Helen Croker owns Divine Denim, a growing company making made to measure, designer denim jeans and jackets. She uses organic yarn-dyed cotton denim of different weights depending on the garment that she is making. Although she prefers to take the measurements herself, she is now making denim clothes for international customers using the self-measuring system she has developed and put online. For her custom clients, she takes measurements or uses the measurements supplied through her customers’ online application. She uses these measurements to alter the pattern for the design chosen by the client. The pattern is sent to the Cutting Department and the cut material then transferred to the Machining Department.
Helen has recently expanded into a Ready to Wear (RTW) collection which is made in Australia and sold online at a cheaper price point than the made to measure clothing.
Helen designs the RTW clothes and sends the designs to a pattern maker. She previously had two machinists working for her and has just expanded to 8 machinists and a cutter in an expanded factory to manufacture the RTW clothing. One of the machinists uses the riveting and buttonhole machines. Helen has the latest computerised machines enabling her to complete a single setup for all machines from an iPad. She has an administrator who manages the payroll, orders, creditors, delivery and invoicing. An IT expert works 2.5 days a week and manages the company’s website, other IT issues and online presence including monthly podcasts. A bookkeeping service is used for basic bookkeeping, GST returns and preparing information for the tax agent.
Helen decided that she needs better cost control and regular information and has asked your firm of accountants, Good Numbers, to provide her assistance to maintain and grow her expanding business.
QUESTION 1 COST ALLOCATION
You have explained to Helen the importance of understanding how indirect costs can be allocated to the cost of finished goods and the problems of using a cost of goods manufactured statement to apply these costs and appropriately cost and price her products. Divine Denim has 2 production departments (Cutting and Machining), and 3 support departments (Administration, IT and Design).
The IT Department’s costs are allocated based on the number of computers. The Administration Department’s costs are allocated based on the number of employees. The Design Department’s costs are allocated 50% to cutting and 50% to Machining. Allocate the support department costs in the following order: Administration then IT. Helen has provided some estimates of costs for the current year (see below).
| INPUT DATA | |||||
| Direct costs | Administration | IT | Design | Cutting | Machining |
| Materials & Labour | 55,000 | 35,000 | 45,000 | 50,000 | 400,000 |
| Indirect costs | 10,000 | 7,500 | 10,000 | 7,500 | 25,000 |
| Total | 65,000 | 42,500 | 55,000 | 57,500 | 425,000 |
| Allocation base | |||||
| No of computers | 1 | 1 | 1 | 9 | |
| Designs | 0.5 | 0.5 | |||
| No. of employees | 1 | 1 | 1 | 1 | 8 |
REQUIRED:
- Allocate the support department costs to the operating departments using the direct method.
- Allocate the support department costs to the operating departments using the step- down method. Allocate first the costs for the support department with the largest direct costs.
- Allocate the support department costs to the operating departments using the reciprocal method. Use Excel Solver to prepare your answer.
Presentation: The input data above can be copied directly from the online subject outline into a spreadsheet. Cut and paste your spreadsheet results and formula view into your Word document. The formula view should include the column letters and the row numbers. See the ‘Getting Started’ menu tab on the Interact subject site for advice on spreadsheet layout and utilities.
QUESTION 2 PROCESS COSTING
As part of your role, you provide Helen with the costs of running her Cutting and Machining departments in July. Only skinny jeans were manufactured in July. All work is commenced in the Cutting Department and output is then transferred to the Machining Department. No direct material is added in the Machining Department but labour and overhead costs, including thread, rivets, buttons, and zippers are incurred uniformly throughout the process. Overhead is allocated based on 125% of direct labour cost. For the Machining Department, the following work in process information for 1 March 2020 is available: 100 units, 75% complete. Costs of this work in process include:
| $ | |
| Cutting department costs transferred in | 3,330 |
| Machining department costs | |
| Direct labour | 32,000 |
During March 200 units were completed and transferred to Administration for dispatch. Units transferred from the Cutting Department to the Machining Department were charged to Machining at $44.50 each. Direct labour costs in March for the Machining department were $32,000.
On 31 March 35 units were in process in Machining and these were estimated to be 45% complete.
REQUIRED:
- For the Machining Department calculate, for the month of March, the cost of work completed and the cost of work in process as at 31 March 2020, using:
- The weighted average cost method, and
- FIFO.
- Design a job cost record for a pair of custom-made jeans.
Presentation: Use Excel to prepare your answers to parts i and ii. Cut and paste your spreadsheet results and formula view into your word document. The formula view should include the column letters and the row numbers.
QUESTION 3 BUDGETS
On 1 February 2020 Divine Denim has a cash balance of $40 000. Sales for the next six months are expected to be:
| Feb | March | April | May | June | July |
| $50,000 | $70,000 | $130,000 | $210,000 | $260,000 | $300,000 |
The gross margin on sales is expected to be 50%. The company plans to carry a finished goods inventory equal to expected sales for the next two months. Purchases are paid in the month following purchase.
Variable selling expenses are expected to equal 15% of sales. Fixed selling and administrative expenses are expected to be $30 000 per month, including $2,000 depreciation. Eighty percent of the expenses will be paid in the month incurred, the balance in the month following.
Sixty percent of sales are expected to be cash sales. Twenty-five percent of credit sales are collected in the month of sale and 75% in the month following sale.
REQUIRED:
- As an accountant working for Good Numbers you have been asked to prepare a cash budget for the months of March, April, May and June. Comment on the results. (150 words)
- In light of your findings in i. Good Numbers have been told that the company has arranged to borrow funds whenever necessary in order to maintain a minimum cash balance of $10,000. A line of credit has been arranged with the bank requiring interest of 1% per month on borrowed cash. Interest will be paid at the time the loan is repaid. The loan will be repaid as soon as there is enough cash to do so. Using this information, revise the cash budget.
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