposal just last week.
Instead of purchasing a dedicated premises to facilitate these classes, Catherine wants to invest in two refrigerated trucks that would act as mobile outdoor teaching kitchens. The trucks would tour Beeland and provide our cookery classes on sites that we would rent for the day. To reduce fixed costs, we would only use freelance drivers and chefs. The classes will only go ahead if a minimum of 10 delegates are booked. The SMT has set an upper limit of 20 delegates for each class.
Based on data analysis of similar initiatives in North America, the SMT expects to generate B$1,500 in sales revenue per class. This sales figure was calculated under the assumption that 15 delegates would attend each class. The expected number of classes to be run for the next twelve months is 400. The estimates for total fixed costs and the average variable cost are based on this sales volume. I’ve created a profit / volume chart based on all of these estimates (Exhibit 1).
I am meeting with the SMT shortly. I need you to draft me a briefing paper explaining:
The profit / volume chart and the impact that changes to my estimates mentioned above would have on the break-even point and margin of safety. (sub-task)
Why the data used to construct the profit / volume chart will limit its usefulness. (sub-task)
The trucks required for the classes will be purchased. We will need to carry out some customisation to ensure that they can operate as mobile outdoor teaching kitchens. I’ve printed a schedule of costs associated with the trucks (Exhibit 2). Could you include in your briefing paper:
An explanation of the criteria for the capitalisation of costs under IAS 16 Property, Plant and Equipment and whether the trucks meet these criteria. Please also explain the treatment, as either capital or revenue expenditure for each of the individual costs in Exhibit 2. (sub-task )”
Exhibit 1 – Profit / volume chart for outdoor grill cooking classes – 1 July 2022 to 30 June 2023
Fixed costs include:
Cost of purchasing and customising two trucks.
The annual depreciation charge for the two trucks.
The maintenance costs associated with the two trucks.
The cost of hiring a dedicated, full-time coordinator who will organise the classes and process bookings from our head office.
Exhibit 2 – Vehicle cost schedule
Notes:
The refrigerated trucks will be purchased new from a supplier based in Westland.
The trucks will need to be imported into Beeland. There is an import duty payable as a result of importing the trucks.
The trucks will need to be delivered to FireWorks’ head office in Beeland.
Once the trucks are delivered, fixtures within the trucks will need to be installed so that FireWorks’ grills can be transported with ease. The trucks currently have a fixture which fits one grill. The installation work will allow for four large grills to be transported safely.
The truck’s supplier will provide training to our roster of freelance chefs. The training will cover the functions (e.g. refrigeration) of the truck and how to use them properly.
Question 3: Zero Based Budgeting
It is now the end of December 2022. Following increased positive publicity over FireWorks’ new grill cookery classes, grill sales have increased materially, and production capacity has been expanded to meet this heightened demand.
You receive the following email from Savita Sharma, Finance Manager:
From: Savita Sharma, Finance Manager
To: Finance Officer
Subject: Zero-based budgeting
The Senior Management Team (SMT) recently had an operational review. At this review, it was noted that our production facility is at full capacity and that the facility has never in its history produced this many units per week. There is a concern among the SMT that employees may start to rush production in order to meet output targets. If this occurs, quality could be reduced, leading to long-term reputational issues.
At the SMT’s recent operational review, Mavis Jones, Production Director, noted that we will need to fundamentally rethink how we perform machine maintenance to ensure consistent high quality output and minimal downtime. Mavis will receive an increased maintenance budget next year to minimise machine downtime and ensure high-quality output. Ben is concerned that using our current budgeting technique for machine maintenance may result in an inaccurate budget for next year and has suggested that zero-based budgeting (ZBB) is used for machinery maintenance spend instead. I’m not fully sure I understand ZBB, so could you include in your report an explanation of:
How zero-based budgeting could be used to allocate funds to discretionary support activities. Please use a budget for production machinery maintenance to illustrate your explanation. (sub-task)
Savita Sharma Finance Manager
Question 4 : Sensitivity analysis & choosing a supplier
A few weeks have passed. The SMT remain committed to producing the first batch of Smart Sear gas grills in December 2022. The first sales will take place on 1 January 2023. The product will be sold to agents, retailers and through the FireWorks website.
You receive the following email from Savita Sharma, Finance Manager:
From: Savita Sharma, Finance Manager
To: Finance Officer
Subject: What-if analysis & choosing a supplier
I’ve been working closely with the Sales & Marketing and Production departments. Together, we have produced a three-month budget for the new Smart Sear gas grill product. The budget that we have prepared used a proposed selling price of B$1,500 per unit. This estimated price represents the average price that will be achieved through retail, agent and direct online sales. The new product will be sold in one size only.
Before signing off on the initial selling price of the Smart Sear grill, Catherine Wheeler, Managing Director, wants to see the impact of reducing the product’s selling price by 5% and 10%. I’ve attached a what-if analysis incorporating her assumptions of how these reductions would impact sales volumes and fixed costs (Exhibit 1).
I have a meeting with the Senior Management Team (SMT) later on. Could you prepare a report for me which explains:
The impacts of the changes to the selling price on budgeted revenues, contributions and profits for the Smart Sear grill and the factors we should consider before either of the changes are implemented. (sub-task)
The Smart Sear uses a ‘Smart Box’ component which allows the grill to be connected to and controlled by a smartphone or tablet device. Mavis Jones, Production Director, is still evaluating suppliers for this component. She has provided me with details on three different suppliers (Exhibit 2). Mavis is looking for help and would like us to evaluate these suppliers financially. In your report, could you include:
An explanation of the working capital position of the three potential suppliers and the possible risks and benefits it presents if we were to trade with any of these suppliers. (sub-task)
Suggestions of two other factors we should consider before making the final decision on which supplier to use. (sub-task)
Savita Sharma Finance Manager
Exhibit 1 – What-if analysis: Impact of decreases in selling prices on the budget for the Smart Sear grill for January to March 2023
*Note – This analysis was prepared under the assumption that the variable cost per unit will not change when the selling price changes.
Exhibit 2 – Financial information for three potential suppliers
Details
Each supplier offers credit terms of 30 days to their credit customers.
Supplier A is an established company with the largest total revenue of the three.
Supplier B has a contract with our main European competitor to supply a similar component for their latest grill.
Supplier C is a fairly new company and is significantly smaller than Supplier A and Supplier B.
Question 5: Online KPIs & Relevant Costing
It is now 15 April 2023. The newly launched Smart Sear gas grill has been selling for the past three months. The product has been sold on FireWorks’ website, through agents and in retail stores.
Savita Sharma, Finance Manager, calls you into her office for a discussion:
“The Senior Management Team (SMT) is meeting later this week to discuss the company’s quarterly performance. The SMT is eager to see how the new product is performing from a sales perspective.
I know the SMT is going to want to see how our overall online sales are performing as well. I’ve created a performance report for our website using internal website data. I’ve printed a copy for you (Exhibit 1). I’ve added some small notes to help give the key performance indicators some context, but I need some commentary ahead of this meeting with the SMT. In your briefing paper could you include the following:
An explanation of what the KPIs shown in Exhibit 1 indicate about our overall sales for the period January – March 2023. (sub-task)
On an unrelated note, we received an email yesterday from Gary Buchanan, the Managing Director of Premier Events. Gary’s company is organising a series of barbeque cooking tournaments in Beeland and other countries across the world.
The company originally supplying the grills for the competitions has pulled out suddenly, and now Premier Events requires an urgent, one- off delivery of our ‘Firecracker’ gas grills, modified to their specifications. The price offered by Premier events is 70% of our normal selling price, and therefore I believe the SMT would like to know the minimum cost of producing the grills in order to appraise the offer properly. I’ve printed off the details of the one-off contract for you (Exhibit 3). In your briefing paper, could you include an explanation of:
Whether each of the cost items listed in Exhibit 2 is relevant or irrelevant to the decision to accept or reject the contract. (sub-task)”
You tell Savita that you will respond to her shortly.
Exhibit 1 – Online performance report representing all FireWorks website sales from 1 January 2023 – 31 March 2023
Note:
This report represents total sales for all products on our website during January, February and March 2023.
The 5% discount code for all visitors to the website was actioned in January and ceased in the middle of February. Existing customers were emailed about the discount code, and it was also advertised at the top of the website during that time.
Exhibit 2 – Cost items for the Premier Events contract
END OF QUESTIONS
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