PACC6001: Management Accounting - Wildwood Creations Ltd - Assessment Answer

Management Accounting Assignment

Assignment Task

WILDWOOD CREATIONS Ltd

Sam Dekkan, a part owner of the WILDWOOD CREATIONS Ltd, a maker, repairer and restorer of wooden outdoor entertainment furniture, was responsible for setting the charges for various kinds of repairs.

A potential customer had called to inquire about the cost to repair an outdoor set of chairs. Dekkan gave an estimated price for the job, after which the woman thanked him and let him know that she would be going elsewhere - a competitor.

Dekkan was aware that competition was increasing not only from the repair market but from the manufacturer of outdoor furniture with their low prices for new furniture. To attract repair jobs and avoid layoffs, Dekkan and his partners had lowered prices for minor repairs for the first time in a decade. Dekkan had once again looked at the budgeted and the actual Operating Profit statement. How could he tell what portion of the company’s profits were due to the price decreases and how much was related to other factors?

BACKGROUND

WILDWOOD CREATIONS Ltd is a small shop-factory that specialises in repairing, restoring and making (a standard design) outdoor table and small entertainment furniture.

SERVICES Currently, WILDWOOD CREATIONS offers four main services:

• major repairs,
• minor repairs,
• making a variety of new outdoor furniture: tables, bench seats, chairs, outdoor coffee tables, small storage cabinets. It uses its standard designs and can also adapt those designs for customer preferences (size, colour, height, material variations);
• restoring used outdoor furniture brought in by customers (however, not restoring antique furniture),

Historically, minor furniture repair jobs were billed at a rate of $65.00 an hour. The minor repairs of furniture pieces was carried out by the four full-time salaried employees.

In addition, Rush-jobs for minor repairs were occasionally performed for local customers only. These jobs were sub-contracted to a group of people who were retired employees of the WILDWOOD CREATIONS. They carried out the repairs for $27 an hour. Rush jobs were charged under flat-fee arrangements that averaged $160 per job. Usually, the average time that a Rush-job took was three hours to complete.

Major repairs and restorations were performed under individual flat-fee2 agreements that were quoted to customers based on the type of work needed for each piece of furniture. The three owners of WILDWOOD CREATIONS’s as well as their four employees carried out all the major Repair Jobs as well as making new furniture in the shop-factory facilities.

1 © Dr. W. Motyka 2016. All rights reserved. 2 Flat-fee: means a fee amount that does not change no matter how much the cost of the item eventually turns out to be.

THE ANNUAL OPERATING COSTS

Before the start of the current year under review (July 2015 to June 2016), Dekkan’s accountant had prepared the annual operating plan for the business [SCHEDULE 1] in the APPENDIX. WILDWOOD CREATIONS’ business was small and relatively straightforward, which made it possible to develop the company’s operating budget using specific volume and revenue data for each product-service area. The following information was used in preparing the annual plan (Master Budget) for July 2015 – June 2016:

• Based on earlier year’s work orders (2014-2015), the business was expected to carry out the following number of jobs in the July 2015 – June 1016 year:

1. 390 major repairs Jobs; 1,830 minor repairs Jobs; 540 restoration Jobs; also, the company expected to receive an order to make and sell 520 standard new outdoor tables.In addition, it expected to take on 50 rush repair jobs.
2. The major repairs Jobs were to be charged an average price of $450 per Job. Major repair Jobs were expected to take an average seven hours to complete.
3. The repair jobs that were in fact restoration jobs work were to be quoted at a price of $320 per job;
4. The fee for Minor repairs is based on hours worked and is $65 per hour. The minor repair Job work was expected to take an average of two hours to complete.
5. The sale price of standard new outdoor tables was expected to average $680per table.

• All three partners were to be paid an annual base salary of $60,000 plus bonuses of 5% based on the total sales revenue of the company for year July 2015 to June 2016.
• The hourly wage rate for (wages) employees was to be $28 an hour for work done.
• The four salaried employees are paid an annual base salary of $43,000.
• Replacement parts and other supplies were budgeted at $120 for each major job and $47 for each minor job (including Rush jobs). This estimated cost was based on experience. The making of new tables requires various materials that combined represent an expected cost of $140 per table.
• Approximately 35% of the furniture repair Jobs that WILDWOOD CREATIONS worked on were transported to the shop-factory from outside of the city. The company expected to incur average transportation charges of $38 per package to transport the repaired furniture pieces back to their owners after the work was completed.
• The budgeted advertising, depreciation, office rent, and miscellaneous expenses were treated as fixed expenses.

ACTUAL RESULTS FOR THE YEAR

At the end of the year (June 2016), Dekkan’s accountant prepared the actual Operating Profit statement shown in the last column of SCHEDULE 1. Although Dekkan knew that WILDWOOD CREATIONS had experienced significant changes during the past year, he was still shocked to discover that the company’s profit was $2,917 less than the budget for that year even though revenues had increased by $55,390. In order to understand fully the decrease in profits, Dekkan gathered the following information:

1. Owing to increased competition, major repairs were billed at $440 per job, whileminor repairs jobs were billed at a fee of $60 per hour.
2. The planned and the actual number of Jobs as well as the average hours per jobare presented in SCHEDULE 2 in the Appendix.
3. On average, major repairs and restorations required more replacement parts than in past years. The replacement parts expenses for major repairs Jobs were $120 per job for the year, while for minor repair Jobs the cost was $47. The materials for new tables was $140 per table.
4. The transportation-delivery expenses were $38 per package.
5. Advertising expenses were $2,000 more than budgeted owing to an unplanned printing of flyers for the new standard design table that was now available.
6. Miscellaneous expenses, however, were $900 less than the budgeted amount.

REQUIRED Analyse the information about the activities and financial performance WILDWOOD CREATIONS Ltd. Prepare an Executive Report of no more than 2 pages for the owners of Wildwood Creations, setting out the overall outcomes and conclusions of your analysis which addresses the following listed requirements and issues.

The two page report is to be in proper format, structure and style, and is to be accompanied by relevant Appendices. The Appendices of relevant Schedules are to be in a proper presentation format, and structured to show the relevant calculations that support your analysis. There is no limit on the number of schedules/tables/workings that the APPENDIX contains. However, these schedules/tables and workings must be clearly formatted and understandable.

Suggestions:

1. Prepare a schedule showing the differences between the planned outcome andthe actual results for WILDWOOD CREATIONS for the period July 2015 to June 2016.
2. Prepare a profit reconciliation of planned versus actual profit by quantifying, indollar terms, all significant factors.
3. Prepare a revised budget using all the previous planning assumptions, but use the total actual number of jobs that WILDWOOD CREATIONS company worked on during the year July 2015 to June 2016. In essence create a flexible budget based on the actual number of jobs worked on.
4. Consider how the different compensation (salaries, wages) arrangement of thecompany affect profit?
5. What changes should Dekkan and his partners consider making based on theresults of your analysis.

Introduction

The purpose of the report is to analyse the activities and financial performance of WILDWOOD CREATIONS Ltd. so as to set out the overall outcomes and recommend on the changes that would improve the performance of the company. The report is being prepared to make recommendations to Sam Deccan, the owner and his partners on the above mentioned parameters.

The analysis has been done by preparing a schedule showing the differences between the planned outcome and the actual results for the period July 2015 to June 2016 together with a profit reconciliation of planned versus actual profit. A revised flexible budget has also been prepared on the actual number of jobs worked on. A schedule analysing the different compensation arrangement is also appended for the purpose of the analysis followed by the recommendations based on the results.

Main Body

Appendicle 1 lists out the differences between the planned outcome and the actual results. The schedule has been prepared using budgeted quantity and rates and actual quantity and rates. Variable costs and fixed costs have been bifurcated so as to correctly analyse the impact of change in budgets on the contribution and operating profit of the company. As per the Appendicle; the actual operating profit is greater than the budgeted profit by $ 54,445.4 and the contribution to profit is greater by $ 58,145.4. This indicated that variable costs majorly occupy the cost structure of the company and also are indicative of the need to further analyse the impact of variable cost on profit through Appendicle 3. The flexible budget is based on actual quantity at budgeted prices, it indicates an excess profit of $ 30,596 and a contribution towards profit of $ 34,296. The schedule also hints at the unfavourable variable and fixed cost variances reported by the company. Based on this information, a reconciliation of the actual and budgeted profit finally culminates in the identification of the reasons for the variances between budgeted and actual costs and profits. Appendicle 2 indicates that the major cause of unfavourable variance is due to the labour efficiency and fixed cost spending variance. A correction of these variances would result in further accentuated profits for the company. Appendicle 4 analyses the budgeted number of hours against the actual number of hours and is indicative of the fact that the actual number of hours utilized were more than the budgeted hours by 1,588 hours.

Conclusion and Recommendation

It is therefore concluded on the basis of the analysis that Sam and his partners should take steps to improve the labour efficiency. This can be achieved through proper training and instructions to the employees regarding the repair jobs. Another reason for the huge variance could be the difference in the assumed skills set of the budgeted employees compared to standard employees. This variance can also be corrected through proper training. It is imperative to note that the major chunk of the labour efficiency variance is attributed to the minor repairs which alone consumed 1,914 hours extra @ 1.1 hour extra per job. This may necessitate a correction to the budgeted number of hours after proper analysis of the reasonable time required for this job. Another perspective of seeking a solution to the problem is by employing a fixed number of salaried employees for the minor repair jobs. The fixed salary would not cause as much fluctuation in the cost variance of the repair services provided by the company. (Accountingtools.com, 2016)

Appendicle 1

Schedule showing the differences between the planned outcome and the actual results for WILDWOOD CREATIONS for the period July 2015 to June

2016.

Working

Appendicle 2

Profit reconciliation of planned versus actual profit For Wildwood Creations Ltd. for the Period July 2015 to June 2016

Appendicle 3

Flexible budget based on the actual number of jobs worked on. For Wildwood Creations Ltd. for the Period July 2015 to June 2016

Workings

Appendicle 4

Hours worked Schedule For Wildwood Creations Ltd. for the Period July 2015 to June 2016