Question

LO 2 - Apply a range of management accounting techniques. Case Study 2 –

Watirose PLC

As a result of effective management of costs and a focus on efficiency throughout the business at Waitrose, its Operating profit was £232.6m in 2016. Although it was down 0.8% (down 2.0% on a 53-week basis when compared to 2015), but when excluding property profits it was up 3.9% (up 2.5% on a 53-week basis), despite absorbing a greater share of centrally incurred functional costs. This profit improvement came against a backdrop of exceptionally tough market conditions and continuing food price deflation, as a result of improved productivity in its branches, reduced head office costs and operational improvements in its supply chain.

Waifrose BRAND PRICE MATCH You won' pay more Wematch Tescosprices M groceries promotions on branded

Giving customers additional reasons to visit our shops in an online age is a core part of Waitrose’s approach. In order to generate sustainable returns and review its current cost structure, the organization has approach Westford University College for identifying the most appropriate ‘cost accounting method’ for helping its customers enjoy quality, inspiration and service they trust.

Absorption costing: Absorption costing principles must be used when preparing financial statements for external purposes. One of the key principles of absorption costing is that inventory and units produced must include a share of all production costs, both fixed and variable, incurred in getting them to their present condition.

                                      

Selling price per unit	50.00
Direct materials per unit	8.00
Direct labour per unit	5.00
Variable production overheads per unit	3.00
Details for the months of May and June 2017 are as follows:	May	June
Production of Product A	500.00	380.00
Sales of Product A (units)	300.00	500.00

Fixed production overheads are budgeted at €4,000 per month and are absorbed on a unit basis. The normal level of production is budgeted at 400 units per month.

Other costs
Fixed selling	€4,000 per month
Fixed Administration	€2,000 per month
Variable sales commission	5% of sales revenue

Note: - There was no opening inventory of Product A at the start of May. Prepare an absorption costing income statement.

Marginal Costing -Marginal costing principles are used for internal decision making purposes (short-term). As fixed costs are incurred regardless of the level of activity the purpose of marginal costing is to determine what contribution is been generated (sales less variable costs).

Working 1: Calculate the variable production cost	€
Direct materials	8
Direct labour	5
Variable production o/h’s	3
Variable production cost	16

Q: Prepare an income statement that depicts the changes in profit values & individual cost lines based on the above scenarios presented for Waitrose Plc by examining absorption costing and marginal costing scenarios. Do you believe that costing plays an important role in managing sales & eventual profitability, if so, use a range of accurate management accounting techniques in producing appropriate financial statements. Provide a range of financial reports that interpret data accurately for a range of business activities in Waitrose Plc.

Note. Your research should be referenced using the Harvard referencing, system. Please also provide a bibliography using the Harvard referencing system. The recommended word limit is 1,000–1,500 words.

Answer 1

Working 2: Calculate value of inventory and production (These must be valued at 26 plul Opening inventory Closing inventory May 0 500 units x 261[200 units x 26] 5,200 13,000 380 units x 26]- 9,880 June 1200 units x 26]- 5,200 [80 units x 261 2,080 Working 3: Underlover absorbed fixed production overhead Actual fixed prod o/h 4,000 Fixed o/h absorbed 5,000[500 10] May 4,000 3,800 [380 units *10] 1,000 (over absorbed 200 (under absorbed)

Absorption costing profit statement May May June June Sales Less cost of sales Opening inventory (w2) Production (w2) Closing inventory (w2) 15,000 25,000 5,200 9,880 13,000 (5,200) (7,800) 2,080 (13,000) (200 11,800 (Under)/over absorbed Fixed prod o/h (w3) Gross profit Less expenses Variable sales commission Fixed administration Fixed selling Net profit 1.000 8,200 750 2,000 1,250 2,000 4,000 6,750) 4,000 7.250) 4,550 1,450

Marginal Costing Marginal costing principles are used for internal decision making purposes (short-term) As fixed costs are incurred regardless of the level of activity the purpose of marginal costing is to determine what contribution is been generated (sales less variable costs) Using the previous example prepare a marginal costing profit statement for the months of May and June Working 1: Calculate the variable production cost Direct materials Direct labour Variable production o/h's Variable production cost 8.00 5.00 3.00 16.00 Working 2: Calculate value of inventory and production (These must be valued at 16 plu] Opening inventory Production Closing inventory 3,200 1,280 [500 units x 16]F [200 units x 16] 8,000 May June [200 units x 16 3,200 [380 units x 1680 units x 16] 6,080

Marginal costing profit statement May May June June Sales Less variable costs Opening inventory (w2) Production (w2) Closing inventory (w2) 15,000 25,000 3,200 6,080 8,000 ( (1280) (8,000) (3,200 (4,800) Variable sales commission Contribution Less fixed costs Fixed production ixed administration Fixed selling Profit (750) 9,450 (1250 15,750 4,000 2,000 4000 (10.000) 4.000 (10.000) 4,000 2,000 5,750 (550)

Difference in profit figures calculated under absorption and marginal costing principles: The difference between the profit figures calculated under absorption and marginal costing principles is caused by the treatment of fixed production overheads. In marginal costing the full amount of fixed production overheads is written off in the period that it occurs. In absorption part of the fixed production overheads is carried between accounting periods as part of inventory valuation:s

Reconciliation of profit fiqures May 1,450 June Profit under absorption 4,550 Difference in units of inventory * fixed production overhead p/u (2.000) [200 units 10] 1.200 [120 units *10] Profit under marginal costing (550) 5,750 When the number of units produced is higher than the number of units sold absorption profit will be higher than marginal profit When the number of units produced is less than the number of units sold absorption profit will be lower than marginal profit.