Case Study – Northumbria Cheese Ltd

Case Study – Northumbria Cheese Ltd

Scenario

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Northumbria Cheese Ltd started as a family business in the North East of England in 1999. The business was started as part of a farm enterprise and has become a successful standalone business which produces a variety of local cheese for retail outlets in the north of the country. The business operates two separate outlets, one based in Falstone and the other in Stanhope to meet local market demand.

 

The business appears to be well run although there is a concern in the business that it is not operating to its full potential financially. The annual accounts are prepared by an external accountant and there is little financial knowledge within the business to understand the accounts.

 

You have been employed to deliver a presentation on the role and function of the management accounts department, covering the management accounting systems operating in this organisation as well as the range of techniques used.

 

This assignment has two parts.

Part A: Produce a portfolio of completed calculations for financial statements, including income statements using variable costings. The portfolio can be completed and achieved by answering all of the questions within this booklet.  You are also permitted to include any of the exercises you complete during lessons as further evidence of your understanding and application.

 

Part B: The presentation is in two parts in that you must present the answers to the questions below and support your answers with evidence.  Some of this evidence can be taken from class activities, individual research and your portfolio. The presentation includes supporting calculations from a portfolio of completed financial statements,

plus:
  1. An explanation of the principles of management accounting.

  2. The role of management accounting and management accounting systems.

  3. The use of techniques and methods used in management accounting by


presenting calculations for an income statement using variable costings.
  1. Explanation of how management accounting is integrated within an organisation.

  2. The benefits of the function to the organisation.


 

You will also need to review the profit and loss account and balance sheet of the business to form a general impression of the performance of Northumbria Cheese and compare its performance as a food manufacturing enterprise to industry standards.

 

 

 

 

 

ANNUAL ACCOUNTS

 









































 FALSTONESTANHOPE
 ££
Profit and Loss Account 
Sales80,000120,000
Less cost of  
goods sold  
Opening Stock25,00022,500
Add purchases50,00091,000
 75,000113,500
Less closing stock15,00017,500
Gross profit20,00024,000
less depreciation1,0003,000
less overheads9,0006,000
Net Profit10,00015,000

 

 

 

 

 

 

 

 

 

 

Balance Sheet                   Falstone                                Stanhope

FIXED ASSETS

Equipment                   2,000                                                    14,000

CURRENT ASSETS

Stock                          15,000                                                    17,500

Debtors                      25,000                                                   20,000

Bank                            5,000                                                      2,500

 















CURRENT LIABILITIES Creditors  5,00010,000
 42,00044,000
FINANCED BY Opening Capital

Add Net Profit
 

38,000 10,000
 

36,000 15,000
 

less drawings
48,000 6,00051,000 7,000
 42,00044,000

 

 

 

 

 

 
  • Describe three main differences between management accounting and financial accounting.


 

 

 

 

 

 
  • Which formula is used to calculate the overhead absorption rate?


 












AActual overheads’ actual activity 

 
BActual overheads/budgeted activity 

 
CBudgeted overheads/actual activity 

 
DBudgeted overheads/budgeted activity 

 

 

 

 
  • Which one of the following is NOT an example of a cost driver in activity based costing?


 












ANumber of direct labour hours 

 
BNumber of machine set-ups 

 
CNumber of production runs 

 
DNumber of quality inspections 

 

 

 

 

 

 
  • The following information is available for the sale of Cheese A for June 2016.


 










Standard selling price per unit£26.00
Budgeted sales8400 unit
Actual sales8600 units
Actual sales revenue£219,300
  

 

What is the sales price variance for June 2016?

 












A£4300 Adverse 

 
B£4300 Favourable 

 
C£5200 Adverse 

 
D£5200 Favourable 

 

 

 

 

 

 
  • Northumbria Cheese operates a system of absorption costing. The business apportions factory administration overheads to the four departments:  Preparation; Processing; Finishing and Stores based on the number of employees in each department.


 










DepartmentPreparationProcessingFinishingStores
Number of employees25201510

 

The factory administration overheads are forecast to be £175,770.

How much of the factory administration overheads will be apportioned to the Finishing Department?

 












A£12,555 

 
B£37,655 

 
C£43,942 

 
D£58,590 

 

 

 

 

 

 
  • The following budgeted information is available for Cheese B for August 2016.


 








Standard material usage5 kg
Budgeted sales3000 units
Decrease in raw material inventory1800 kg
Increase in finished goods inventory400 units

 

How many kg of material will be purchased during July 2016?

 












A11,200 kg 

 
B13,000 kg 

 
C15,200 kg 

 
D17,000 kg 

 

 

 
  • The following information is available for an exclusive cheese manufactured by Northumbria Cheese.


 








Selling price per unit£24.50
Variable costs per unit£13.80
Fixed costs£90,000
Budgeted production18,000 units

 

How many units must the business sell to produce an annual profit of £80,000?

 












A7,477 units 

 
B14,036 units 

 
C15,888 units 

 
D29,825 units 

 

 

 

 

 
  • The following information is available for Cheese C.


 








Overhead absorption rate£5 per labour hour
Standard labour hours per unit6 hours
Finished goods inventory at 1 May 201650 units
Finished goods inventory at 31 May 2016100 units

 

What would be the difference between the profit for the month using absorption costing and the profit for the month using marginal costing?

 












AAbsorption costing profit would be £1,500 higher 

 
BAbsorption costing profit would be £1,500 lower 

 
CAbsorption costing profit would be £3,000 higher 

 
DAbsorption costing profit would be £3,000 lower 

 

 

 
  • The following information is available for Northumbria Cheese Ltd a manufacturing company.










 Period 1Period 2
Sales in units80009000
Opening inventory1400 

 

The production manager wants the closing inventory to be one-fifth of the following month’s sales.

 

Prepare the production budget for Period 1.










Period1
Sales (units) 
Opening inventory 
Closing inventory 
Production (units) 

 

 

Explain two benefits of preparing a production budget.

 
  • Northumbria Cheese Ltd manufactures two further products: Cheese D and


Cheese E.

 

The direct costs of each product are as follows.

 












 Cheese DCheese E
 ££
Direct materials per unit8.006.00
Direct labour per unit9.0014.00

 

The company’s total factory overheads are £30,100 per month.

Monthly production is:

 




Cheese D1000 units
Cheese E2400 units

 

Cheese D is sold for £17.20 per unit and Cheese E is sold for £36.40 per unit.

 

The company used activity based costing and has established that it has the following cost pools and cost drivers.

 












Cost PoolCost DriverOverhead cost per monthInformation about each product
Transfer of partly finished goodsNumber of times a product is transferred to another machine during production£14,500Cheese D: 5 transfers per unit

Cheese E: 10 transfers per unit
InspectionsNumber of times a product is inspected for quality during production process£15,600Cheese D: 4 inspections per unit

Cheese E: 7 inspections per unit

 

Calculate the cost of making each unit of Cheese D and each unit of Cheese E and the profit or loss per unit on each product.

































 Cheese DCheese E
 ££
Direct materials  
Direct labour  
Total direct cost  
Overheads:  
Transfers  
Inspections  
Total unit cost  
Selling price per unit  
Profit/ (loss) per unit  

 

 

 

 
  • The company faces strong competition from some rival companies and the selling prices of each product were chosen with this in mind.


Currently the company is able to sell all its production.  However, the directors feel they should review the continued production of these products.

Advise the directors whether the company should continue production of Cheese D and Cheese E.

 
  • Northumbria Cheese manufacture a luxury range of cheese. The company operates a standard costing system.


The managing director is very concerned that the actual profit for the month at £22,770 is significantly less than the budgeted profit of £90,000.

 

The cost accountant provides the following information.


















 BudgetActual
Sales and production800 blocks£650 per block860 blocks£600 per block
Materials25 litres per block£5.50 per litre35 litres per block£4.50 per litre
Labour15 hours per block£20 per hour19 hours per block£17 per hour

 

The cost accountant has also calculated the relevant variances.

 





















Variance£ 
Sales – price43000Adverse
Sales – volume39000Favourable
Materials – price30100Favourable
Materials – usage47300Adverse
Labour – rate49020Favourable
Labour - efficiency68800Adverse

 

The managers of the relevant departments have seen the figures above and have made some initial comments.

Managers responsible for sales.  “The price variance was the result of having to lower the price because of increased competition”.

Manager responsible for materials.  “The price variance was the result of negotiating a much better deal with a new supplier”.

Manager responsible for labour.  “We have followed other companies in the industry and employed workers on zero hour contracts and this has reduced our wage bill”.

The managing director believes that the managers may be covering tor each other and the reasons given are not the real causes of the variances but have been caused internally.

Assess the significance of the variances on the performance of the business and the managing director’s view that the variances are caused internally.

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