CricSmart produces a practice cricket ball called the Swing-Ball. In 2012, CricSmart sold 10,000 Swing-Balls. CricSmart’s accounting records show the following results at the end of December 2012: Direct materials per Swing-Ball £ 1.00 Direct labour per Swing-Ball £ 0.50 Variable manufacturing overhead per Swing-Ball £ 0.25 Total fixed manufacturing overhead costs £ 13,500 Total fixed selling and administrative costs £ 3,000 Production 15,000 Swing-Balls Sales 10,000 Swing-Balls Sales price per Swing-Ball: £ 3.50 There were no beginning inventories in 2012. On the 1st January 2013, CricSmart hired a new Chief Operating Officer, Mr. Alastair Cook, whose primary objective was to increase operating income. The board of directors agreed to pay Mr. Cook a bonus of £200,000 if he achieved a 10% increase in net operating income. CricSmart’s accounting records show the following results at the end of December 2013: Direct materials per Swing-Ball £ 1.00 Direct labour per Swing-Ball £ 0.50 Variable manufacturing overhead per Swing-Ball £ 0.25 Total fixed manufacturing overhead costs £ 13,500 Total fixed selling and administrative costs £ 3,000 Production 6,750 Swing-Balls Sales 11,000 Swing-Balls Sales price per Swing-Ball: £ 3.50 CricSmart use an absorption costing system. Actual overheads were as budgeted. At the end of December 2013, Mr. Cook was delighted to have increased sales by 10% and was sure that the net operating income would have equally improved since costs appeared to have remained the same. Yet he was left dismayed and disappointed after the board of directors decided that he would not receive any bonus because according to the financial statements CricSmart made a loss in 2013. The board of directors described his performance as particularly unsatisfactory considering CricSmart had made a profit in 2012. Mr. Cook felt certain there had to be an error somewhere and immediately called the Chief Accountant into his office to find the problem. The Chief Accountant stated, “I can assure you that the net operating income is correct, Alastair. Although sales went up the problem is with production”. Mr. Cook was not satisfied by the Chief Accountants explanation. “I call you in here to find out why income dropped when sales went up, and you talk about production. So what if production was off? What does that have to do with the sales that we made? If sales go up, then income ought to go up. If your statements cant show a simple thing like that, then were due for some changes in your area!” Required You are required to prepare answers to the tasks set out in the table below. Round your computations to the nearest whole pence. Assessment tasks and criteria Marks 1. Identify, discuss and critically evaluate the advantages and problems of using the following costing methods for internal reporting purposes: A. absorption costing; B. marginal costing. Refer to the CricSmart case as and when necessary. 30% 2. Produce absorption and marginal cost profit statements for CricSmart for the year- ending 2012 and for the year-ending 2013. 20% 3. Using the data provided in the CricSmart case and your profit statements produced in task 2, explain the board’s decision to not pay Mr. Cook a bonus and provide an opposing argument as to why Mr. Cook should receive a bonus for his performance in 2013. 20% 4. Discuss why performance measurement systems and rewards should focus on performance that employees can control. Your answer must critically evaluate financial and non-financial performance measures. 20% 5. Referencing and report presentation 10% You are required to prepare a fully referenced report (between 1,500 and 2,000 words). You must include the word count at the end of the report before the list of references (i.e. the word count excludes the references and exhibits).
Posted on: Sun, 09 Mar 2014 17:10:21 +0000
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