The Quality of Furniture Product - Coursework Example

?Question a) (b) If dressing are eliminated, the company will make a profit of ?94,000 rather than ? 64,000. (c) Other issues that John should consider before making the decision include the deteriorating quality of furniture product. It should be kept in mind before the decision of stop producing is made that the quality is not being maintained when the product is being bought from an outside contractor. The control quality over the mirrors sections has been troublesome which can also be a reason for the loss that is incurred. The maintenance of quality for mirrors has been an issue and the cutting cost had a negative effect on the sales and eventually profits from dressings. (d) If John would have produced dressings in house, the net loss would have been less as compared to outsourcing. He would have incurred a net loss of ?25,600 rather than ?30,000 leading to an eventual profit of ?74,000 (the working for this is shown in table 2 below). In house production would have not damaged the costs like it did with outsourcing and the prime reason for this could be the quality control. Above this whether the product was being made in house or was outsourced, it is a product, either way, that is lowering the adversely affecting the profits of the company. Question 2 "Discuss the decision situation regarding the American enquiry. Your discussion should be supported by financial information which Mary would be likely to produce, and also briefly consider strategic issues." The company is currently incurring a loss from dressings and above this, the quality of the mirrors has been deteriorating over the 6 months since the outsourcing. The company has been saving ?20,000 after outsourcing of mirrors. However, the in house production, although the cost is higher than the outsourcing, leads to a net loss of ?25,600 while the outsourcing leads to a loss of ?30,000. In this situation the American enquiry demands 50 chests at a 70% price of the normal price. It would be easier to analysis if the discussion is on micro level. The normal price per piece is $1500 and the demanded price is at 1050 a difference of $450. This difference could not be covered by the way company is operating right now. Not to forget the delivery charges to the docks is $18 on each chest, which adds to the existing loss. The final price of the chest stands at $1148 which is $98 more than the demanded price. As stated in the case there is a over load of work in the company already, so handling this project would be very tough for everyone. Then comes in the travel issue, the distance between the countries will give rise to the probability of the project being damaged. The only way the company can achieve breakeven on this enquiry is to change the place they buy the raw material from or their labor costs, or any of their expenses.   Chest per piece American enquiry/piece    (?000) (?000) (?000) Sales revenue $300 1.5 1.05 Direct materials 90 0.45 0.45 Direct labor 53 0.265 0.265 Variable workshop over head 15 0.075 0.075 Apportioned fixed workshop overheads 68 0.34 0.34 total manufacturing cost 226 1.13 1.13 Gross profit (loss) 74 0.37 -0.08 Selling & distribution costs 7 0.035 0.018 Net profits 67 0.335 -0.098 Question 3 Mary has suggested to John that the company would benefit from a management information system to aid him in planning and controlling the activities of the business and to assist in organisational decision making. Join is not sure what Mary means. (a) Illustrate the types of planning and controlling activities that are likely to take place at High Street Reproduction Furniture Ltd. High Street Reproduction Furniture Ltd needs plan its activities along with the production and expected sales of the company. With the over burdening of the employees, important data is being ignored like in the case of dressings. The company should also check its product at each and every production stage. This product quality check will allow John to anticipate issues in quality before its effects are felt in the net profit. Above this, planning production activities and having quality checks this also allow John to manage his workforce effectively in accordance to demand and work load. (b) Describe the types of information which might be useful. John should be aware of the demand, production requirements to fulfil the demand, the workforce requirements to meet the demand, responsibilities and duties of the workers and finally, the workload per worker. This will allow him to be fully aware of the situation and the workers can be held accountable for their responsibilities later when a problem like ‘net loss’ is experienced. John should also be aware of the market and economic situation to run the business effectively. It is useless to know everything about your own business when you can’t compare it with the industry. Hence, knowing the economy and market is essential for the comparisons and for setting benchmarks for your own business so that performance can be assessed. (c) Suggest the likely sources of this information. For information, understanding the mistakes in the past has been the best source of information. Hence, the first best source for information gathering is the history of the company; past production levels, production performance and employee performance is the best to gather information. The industry should also be looked at for information gathering; past and present performance. Other than this, suppliers of raw materials can also provide valid information regarding different aspects of the industry and the competitors which can be helpful in setting benchmarks. Question 4 At the urgent meeting last week, the Sheffield Timber Company informed John that supplies of mahogany from South America were in jeopardy. There had been a serious forest fire and much of the seasoned stock ready for export at the premises of the South American exporter had been wiped out. Sheffield Timber envisaged that there would be no more supplies of the type used by High Street Reproduction Furniture for the next six months. After that date, it seems that supplies can be restored to normal. Required: (a) Provide a production schedule which would maximise profits on the stocks of mahogany held by High Street Reproduction Furniture Ltd and identify the forecast profit figure based on this production schedule. You should assume that forecast demand from the normal customer base will be 10 per cent higher than the last six months’ figures and that the decision on the American enquiry is still unresolved. You should also assume that the mirror section of the dressing table will have to be produced by High Street Reproduction Furniture, since the current supplier does not hold any stock of the mahogany.   Wardrobes Dressing Chests   (?000) (?000) (?000) Demand 220 176 220 Material needed 2200 880 1100   Wardrobes Dressing Chests Total Demand 220 176 220   Sales units 200 106 220 616 Revenue 340,000 132,500 330,000 802,500 Total manufacturing costs 200,000 220,000 226,000 696,000 Gross profit/loss 100,000 -87,500 104,000 116,500 Selling & distribution costs       80,000 Net profit/loss       36,500 Production Schedule for 6 months Wardrobes 200 Dressings 106 Chests 20 This would lead to full consumption of 3250 square meters of stock available including the production of mirrors. (b) Identify other issues which John would need to take account of, if this production schedule is undertaken. The issues that should be taken into account are the work load of managers. It is essential to cater to this problem as it has led to ineffective management of the products which eventually led to a net loss in the dressing. One of the employees was completely unaware of the loss that was being incurred because of the high workload. The company should also look into hiring more staff for the division of work load and better performance in the managerial divide of the company. Above this, the company also needs to analyze what is the position of the competitors during the shortage as the company needs to be competitive enough to retain its customers. (c) Compare the predicted profit in (a) above with the profit which John might have expected in the second half of the year, if the predicted demand for all three products had been met, the American contract had not been taken on and the mirror section of the dressing table had been produced by High Street Reproduction Furniture Ltd. Comment on your findings. With the shortage of raw material, the company will be able to make a profit of ?36,500 by producing 200 units of wardrobes, 106 units of dressing in which the mirrors are being produced in house and 220 chests. The demand of chests is being met fully while the other two are lacking. The highest difference between demand and production supply is in dressings which are already in a loss. Question 5 Discuss whether or not you agree with each of the following statements. Carefully define terms and, where appropriate, provide an illustrative example. 1- All direct costs are variable; 2- A cost can be direct in respect of one cost objective but an overhead in respect of another; 3- Including a proportion of fixed production overheads in product costs, as in absorption costing, can be justified since the allocated cost acts as a proxy for hard-to-measure opportunity costs No, all the direct costs are not variable. Direct cost is the costs which directly contribute to the production of a product. In this case the raw material and the labor is the direct cost for the company. The raw material (wood) cost will always vary with the fluctuation in the transport price and the price of the wood. The labor cost is variable when it is on wages and a company doesn’t have permanent workers. But in this case the workers are permanent and their pays are fixed. This will nullify the statement that “All direct costs are variable.” No. the direct costs will stay the direct no matter with which angle they are being viewed. As direct cost contribute to the manufacturing directly. Overhead expenses are the extra expenses which are not direct to manufacturing product but an indirect contributor. Overhead expenses are of two kinds fixed overheads and variable overhead. Fixed overheads are which cannot be avoided for example the utility expense is a fixed overhead for the manufacturing process or the wage paid to the person who cleans the workshop, etc. So it is not true that a direct cost can be judged as an overhead with respect to another cost objective. It will stay the direct cost no matter what as it is contributing to manufacturing direct. Fixed production overheads are the overheads which are to be paid to get the production moving, for example the transportation of the raw material to the site of production. Product cost are all the costs required in making a product for example direct material, direct labor and any product related overheads. Absorption costing is a costing method that takes into account the indirect overheads into account along with all the direct costs incurred in making a product. Opportunity cost is the forego advantage that u let go because of choosing one alternative over another for example producing more wardrobes instead of chests. Here letting production of chests is an opportunity cost. References James, C., Polimeni, R. & Handy, S. 1994. Schaum's Outline of Cost Accounting. MC-Graw Hill Education. Lanen, W., Anderson, S. &  Maher, M. 2013. Fundamentals of Cost Accounting. McGraw-Hill/Irwin (4 ed). Read More