Solved by verified expert :Royal
biscuits inc has a very select but highly respected product portfolio. They
produce 3 different kinds of fine biscuits.
-supreme
crisp: A light wafer cookie with dark chocolate crème filling
-tropical
chocolate : A heart-shaped cookie enrobed in smooth Belgian chocolate, with a
touch of orange flavor.
–
sublime roll : A thin crepe rolled into an elegant flute, drizzled with a hint
of dark chocolate.
All
biscuits have the same main ingredients ( chocolate, butter, sugar and flower)
complement with biscuit specific ingredients. Royal Biscuits Inc. only works
with top quality suppliers who charge $8 per kg of chocolate, $ 4 per kg of
butter, 1 $ per kg of sugar and $0,35 per kg of flower. All other ingredients
are purchased at an average price of $ 1,5 per kg . To produce 1 kg of supreme
crisps, Royal Biscuits Inc. needs to purchase 200g of chocolate, 150g of
butter, 250g of sugar, 250g of flower and 150g of other ingredients such as
vanilla powder, eggs, … for 1 kg of Tropical chocolates, they need 200 g of
chocolate, 250g of butter, 150g of sugar, 250g of flower and 150g of other
ingredients. The third product, the sublime rolls, are made of 50g chocolate,
250g butter, 200g sugar, 250g flower and 250g other ingredients.
Royal
biscuits Inc. employs 4 full time production workers in its production hall,
working in 2 shifts. A production worker works 1750 hours every year at
practical capacity and at a cost of $ 25 per hour. In case of temporary
technical unemployment, the production workers receive an unemployment benefit
from the government and Royal Biscuits Inc. does not have pay any supplementary
compensations. To produce 1 kg of supreme crisps , Tropical chocolates and
Sublime rolls, respectively 0,09; 0,08 and 0,12 labor hours are required. In
addition, the company has 1 person(FTE) in charge of maintenance. He also works
an average of 1750 hours a year but earns only $19 per hour. A few years ago,
Royal Biscuits Inc has invested in 3 new production process of Supreme crisps
takes 0,16 machine hours per kg, the process of Tropical chocolates takes 0,12
machine hours per kg and producing the Sublime rolls takes 0,13 machine hours
per kg.
Annual
depreciation of the machines is $134000. The cost of power and other supplies
to run the machines is $ 3 per machine hour for the Supreme crisp production
line, $2 per machine hour for the Tropical chocolate production line and $2,5
per machine hour for the Sublime roll production line. As such, the cost of
power and supplies is considered to be a direct cost.
William
Kensington calculated that there were $16300 general administration costs
linked to the production, and that Royal Biscuits Inc pays a total amount of
$30000 rent for the administration building and the production hall. Management
receives $48760 for running the business.
Distribution
costs and selling costs, both non related to production, amount respectively
$18450 and $7800 per year.
Royal
Biscuits Inc has a total shareholders’ capital of $12500000 and outstanding
debt of $1100000 at 7% the current tax rate is 39%
Allocation
of costs
Knowing
these costs, William Kensington had to
make a decision about how to allocate the overhead costs. The allocation needed
to be both logical and uncomplicated. After a long discussion with Jim Martin,
they decided it would be best to allocate the maintenance and depreciation
costs based on the machine hours. All other indirect costs linked with
production would be allocated based on direct labor hours.
Assignment
questions
1-
Calculate
the standard cost of 1 kg of Supreme crisps, Tropical chocolates and Sublime
rolls, with the full costing method, using practical capacity as a denominator.
This will allow William Kensington to review its selling prices.
2-
At
the end of the year, it becomes clear that the purchase price of chocolate
increased to $8,65 per kg. A marketing study performed by an outstanding
marketing office revealed that in order to increase sales, the flavor of the
Supreme crisps should be adapted. Therefore, the recipe of Supreme crisps was
changed. Royal Biscuits Inc. needed to purchase 150g of chocolate and 200g of
butter to produce 1kg of the new Supreme crisps. In addition the production
workers hourly cost increased from $25 to $26,5. Calculate the actual costs per
Kg of the 3 products, using the full costing method. The actual sales volume
consists of 22,500Kg of Supreme crisps, 16,300kg of Tropical chocolates and
20.880Kg of Sublime rolls.
3-
Compare
actual and standards. Calculate and analyze the following variances:
a-
Direct
materials variance, direct labor variance and manufacturing overhead variance.
b-
Supreme
crisp variance, Tropical chocolates variance and Sublime roll variance( these
variances only include the direct costs)
4-
Royal
Biscuits Inc. sells it Supreme crisps at $13,2/kg, its Tropical chocolates at
$14,8/Kg and its Sublime rolls at $11,5/kg. Given the actual sales volume, how
will the income statement look like using.
a-
Standard
full costing at practical capacity ?
b-
Actual
costing ?
