Management accounting (Absorption versus Marginal costing)

Management accounting (Absorption versus Marginal costing)

CricPitch Ltd produces an artificial cricket pitch called the Flexi-pitch and started trading on the 1st January 2013. CricPitch sold 900 Flexi-Pitches and achieved a

net profit margin close to 16% by the end of its first year of trading. Whilst the board of directors were pleased with the overall financial performance they were

disappointed by the sales figures. CricPitch’s accounting records show the following results at the end of December 2013:
Direct materials per Flexi-Pitch £ 300.00
Direct labour per Flexi-Pitch £ 200.00
Variable manufacturing overhead per Flexi-Pitch £ 100.00
Total fixed manufacturing overhead costs £ 200,000
Total fixed selling and administrative costs £ 67,000
Production 1,200 Flexi-Pitches
Sales 900 Flexi-Pitches
Sales price per Flexi-Pitch: £ 1,000.00
There were no beginning inventories in 2013.
On the 1st January 2014, CricPitch hired a new Sales Manager, Mr. Jos Buttler. The board of directors agreed to pay Mr. Buttler a bonus of £10,000 if he achieved a 10%

increase in sales on 2013 providing the business also increased net profit by 10%. CricPitch’s accounting records show the following results at the end of December

2014:
Direct materials per Flexi-Pitch £ 300.00
Direct labour per Flexi-Pitch £ 200.00
Variable manufacturing overhead per Flexi-Pitch £ 100.00
Total fixed manufacturing overhead costs £ 200,000
Total fixed selling and administrative costs £ 67,000
Production 800 Flexi-Pitches
Sales 1,000 Flexi-Pitches
Sales price per Flexi-Pitch: £ 1,000.00
CricPitch use an absorption costing system. Actual overheads were as budgeted At the end of December 2014, Mr. Buttler was delighted to have increased sales by more

than 10% and was sure that the net profit would have equally improved since costs appeared to have
remained the same. Yet he was left dismayed and disillusioned after the board of directors decided that he would not receive any bonus because according to the

financial statements CricPitch had not attained the profit objective. The board of directors described his performance as satisfactory, but would not pay him a bonus

because the overall firm performance target had not been achieved.

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 CricPitch case as and when necessary.
An excellent answer will first define absorption and marginal costing in the author’s own words and will cite appropriate references.
An excellent answer will critically evaluate the advantages and problems of using absorption and marginal costing for internal reporting purposes. Must use relevant

peer reviewed academic
journal articles to support arguments.
30%
2. Produce absorption and marginal cost profit statements for CricPitch for the year ending 2013 and for the year-ending 2014. The profit statements must have an

appropriate title, layout and specify the unit of measurement (£).
10%
3. Using the data provided in the CricPitch case and your profit statements produced in task 2, explain the board’s decision not to pay Mr. Buttler a bonus and provide

opposing arguments as to why Mr. Buttler should receive a bonus for his performance in 2014. You must fully explain the board of directors’ bonus decision and also

present a strong argument as to why Mr Buttler should receive a bonus. An excellent answer will consider all the available information and emphasize the short and

long-term perspective. Must use relevant peer reviewed academic journal articles to support arguments.
30%
4. Discuss why performance measurement systems and rewards should focus on performance that employees can control. Your answer must include a critical evaluation of

financial and non-financial performance measures. An excellent answer will first discuss the concept of controllability with respect to performance
measurement systems and reward. An excellent answer will also recognise and critically evaluate the limitations and benefits of financial and non-financial performance

measures. Must use relevant peer reviewed academic journal articles to support arguments.
20%
5. Referencing and report presentation, In order to achieve all 10 marks students must cite correctly (see Harvard reference guide) and
provide a correct list of references. An excellent report will have relied primarily on academic peer reviewed literature. Inadequate referencing will result in no

marks for this section and a low overall mark for the coursework.
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).

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