Company Name : Patio Grill Sdn Bhd

Industry : Manufacturing
Nature of Business : Manufacturing and selling of high end Gas Barbeque Grill
Products : 1. Standard Grill
2. Deluxe Grill
3. Ultimate Grill
Company Size : Medium Size (Less complex)

Based on the Master Plan for 20X1 and financial report year ended 20X0, the following data were identified :

PATIO GRILL SDN BHD

Products TOTAL
Cost Behavior Standard Grill Deluxe Grill Ultimate Grill
Master Plan 20X1
Planned annual Production (i) 10,000 8,000 2,000 assumption :
Volume (Qty) Sales Budget
(Qty) =
Production
Budget (Qty)

Budgeted Direct Labour Hours (ii) 90,000 88,000 26,000 204,000

(hrs)
Budgeted no. of Hits (iia) = (iiia)*(i) 90,000 88,000 26,000 204,000
Budgeted machine hours (iib) = (iiib)*(i) 100,000 96,000 34,000 230,000
Budgeted no. of production runs (iic) = (i)/(iiic) 80 80 40 200

Direct Labour hours per unit (iii) 9 11 13

(hrs)
Budgeted no. of Hits per unit (iiia) 9 11 13
Machine hours per unit (hrs) (iiib) 10 12 17
No. of units per production run (iiic) 125 100 50

Selling Price Per unit (iv) $ 585 $ 705 $ 940

Direct Material per unit (v) VC $ 100 $ 120 $ 180
Direct Labour per hour (vi) VC $ 20 $ 20 $ 20
POHR per labour hour $ 24 $ 24 $ 24
POHR per unit $ 216 $ 264 $ 312

Budgeted Manufacturing (vii)

Overhead
Indirect Material FC $ 223,000
Indirect Labour FC $ 853,000
Depreciation on Factory FC $ 1,903,000
Depreciation on Machinery FC $ 1,483,000
Insurance FC $ 106,000
Utilities SEMI-VC $ 328,000
$ 4,896,000
Selling Expenses: (viii)
Market Research Expenditure FC $ 200,000
Promotion and Advertisement SEMI-VC $ 407,000
$ 607,000

POHR Total Budgeted Cost Driver

Overhead Cost
=Total Budgeted Overhead Budgeted Budgeted Direct $ 24
Cost/ Total Cost Driver Manufacturing Labour Hours
Overhead (hrs)

Production Capacity:
1,000 1,000 400
2,000 2,000 800
4,000 4,000 1,200
6,000 6,000 1,600
Planned Production Volume 8,000 8,000 2,000
20X1
Planned Production Volume 10,000 10,000 2,400
20X1
12,000 12,000 2,800
Maximum capacity 14,000 14,000 3,200

Scenario I:
Company XYZ Sdn Bhd wanted to place a special order of 500 units of Ultimate Grill at below market price of $900 per unit in December 20X1.
Assuming that Patio Grill S/B as at December 20X1, only managed to produce and sell at the budgeted volume of 20X1, what would be
management's decision on the special order?
 Scenario I:
Company XYZ Sdn Bhd wanted to place a special order of 500 units of Ultimate Grill at below market price of $900 per unit in December 20X1.
Assuming that Patio Grill S/B as at December 20X1, only managed to produce and sell at the budgeted volume of 20X1, what would be
management's decision on the special order?

Budgeted Production 10,000 8,000 2,000

MAximum capacity 14,000 14,000 3,200 ==> excess capacity

Absorption Costing Statement - Ultimate Special Order Normal Price Variance

Grill
Qty $/unit Total Qty $/unit Total
Sales 500 $ 900 $ 450,000 500 $ 940 $ 470,000
(-) Cost of Goods Sold
Direct Material $ 180 $ (90,000) $ 180 $ (90,000)
Direct Labour DL hour X DL rate $ 260 $ (130,000) $ 260 $ (130,000)
Direct Overhead POHR X DL hour $ 312 $ (156,000) $ 312 $ (156,000)
$ (376,000) $ (376,000)

Gross Profit $ 74,000 $ 94,000

(-) SGA (not calculated
because there
is no POHR)

Net Profit before tax $ 74,000 $ 94,000 $ (20,000)

Analytical Review:
Patio Grill S/B Ultimate Grill production is still below maximum capacity even by accepting the special order. (no opportunity cost)

Even though Patio Grill will lose $20,000 in contribution margin selling at $900 per UltimateGrill, Patio Grill S/B still make a positive Gross Profit
margin by accepting the special order and furthermore.
The special order will increase the potential Net profit before tax by $74,000, if Patio Grill S/B were to accept the special order.
DECISION : ACCEPT SPECIAL ORDER AT $900 per Ultimate Grill.
 Scenario II:
Company ABC Sdn Bhd insisted on placing a special order of 550 units of Ultimate Grill at below market price of $920 per unit.

Currently, Patio is producing and selling at its maximum capacity of Ultimate Grill, hence there is NO more room to meet more sales as at ==> limited capacity ==> opportunity cost
December 15th, 20X1.

Absorption Costing Statement - Ultimate Gril Special Order Normal Price Variance
Qty per unit TOTAL Qty per unit TOTAL
Sales 550 $ 920 $ 506,000 550 $ 940 $ 517,000
(-) Cost of Goods Sold
Direct Material $ 180 $ (99,000) $ 180 $ (99,000)
Direct Labour DL hour X DL rate $ 260 $ (143,000) $ 260 $ (143,000)
Direct Overhead POHR X DL hour $ 312 $ (171,600) $ 312 $ (171,600)
Total Direct Cost $ (413,600) $ (413,600)

Gross Profit $ 92,400 $ 103,400

(-) Opportunity Cost:   $ (103,400)
  Sales at full price   $ 517,000
  Less: COGS   $ (413,600)
  Gross Profit at full price   $ 103,400

(-) SGA
Net loss before tax $ (11,000) $ 103,400

Analytical Review:

DECISION : REJECT SPECIAL ORDER

Scenario III:
Management has conducted engineering cost estimation and has identified that Machine Setup activities for Ultimate Grill production line is a non-value adding
activity, hence the management proposed the activity to be outsourced. Management anticipates that by outsourcing Direct Labour hourfor Machine Setup for
Ultimate Grill could be saved by $2.00 per unit.

Setting Machine Sdn Bhd an expert in setting up machinery for Ultimate Grill production line, has offered to $35,000 for the year.

How will management present the proposal to BOD?

Activity Based Costing Statement - Ultimate Grill Outsource of Machine Setup In-House of Machine Setup Variance
$/unit Qty Total $/unit Qty Total
Sales $ 940 2,000 $ 1,880,000 $ 940 2,000 $ 1,880,000
(-) Cost of Goods Sold:
Direct Material $ (360,000) $ 180 2,000 $ (360,000)
Direct Labour $ (520,000) $ 260 $ (520,000)
 Cost Pool Cost Pools
Direct Overhead Allocation Amount Cost Driver Cost Pool Rate Cost Pool Rate
Assembling 50% $ 2,448,000 Direct Labour $ 156.00 $ (312,000) $ 156.00 $ (312,000)
Machine Setup 30% $ 1,468,800 Machine Hours $ 17.50 $ (35,000) $ 108.56 $ (217,127) $ 182,127
Packaging 15% $ 734,400 Direct Labour $ 46.80 $ (93,600) $ 46.80 $ (93,600)
Quality Check 5% $ 244,800 Machine Hours $ 18.09 $ (36,188) $ 18.09 $ (36,188)
$ 4,896,000

(+) Cost Saving

  Direct Labour $ 2.00 4,000.00 $ - $ 4,000

Gross Profit $ 527,212 $ 341,085 $ 186,127

(-) SGA
Net Profit before tax $ 527,212 $ 341,085 $ 186,127

Analytical Review:
Patio Grill will increase overall Gross Profit by $186,127, if Machine Setup Process is Outsourced.
Increase in GP is due to cost saving on Machine Setup Activity and Direct Labour cost of $182,127 and $4,000 respectively.

DECISION : OUTSOURCE MACHINE SETUP ACTIVITY

Activity Based Costing Statement - Ultimate Grill Shutdown Shutdown Normal Operation Variance
$/unit Qty Total $/unit Qty Total
Revenue $ - 0 $ - $ 470 2,000 $ 940,000
(-) Cost of Goods Sold:
Direct Material $ - $ - $ 180 $ (360,000)
Direct Labour $ - $ - $ 260 $ (520,000)
Cost Pool Cost Pools
Direct Overhead Allocation Amount Cost Driver Cost Pool Rate Cost Pool Rate
Assembling 50% $ 2,448,000 Direct Labour $ 156.00 $ (312,000)
Machine Setup 30% $ 1,468,800 Machine Hours $ 108.56 $ (217,127) $ 108.56 $ (217,127) unavoidable
Packaging 15% $ 734,400 Direct Labour $ 46.80 $ (93,600)
Quality Check 5% $ 244,800 Machine Hours $ 18.09 $ (36,188) $ 18.09 $ (36,188) unavoidable
$ 4,896,000
`
 Gross Loss $ (253,315) $ (598,915) $ 345,600
(-) SGA
Net Profit before tax $ (253,315) $ (598,915) $ 345,600

Analytical Review:
Patio Grill S/B in normal production of Ultimate Grill will be facing Gross Loss of RM598,915.
Should the company decides to shutdown, there will still be unavoidable cost of RM253,315. Furthermore, budgeted savings due to shutdown is RM345,600

DECISION : SHUTDOWN Ultimate Grill production line

Scenario V:
Seeing that the competitor has introduced absolute substitute to Ultimate Grill, BOD of Patio Grill has proposed to value add the current Ultimate Grill and charge at a premium
price (50% more than current price), hence creating a new market segment.

Management proposed that Ultimate Grill solid colored metal covered to be changed to an artistic design by engaging known artists to design the metal cover for $350 per unit.

Management is required to tabulate the proposal using relevant costing statement.

Target Costing Statement - Activity Based Further Process Normal Operation Variance
$/unit Qty Total $/unit Qty Total
2000 2000
Cost of Goods Sold:
Direct Material $ 180 $ 360,000 $ 180 $ 360,000
Direct Labour $ 260 $ 520,000 $ 260 $ 520,000
Cost Pool Cost Pools
Direct Overhead Allocation Amount Cost Driver Cost Pool Rate Cost Pool Rate
Assembling 50% $ 2,448,000 Direct Labour $ 156.00 $ 312,000 $ 156.00 $ 312,000
Machine Setup 30% $ 1,468,800 Machine Hours $ 108.56 $ 217,127 $ 108.56 $ 217,127
Packaging 15% $ 734,400 Direct Labour $ 46.80 $ 93,600 $ 46.80 $ 93,600
Quality Check 5% $ 244,800 Machine Hours $ 18.09 $ 36,188 $ 18.09 $ 36,188
Artistic Design process $ 350.00 $ 700,000
$ 4,896,000

TOTAL COST $ 2,238,915 $ 1,538,915

SALES $ 1,410.00 $ 2,820,000 $ 940 $ 1,880,000

Gross Profit $ 581,085 $ 341,085 $ 240,000

(-) SGA
Net Profit before tax

Analytical Review:
Patio Grill will increase overal profit by $240,000 if UG is further processed.
Increase is mainly due to increase in Selling price to $1,410 (50% more than original price).
Despite additional artistics design process cost of $700,000
DECISION : FURTHER PROCESS