Cost accounting (Case study calculation)

Cost Analysis and Applications

Case Study Assignment

Killies Scuba Diving Case

Jerry and Roy were relaxing with some friends on the patio of Jerry’ new apartment in Surfer’s Paradise, Queensland, Australia. Just that morning they had looked over their business’s profit statement and were feeling very pleased with what they saw. Killies Scuba Diving (Killies), the business they’d started in 2000, had made profits for the last six months that exceeded their expectations. While both were pleased that their business had apparently done so well, they admitted that they didn’t really know why, because they had experienced a number of issues throughout the period1 that were expected to negatively affect profit.

“You know guys, I’d be happy to undertake a variance analysis of your profit results,” said De Ling, the business’s management accountant and a close friend of both Roy and Jerry. “It can really help you understand why the profit you made differed from what you budgeted at the start of the period.”

Jerry looked at Roy and nodded. “Why not,” he said. “I guess it’s about time we became a little more professional now we’re business tycoons.”

And so it was decided that De Ling would analyse Killies’s profit to find out how Roy and Jerry managed to do so well.

Business Background

Killies Scuba Diving provides scuba diving courses around Surfers Paradise in Queensland, Australia. The business began in 2000 with the intention of bringing scuba diving into the lives of as many people as possible. Both Jerry Tayler and Roy Hansen had dived around the ocean beaches of Surfers Paradise since they were small children. After finishing school both became scuba diving instructors. After working for a number of years for another company, they decided to take a risk and open up their own business. As Roy owned a dog called Killie at the time, they decided to call the business Killies Scuba Diving.

The Scuba Diving Open Water Course

The scuba diving course offered by Killies is a 3 day program that allows beginner scuba divers to develop their scuba diving skills. It is accredited by PADI (The Professional Association of Diving Instructors), the world’s leading scuba diving training organisation. The Open Water Course is divided into three segments.

• Academic training – Giving students the basic principles and knowledge needed for safe and enjoyable diving.

• Confined pool training – Which will teach students the basic skills of diving.

• Open Water training – Allows students to demonstrate their mastery of these skills and practice them in a typical diving environment.

At the successful completion of the course participants are presented with the PADI Open Water Certification card (1 card). Information relating to this course is contained in table 1.

Standard Costs at Killies Scuba Diving

De Ling has collected the following standards for the first six months of 2016 (contained in tables 2 and 3). De Ling has also reconstructed the budgeted profit statement for both courses and this is provided in the table 4.

6 months ended 30 June, 2016

Table 4: Killies Scuba Diving

Budgeted Profit Statement

Killies Scuba Diving – Actual Results

For the six months ended 30 June, 2016 Killies Scuba Diving earned profit that was higher than budgeted for its Scuba Diving course. Table 5 provides details of actual profit.

Table 5: Killies Scuba Diving

Actual Profit Results

Six months ended 30 June, 2016

De Ling has collected information relating to Killie’s operations in the first half of 2016 to help her understand why budgeted and actual profit was different. This information is as follows.

• The number of courses undertaken was actually 3364.

• Killies actually charged participants on average $375 per course.

• A batch of certification cards was unusable as Killies’s name was spelt incorrectly. PADI, which provides the certificates, is denying responsibility saying that Killies provided the incorrect spelling. Killie’s new administrative assistant, Mia Fault, has admitted that she might have been responsible. As a result of this mistake, 403 additional certificates had to be purchased to replace those that were unusable.

• PADI unexpectedly increased the price of certification cards. This resulted in an actual cost of these cards being on average $1.50 more than standard.

• During the period Killies decided to use a different printer for its Open Water Manuals in order to reduce costs. Actual costs per manual were $2.50 lower than standard. However when the manuals were delivered there was concern that the quality of the manuals was not satisfactory.

• Concern about the quality of the Open Water Manuals was warranted, as a number of participants’ manuals fell apart during their courses and had to be replaced free of charge. This resulted in the average number of manuals used per participant being 25% higher than standard.

• Use of the Dive Logbook was 15% more than standard for the number of participants taking courses. This occurred because a number of participants lost their Logbooks and Killies replaced them free-of-charge.

• The cost of each Dive Logbook was on average, 10% higher than standard. This occurred because Killies made improvements to these materials during the period, which were highly valued by the participants.

• During the period Logo Clothes, Killie’s regular supplier of its t-shirts, experienced a fire in its warehouse. As a result Killie had to find another supplier for some of these items. The new supplier, T-shirts R Us, was substantially more expensive than Logo Clothes. Consequently the purchase price per t-shirt was on average $3 more than expected.

• A large number of the t-shirts provided by T-shirts R Us were far too small for any of Killie’s participants. The supplier refused to allow the items to be returned as they stated that Killies requested that size. While Killies was sure that this was not the case, it decided not to pursue the matter. Consequently, during the period Killies gave away these t-shirts to any participants who wanted them. This resulted in the average quantity of t-shirts per participant being 30% higher than anticipated.

• Due to particularly bad weather during the period 14 courses had to be postponed and rescheduled. As part of the employment contracts with its instructors, Killies has agreed to pay instructors for both the standard hours associated with the initial course and the rescheduled course. Hence for every course that had to be rescheduled, instructors ended up being paid for two courses. This caused the actual average instructor hours per course to increase from standard. No other additional costs occurred as a result of the postponement of the 14 courses.

• Killies decided to increase the rate it paid per hour to its instructors to ensure it was paying its instructors competitive rates. As a result the actual labour rate per hour for Instructors was $32 per hour.

• Due to construction works on the roads taken by Instructors when travelling to the courses during the period, average distance travelled per course was 6 kilometres longer than expected.

• Petrol prices per litre increased substantially during the period, which resulted in the petrol cost per kilometre travelled increasing by 25% from standard.

• Due primarily to the problems associated with the Open Water Manuals, Logbooks and t-shirts (outlined above), Administrative costs increased for the period.

• Indirect material costs were also affected by the problems encountered with the Open Water Manuals, Logbooks and t-shirts.

• When estimating budgeted depreciation for the period an item of equipment, which had already been fully depreciated, was included in the calculation. This error amounted to $5,000, and was not corrected in the budgeted profit figures contained in table 4.

You are required to prepare the following:

1. A clear and detailed explanation of the benefits of using variance analysis to evaluate Killies Scuba Diving’s revenue and cost performance. Ensure you relate your answer specifically to Killies Scuba Diving.

(6marks)

1. Please provide the following calculation (with formulas stated clearly):

1. 1. A table listing the standard prices, standard quantities and standard costs for all variable costs (direct and indirect).

   2. A Flexible Budget for Killies Scuba Diving for the six months ended 30 June 2016.

   3. Calculation of the following variances:

1. 1. 1. Sales volume variance (assume volume is the total number of courses for the period);

      2. Selling price variance;

(Note that the variances above have not been directly covered in lectures).

1. 1. 1. Price and quantity variances for each type of direct material;

      2. Rate and efficiency variances for direct labour;

      3. Spending and efficiency variances for each variable overhead category;

      4. Spending variance for each fixed overhead category;

Formula:

Direct Material Price Variance = (AP - SP) x AQ

Direct Material Efficiency Variance = (AQ - SQ) x SP

Direct Labour Rate Variance = (AR - SR) x AQ

Direct Labour Efficiency Variance = (AQ - SQ) x SR

Variable Overhead Spending Variance = (AR - SR) x AH

Variable Overhead Efficiency Variance = (AH - SH) x SR

Note for 2(b):

5 column heading for flexible budget table

Note for 2(c):

For the variances i.e Direct Materials, have to calculate all the 4 different types of direct material separately and not lump them together.

To check whether you answer is correct, Price variance and Efficiency variances for i.e certificate will be tied to the flexible budget table’s variances.

1Details of these issues are provided later on in this case study.

2 Purchases of direct materials exactly equaled usage for the period.

3 Each course is expected to require 30 kms of travel.

4 Note that each course had six (6) participants, as budgeted.

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