DFA6127 – Group Assignment (60 marks)

QUESTION 1 (35 marks)

Butterfly Limited uses absorption costing to analyse its production overheads. It operates with two
production departments, Machining and Assembly, assisted by two service departments, Stores and
Maintenance. The production manager has prepared the following budgets for the forthcoming financial
year:
Total Machining Assembly Stores Maintenance
$ $ $ $ $
Indirect wages 7,690 1,980 4,250 1,260 200
Indirect materials 6,640 2,350 3,775 400 115
Power 19,520 10,080 8,215 370 855
Rent of building 2,500
Insurance of building 900
Factory administration 6,000
Depreciation of plant & equipment 18,750
62,000

Additional information:
Machining Assembly Stores Maintenance
Area occupied in square feet 24,000 36,000 16,000 4,000
Cost of plant & equipment $45,000 $25,000 $3,000 $2,000
Number of employees 45 25 3 2
Maintenance hours needed 50 45 5
Number of stores requisitions 68 27
Machine hours 4,250 250
Direct labour hours 500 2,000

The company has recently been approached by a customer to undertake a job (K701) requiring raw
materials costing $956. Direct labour would cost $28 per hour. The number of direct labour and
machine hours required to complete the job is estimated as follows:
Machining Assembly
Direct labour hours 3 20
Machine hours 15 4
The company usually achieves a margin of 20% on all its jobs.

Required:
(a) With reference to Butterfly Limited, distinguish between the following cost concepts, with
appropriate examples:
(i) direct and indirect costs;
(ii) allocated and apportioned costs; and
(iii) fixed and variable costs. (12 marks)

(b) Explain why a departmental overhead absorption rate (OAR) is more appropriate than a factory-
wide OAR to absorb production overheads to jobs for Butterfly Limited. (3 marks)

(c) Calculate a suitable overhead absorption rate for each of the production departments, explaining
your answer. Show all your workings. (15 marks)

(d) Calculate the quotation price of Job K701. (5 marks)

1
QUESTION 2 (25 marks)
QRL is a wholly owned subsidiary of HVL. QRL sells jewellery through stores in retail shopping centres
throughout the country. The shopping centres are owned by HVL. Consequently, QRL is able to get
shopping space in strategic locations at concessional rates from HVL. QRL also benefits from common
marketing campaigns regularly undertaken by HVL.

Over the last two years QRL has experienced declining profitability and is wondering if this is related to
the sector as whole. It has recently subscribed to an agency that produces average ratios across many
businesses. Below are the ratios that have been provided by the agency for QRL’s business sector
based on a year end of 30 June 2013.

Return on year-end capital employed (ROCE) 16.8%

Net asset (total assets less current liabilities) turnover 1.4 times
Gross profit margin 35%
Operating profit margin 12%
Current ratio 1.25:1
Average inventory turnover 3 times
Trade payables’ payment period 64 days
Debt to equity 38%

The financial statements of QRL for the year ended 30 September 2013 are:

Profit or loss statement

$’000 $’000
Revenue 56,000
Opening inventory 8,300
Purchases 43,900
52,200
Closing inventory (10,200)
(42,000)
Gross profit 14,000
Operating costs (9,800)
Finance costs (800)
Profit before tax 3,400
Income tax expense (1,000)
Profit for the year 2,400

2
Statement of financial position
$’000 $’000
Assets
Non-current assets
Property and shop fittings 25,600
Deferred development expenditure 5,000
30,600
Current assets
Inventory 10,200
Bank 1,000
11,200
Total assets 41,800

Equity and liabilities

Equity
Equity shares of $1 each 15,000
Property revaluation reserve 3,000
Retained earnings 8,600
26,600
Non-current liabilities
10% loan notes 8,000
Current liabilities
Trade payables 5,400
Current tax payable 1,800
7,200
Total equity and liabilities 41,800

Note: The deferred development expenditure is an intangible asset that relates to an investment in a
process to manufacture artificial precious gems for future sale by QRL in the retail jewellery market.

Required:
(a) Prepare for QRL the equivalent ratios that have been provided by the agency.
(9 marks)

(b) Assess the financial and operating performance of QRL in comparison to its sector
averages. (12 marks)

(c) Explain four possible limitations of the usefulness of the above comparison. (4 marks)