Question

(a) Shebbit’s is a leading specialty retailer and the world’s largest direct marketer of hunting, fishing, camping and related outdoor merchandise. Founded in 1961, Shebbit’s is one of the most well-known outdoor recreation brands in the world and it is recognized as the world’s foremost outfitter.

The Hong Kong office, established in 2005, includes a supply chain team that is responsible for social compliance audits. These audits are conducted to make sure that Shebbit’s vendor’s, factories and suppliers are in compliance with requirements in social responsibility.

Esther Yeung, manager of the supply chain team, knows that cost data is crucial in everyday decision making in the supply chain team. Some of her challenges involves answering questions from her management such as, “How we can increase the proportion of unannounced audits while keeping the budget unchanged, though unannounced audits cost more?’ And any other budgeting and costing related questions.

In order to answer these questions, Esther prepares a cost analysis every time she plans an audit trip. She has found that identifying factories located in the same region and combining them into a single audit trip increases output while keeping the budget constant. She has also been able to outsource some audits to qualified third parties.

a) Critically explain how a budget can help answer Esther’s question for her business.

(b) Explain the features of just-in-time manufacturing system.

(c) Explain the difference between the variable and absorption costing methods and analyze which method(s) are required for external reporting and internal reporting.

Answer 1

ANSWER:

[a] Budget :

• It is a quantitative expresssion of a plan for a defined period of time. it may include planned sales volume and revenues,resource quantity,cost and expence,asset, liability and cash flows.
• Budget reflect plan and that planning should have taken place before budgets are prepared.
• Budgets plans are quantified and responsibility is assigned to the persons who are responsible for execution of plan.
• The budget is one way to direct and coordinate business activities and units to achieve stated targets of performance.
• Actual performance of an operation can be compared against the planned targets.
• Comparing actual results to the plan also helps prevent unplanned expenditures.

[b] Just -in-Time System [JIT]:

JIT is an inventory management system wherein the material,or the products are produced and acquired just a few hours before they are put to use. It is adopted by the firms, to reduce the unnecessary burden of inventory management, in case the demands is less than the inventory raised.

Features of JIT:

1} Long Term Perspective -

JIT system require a long term focus for production,development and supply needs. changes in product offers, raw material specification,and even production levels must be established and coordinated with suppliers. Securing supplies,locking in dedicated transpoirtation and staffing requirements must be done in advance so production is not hampered by resource constraints.Some JIT benefits such as higher customer satisfaction,cost saving and lower manufacturing cost may be realised over a longer period.

2} Automated Purchasing -

An automated purchasing system supports the intence coordination needed to ensure a study,consistent stream of materials for production. Agreements and contracts are established with a limited number of suppliers,and the ordering and purchasing process is automated based on the agreements. Generally production levels,establish lead times and current inventory levels are automatically calculated within the production processing system. When supplies are needed,an electronic message is sent to the supplier forreorder level and requirements.

3 } Strong Relationships -

JIT systems exhibits strong relationships between suppliers and the manufactureres. Suppliers are often viewed as an extention of the primary company. communications and information are open and free flowing to help support tight supply cocordination. At a minimum delicated product managers are assigned in each business to coordinate purchasing,planning and transportation requirement. These strong relationships are backed by long term equipments and contracts.

4} Efficiency -

Efficiency in supply process is essential for JIT system,but these efficiencies often spill over to the rest of the production and supply process. Since there is little room for errors,raw materials and products must confirm to strict standards. Employees are generally trained to spot errors early in production process and instructed to take corrective actions. Multiple quality checks help ensure a efficient production line.

5} Constant Improvements -

JIT manufacturing inventory process rely on constant improvements to help drive more simplistic operations. These improvements may come in the form of developing foolproof manufacturing steps establishing systems to identify production errors quickly,they may also eliminate steps that do not add value to the product.

[c] DIFFERENCE BETWEEN VARIABLE AND ABSORPTION COSTING METHOD

BASIS	VARIABLE COSTING	Absorption Costing
Costs	It includes only variable cost directly incurred in production.	It includes both variable costs and fixed cost relating to production.
Alternative Names	It is also known as marginal costing or direct costing.	It is also known as full costing.
Internal \ External use	It is generally used for internal reporting purposses. managerial decesions are taken on the basis of variable costing.	It is used for reporting to the external stakeholders.
Relevance	It is used for comparing the profitability of different product lines.The organisations can carry out an analysis based on cost,volumes and profits.	it is used for calculating per unit cost based on all cost including fixed overhead cost.
Reporting	It is based on internal specifications of reporting and presentation	Based on external reporting standards given by external agencies.
Inventory	It involves only variable production cost to be assigned	It involves considering all production cost and including them in inventory and work process.
Contribution	It calculates contribution which is the difference between sales and variable cost of sales	it is used for calculating profit

• Absorbtion costing is required for external reporting purpose.
• Variable costing is used for internal management reporting purpose.