Question 1
a) To: Harry Smith, Managing Director
From: Management Accountant
Date: 10/01/2025
Subject: Gamma Flooring optimal production plan
Dear Managing Director,
I am writing in response to the memo I received regarding my service record. I appreciate
the feedback provided and would like to address the points raised in the memo.
From the figure that the email provides, this is the figures of each product:
A B C D
Selling price 32 35 55 48
Direct material 5 6 9 7
Direct labour 6 6 12 12
Variable overhead 3 3 6 6
Fixed overhead 9 9 18 18
Profit 9 11 10 5
Labour Hours per unit 1 1 2 2
Machine Hours per unit 4 3 4 5
Production plan:
Calculating variable costs is crucial for understanding cost behavior, determining product
profitability, setting prices, and conducting break-even analysis (Wanns, 2024). Variable
costs, which change with production levels (e.g., raw materials and direct labor), help calculate
the contribution margin and guide decisions on resource allocation, cost control, and profit
maximization.
From that, the contribution margin/unit divided machine hour equal to the rank. They help
determine the profitability and efficiency of each product relative to the available resources.
When resources like machine hours are limited, it is crucial to allocate them to the products that
provide the highest return per unit of the constrained resource (in this case, machine hours). By
ranking products based on their contribution margin per machine hour, companies ensure that the
scarce machine hours are used to maximize overall profitability. The rank determined which
product gain more profit for the company so that profit will be more prioritized.
=> The prioritized products are C, B, D, A respectively.
The machinery can operate at maximum 2,500 hours per week
Allocate the machine hours:
Qc = 250 (units) => MC needed = 250 x 4 = 1000 => MC left = 2500 - 1000 = 1500 (hours)
Qb = 190 (units) => MC needed = 190 x 3 = 570 => MC left = 1500 - 570 = 930 (hours)
Qd = 300 (units) => MC needed = 300 x 5 = 1500. However, the remained MC is not sufficient
=> Qd = 930: 5 = 186 (units)
=> Qa = 0 (units)
The optimal production plan is 250 C, 190 B, 186 D (units) respectively.
A B C D
Demand 250 190 250 300
Variable cost per unit 14 15 27 25
Contribution margin/ unit 18 20 28 23
Contribution
margin/machine hour 4,5 6,7 7 4,6
Rank 4 2 1 3
Machine Hours 0 570 1.000 930
Units 0 190 250 186
The variable cost per unit = Direct material + Direct labour + Variable cost (Sharma, 2024)
The contribution margin per unit = Selling price - Variable cost unit (Schmidt, 2024)
Profit statement:
A B C D Total
Revenue 0 6.650 13.750 8.928 29.328
Variable costs 0 2.850 6.750 4.650 14.250
Fixed assets 9.000
Profit 6.078
Revenue = Selling price x Production unit.
For the fixed assets, The fixed overhead is absorbed on budgeted labour hours of 1000 per
week so that the fixed asset is 1000 x 9 = 9000 £s.
Fixed costs play a key role in break-even analysis, pricing decisions, and profit planning
(Datta, 2017). Efficient use of fixed-cost resources, like facilities and equipment, lowers the per-
unit cost and improves profitability, making them essential for operational stability and long-
term success.
The profit = Renvenue – Variable cost – Fixed assets = 29328 – 14250 – 9000 = 6078 £.
b) The missing units consist of 250 A and 114 D units. The short-term solution is asking staff to
work overtime. The overtime would be paid at 50% above the labour rate and the variable cost
would be expected to increase to labour costs (which means the fixed cost will not be changed).
The labour cost of overtime unit would be:
A = 6 + (50% x 6) = 9 £s
D = 12 + (50% x 12) = 18 £s
The variable overhead will increase proportion to the labour cost:
A = 3 + (50% x 3) = 4.5 £s
B= 6 + (50% x 6) = 9 £s
A D Total
Demand 250 114
Incremental revenue 8.000 5.472 13.472
Incremental cost 4.625 3.876 8.501
Incremental profit 3.375 1.596 4.971
Labour cost 9 18
Variable cost unit 18,5 34
Variable overhead 4,5 9
The variable cost unit = variable overhead + labour cost + direct material
The incremental cost = Variable cost unit x Demand (the missing units)
The incremental revenue = Demand x Selling price.
Incremental profit = Incremental revenue – Incremental cost
c) Benefits:
Outsourcing helps businesses overcome production capacity limitations by leveraging external
suppliers’ resources. For example, Apple Inc. relies heavily on outsourcing production to
manufacturers like Foxconn, allowing it to meet global demand for its products without investing
in massive in-house manufacturing infrastructure (Ellitan, 2024). This flexibility is especially
beneficial for handling seasonal or fluctuating demand, as suppliers can scale production up or
down as needed, enabling Apple to focus on innovation and product development.
Cost savings are another key benefit of outsourcing. Companies like Nike outsource the majority
of their production to countries with lower labor costs, allowing them to focus on design,
marketing, and branding (Leavy, 2024). By avoiding the substantial fixed costs of owning
factories and instead benefiting from suppliers’ economies of scale, Nike has maintained its
profitability and market dominance. This also reduces ongoing overhead costs like salaries,
utilities, and maintenance associated with in-house production, resulting in a more cost-effective
approach
Additionally, outsourcing allows companies to focus on their core activities by delegating
non-core tasks to suppliers. For instance, WhatsApp, during its early growth stages, outsourced
app development to a team in Russia while its core team concentrated on user experience and
growth strategies (Reardon, 2021). This approach enabled WhatsApp to remain lean, efficient,
and focused on strategic priorities, leading to its eventual acquisition by Facebook for $19
billion.
Limitations:
Outsourcing can sometimes negatively affect a company’s brand image, particularly if
suppliers fail to meet quality standards or engage in unethical practices. For instance, Nike faced
significant backlash in the 1990s when reports surfaced about poor working conditions and child
labor at some of its outsourced manufacturing facilities. Such incidents can harm a company’s
reputation and erode customer trust (Leavy, 2024). Similarly, outsourcing customer service to
countries with language or cultural barriers has, in some cases, led to dissatisfaction among
customers who expect seamless support aligned with the brand's values.
Outsourcing can risk confidentiality problem since it involves sharing sensitive information,
such as product designs, intellectual property, or trade secrets, with external suppliers. A well-
known example is the Dell and ASUS case, where ASUS initially started as a supplier for Dell,
manufacturing components (Chhabria, 2021). Over time, ASUS leveraged the knowledge and
expertise gained to launch its own competing products in the same market, eventually becoming
a direct competitor to Dell. This highlights the risk of outsourcing to suppliers who could
potentially become rivals, undermining the company’s competitive advantage.
Relying too heavily on external suppliers can create significant risks if the supplier faces
disruptions, raises prices, or fails to deliver. For instance, Boeing’s 787 Dreamliner project
encountered delays and cost overruns due to its heavy reliance on an outsourced global supply
chain (Gudmundsson, 2017). Some suppliers struggled to meet quality standards or deadlines,
causing cascading issues across the entire project. Such dependencies can reduce a company’s
control over production and introduce vulnerabilities in the supply chain.
In conclusion, Gamma Flooring may be able to meet unmet demand for items like A and D while
concentrating internal resources on higher-margin products like B and C through outsourcing,
which would help the company overcome its manufacturing capacity constraints. Benefits
include the opportunity to concentrate on core operations, potential cost savings, and the ability
to overcome capacity restrictions. However, there are hazards associated with outsourcing, such
as problems with confidentiality, quality control, and reliance on suppliers, all of which may
have an effect on the stability of operations and the reputation of a business. Yet, to make sure
outsourcing fits with Gamma Flooring's long-term objectives, a comprehensive cost-benefit
analysis and strong supplier management techniques are necessary.
I am committed to my role and the success of the team, and I am open to any feedback or
suggestions for improvement. I would welcome the opportunity to discuss this matter further in
person and work towards a resolution.
Thank you for your attention to this matter. I look forward to hearing from you soon.
Sincerely
Management accountant, Do Duc Manh
Question 2
a) Sale budgets (in £s and units):
Renvenue = Sales unit x Unit price
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total Year
Sales unit 28.000 23.000 17.000 32.000 100.000
Unit price (£) 420 420 460 460
Renvenue (£) 11.760.000 9.660.000 7.820.000 14.720.000 43.960.000
Production budget (in units):
Opening stock 8.500 2.300 1.700 3.200
Production
Closing stock 2.300 1.700 3.200 4.500
Sales (Budget
production) 21.800 22.400 18.500 33.300 96.000
Budget production = Sales units – opening stock + closing stock
Stocks / Inventories on 31st December 2023 are expected as follows: finished units – 8,500 units
so that the opening sock of quarter 1 of 2024 would be 8500 units. The opening stock of the next
quarter is the closing stock of the previous quarter. The closing stock of present quarter the is
10% finished units of the next quarter sales units. For quarter 4, the closing stock is expected to
be 4500 since the sales for each quarter in 2025 are expected to be 45000 units.
Material usage budgets (units):
Component R 87.200 89.600 74.000 13.3200 384.000
Component T 65.400 67.200 55.500 99.900 288.000
Each unit of strong-bond glue requires 4 units of component R and 3 units of component T
Material R = 4 x Budget production (units)
Material T = 3 x Budget production (units)
Production cost budget
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total Year
Component R 392.400 403.200 333.000 599.400 1.728.000
Component T 163.500 168.000 138.750 249.750 720.000
Material 555.900 571.200 471.750 849.150 2.448.000
Budgeted labour cost 654.000 672.000 555.000 1.068.930 2.949.930
Budgeted variable overhead 196.200 201.600 166.500 299.700 864.000
Total production cost 1.406.100 1.444.800 1.193.250 2.217.780 6.261.930
Production cost budget (in £):
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total year
Component R 392.400 403.200 333.000 599.400 1.728.000
Component T 163.500 168.000 138.750 249.750 720.000
Material 555.900 571.200 471.750 849.150 2.448.000
Budgeted labour cost 654.000 672.000 555.000 1.068.930 2.949.930
Budgeted variable
overhead 196.200 201.600 166.500 299.700 864.000
Total production cost 1.406.100 1.444.800 1.193.250 2.217.780 6.261.930
Budgeted labour cost = Budget production x Labour hours x wage paid/hour
The budgeted variable overhead = Variable overhead cost x Budgeted production
Total production cost = Budgeted material + Budgeted labour cost + Budgeted variable
overhead + Budgeted fixed overhead.
(Drury, 2012)
The cost for component R and T is 4.5 and 3.5 (£s) respectively.
Material R = Material usage R x 4.5
Material T = Material usage T x 3.5
It take 5 labour hour to combine 2 component into a finished material and the wage is 6 £/hour.
However, there is an increase in wages in the quarter 4 for 7% salary costs. Which means that the
wage in quarter 4 is expected to be 333000 x 5 x (6 + 7% x 6) = 1068930 (£s).
Variable Overhead costs are expected to be £9 per unit for the whole year of 2024.
However, in this case, production overhead costs are excluded from the budget.
b) A cumbersome process that takes a lot of management time
The budgeting process for Strong Bond Ltd is highly detailed, involving precise calculations for
sales, production, material usage, and costs across multiple quarters. This complexity requires
significant input from managers across various departments, such as finance, operations, and
sales, which consumes a considerable amount of their time (Kaplan, 2021). Additionally,
collecting, verifying, and analyzing data for multiple components, like material costs, labor rates,
and inventory levels, can delay the process. This diverts management's attention from strategic
decision-making and innovation to administrative tasks, leading to inefficiencies in resource
allocation.
To resolve this problem , I suggested investing in cloud-based budgeting software such as
Adaptive Insights or Prophix. Cloud-based budgeting software platforms can automate data
entry, integrate with existing financial systems, and generate forecasts in real-time (Adeleke,
2024).
Plan:
Implement Prophix, a cloud-based budgeting software, at a one-time implementation cost of
£30,000 and an annual subscription fee of £10,000. Automate the sales forecast data by linking
the CRM system to the software to update quarterly sales in real time.
If automating reduces the budgeting time for 10 managers from 30 hours each per quarter to 10
hours, it saves 20 hours per manager per quarter. At an average manager hourly wage of £40, this
results in savings of 10 × 20×4×40=£32,00010 \times 20 \times 4 \times 40 =
£32,00010×20×4×40=£32,000 annually
Outcome: The system pays for itself within the first year through saved time and reduced
administrative overhead.
Concentrating in Majority on Short-Term Financial Control
The current budgeting approach is primarily focused on immediate financial metrics, such as
quarterly sales revenue, production costs, and labor expenses (Drury, 2012). While these metrics
are important, they emphasize short-term control over costs and profitability, potentially
overlooking long-term goals like market expansion, product innovation, or investments in
technology. This narrow focus may lead to underinvestment in initiatives that could provide
sustained competitive advantages, limiting the company's ability to adapt to market changes or
exploit new opportunities.
Plan:
10% of the £43,960,000 total revenue forecast for 2024 should go towards R&D and
technological advancements. The total is £4,396,000. The allotment should be divided as
follows:
£2,000,000 will be used to create a new environmentally friendly glue recipe that is expected to
boost sales by 10% by 2026.
To increase manufacturing efficiency, £2,396,000 will be spent on technology enhancements that
should cut material waste by 5%, saving roughly £2,448 000 × 5% = £122,400.
£2,448,000 × 5% = £12,400 per year.
Result: Long-term cost savings and increased market competitiveness.
Having Undesirable Effects on the Motivation of Managers
The budget process can negatively impact manager motivation if they feel that the goals are
unrealistic or rigidly enforced. For example, setting high production targets while simultaneously
emphasizing cost reductions may create pressure, making managers feel overburdened and
underappreciated. Furthermore, if managers perceive that their input is not valued during the
budget-setting process, it can lead to frustration and disengagement. Over time, this can foster a
culture of compliance rather than collaboration, where managers prioritize meeting numbers over
innovation or operational improvements.
Plan:
Organize Quarterly Budget Planning Workshops where department heads and managers
actively participate. Budget a £5,000 allocation per workshop for logistics, materials, and meals.
Schedule the workshops one month before each quarter:
February 2024 for Q2 budgeting
May 2024 for Q3 budgeting
August 2024 for Q4 budgeting
November 2024 for Q1 2025 budgeting
During the workshops, present initial sales and production targets, then adjust based on
managerial input. For example, if the initial Q2 sales target is 23,000 units but managers
recommend increasing production to 24,000 units to capitalize on expected demand, update the
production and material budgets accordingly.
Outcome: Improved engagement, more accurate budgets, and enhanced morale among
managers.
References
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