ACCT2160 Cost Management and Applications

Semester 3, 2016

Barrington Toy Case

INTRODUCTION
Barrington Toy Company (BTC) manufactures a range of soft toy animals. The business has
been in operation since January 1990, when two friends, Thomas Stuart and James Schulz,
sold their first bear the Barrington Bear. This 50cm teddy bear is one of the most popular
products that the business sells. The bear has become so popular that BTC has recently
opened a division - the Barrington Bear (BB) Division - dedicated solely to the manufacture
and sale of the Barrington Bear. James Schulz is in charge of its operations.
Michael and James have just finished examining the profit results for the BB Division, for the
th
year ended 30 June, 2015, and are extremely pleased with the results. Actual profit was
over $2 million more than budgeted at the start of the year and sales were up by 20%. Sarah
Nguyen, the businesss senior management accountant, unfortunately is not so sure that the
BB Divisions performance is as good as it seems. Both Michael and James are busy
congratulating each other when Sarah walks into James office.
Sarah, have you seen Barrington Divisions profit report? Michael says, Were over $2
million better than budget. James should be so proud of himself. With that James and
Michael start another round of congratulations, as Sarah smiles uncomfortably.
Hey guys, she says, I dont want to spoil the party but Im not sure the results are quite as
good as you both might think. James and Michael both turn to stare in surprise at Sarah.
Before either can say anything she continues quickly.
Youre both comparing the budget we set at the start of the year, with the Divisions actual
results. Remember I explained how that was not sensible if sales volume has changed.
Michael and James nod cautiously. Well, Sarah continues, sales volume has increased by
20% over budget. You need to create a flexible budget to which you can compare actual
results, and Id have a look at a number of variances as well, so you have a true picture of
the performance of BB Division.
Okay., says Michael slowly. How do we do that?
Ill get my assistant on it straight away. says Sarah. I can have a report prepared for you
by the end of next week.
THE BARRINGTON BEAR DIVISION
The Barrington Bear Division was opened at the beginning of 2008. It has been in operation
a little over 3 years. The BB Divisions sole role is to manufacture and sell the Barrington
bear; a 50cm teddy bear enjoyed by children and adult toy collectors the world over. The
Barrington Bear is made of extremely high quality materials and is fully jointed.
The BB Division is organised into two departments: purchasing and production.
The
purchasing department consists of Thomas Stuart, the purchasing manager.
This
department is responsible for acquiring and maintaining the supply of production material.
Nina Sullivan manages the production department, where manufacture and assembly of the
product takes place.

Barrington Bear Production

There are several major steps in the production of the Barrington Bear. These steps are
described below.
Cutting
Production begins with a large machine that cuts the acrylic pile fabric into the required
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pattern pieces. The bolts of fabric are rolled out and layered on the cutting table.
Sewing (including attaching of eyes)
In the next stage of production, operators of industrial sewing machines construct the six
parts of the finished unit two arms, two legs, the head, and the torso. Each piece is sewn
inside out and then turned right side out for assembly. Sewing is the most labour-intensive
phase of the production process.
In the next step, two acrylic eyes are attached to the head with plastic rivets. If the rivet
posts are too short, the eyes may fall off later. If the rivet posts are too long the eyes will
stand out from the head, giving the bear a strange appearance. Defects with the eyes are
not discovered until the eyes are used in production. At that point, defective eyes are
discarded and replaced with ones that meet specifications.
Stuffing of the Bears
After the cut pieces have been sewn together and the eyes attached, the companys stuffing
machines are used to blow the polyester fibre filling into the unassembled parts.
The
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machine operator judges whether the part has been filled correctly . Too little filling affects
the firmness of the bear; too much filling is unnecessary and expensive. Inferior grade fibre
filling is less expensive but can cause clumping and clogging in the stuffing machine. When
this happens, production is interrupted and the operator must unclog and reset the machine.
Furthermore, inferior filling tends to cause lumpiness in the filling, affecting the bears quality.
Assembly
Next, the bears arms, legs and head are attached to the torso using snap on, plastic joints.
The joints allow the head and limbs to rotate. The plastic joints are designed to last for the
life of the product. However, once attached, the joints cannot be removed without destroying
them. Occasionally, after initial joint insertion, the parts do not fit together properly and they
must be removed and replaced.
Regular cleaning and maintenance of the sewing, cutting and stuffing machines is performed
to prevent the fibres from building up. Maintenance is especially important for the sewing
machines as these machines must be kept clean for them to operate effectively. Dirty
machines can cause lines of stitches that are uneven and seams that do not hold. The
Barrington Bear workmanship is guaranteed for life. Burst seams require rework during the
production phase and during the lifetime of the product.

Fabric is shipped from the manufacturer wrapped around a cylindrical core or bolt. A standard bolt of fabric
is ten metres long and two metres wide.
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There are more modern stuffing machines on the market which undertake this function more quickly and
without the need for the operator to judge whether the part has been filled properly. However, Barrington likes to
use this machine as it fits with the handcrafted quality of the Barrington Bear.

ACTUAL PERFORMANCE IN THE BARRINGTON BEAR DIVISION

Sarah has collected some information about operations during the year ended June 30 2015
to help her assistant prepare her report. She has summarised the information as follows;
Sales
Towards the end of last financial year, the Barrington Collectibles set up a website to
allow internet sales.
At the same time, the company launched an extensive radio
advertising campaign. All radio advertisements give a reference to the web site. Even
though the advertising campaign was instituted very conservatively and hastily, it
appears that it led to a significant number of internet sales during the period. One of
the main reasons Barrington Bear sales increased substantially was due to these new
initiatives.
Direct Materials
At the beginning of the period Nina Sullivan and Thomas Stuart expressed concern
about the quality of the acrylic pile fabric offered by the Divisions regular supplier.
o As they knew how important this material was to the quality of the Barrington
Bear, Thomas requested from the supplier a higher quality of fabric, at an
additional cost of $6 per bolt more than budget. This fabric was of excellent
quality, with no flaws, tears, soled areas or colour problems.
o During the period 14,000 bolts were purchased.
James Schulz was concerned about the impact of the increase in price of acrylic pile
fabric on his divisions profit. As a result, he urged Nina Sullivan to reduce acrylic pile
fabric usage where possible. Nina did as requested, and reduced the seam allowances
on the bears to an absolute minimum. This allowed him to reduce the overall amount of
fabric required per bear to 0.048 bolts. However, as Nina indicated to James, he was
worried that some of the seams might not hold when the bears were sewn together.
Thomas decided to try and recoup some of the cost increase on the acrylic pile fabric by
searching for cheaper prices for other materials. He chose to purchase the acrylic eyes
from a supplier other than the divisions regular supplier to gain 5c discount on standard
price per eye.
o However, to gain this discount Thomas had to buy in bulk, so in July, 2011 he
purchased 700,000 acrylic eyes substantially more than was expected to be
needed in production.
o Unfortunately when some eyes were eventually attached to the bears it was found
that the rivet posts were not the correct length. 60,000 eyes had to be discarded,
and new eyes attached. The cost of the discarded eyes was included in actual
results.
The regular supplier of plastic joints notified Barrington just prior to the start of the
period that it was ceasing production of this product, so Thomas had to quickly find a
new supplier. This supplier was more expensive, but Thomas had no option but to
accept this price, as he could find no other suitable vendor.
o He ended up purchasing 1,520,000 joints during the period. Unfortunately the
joints were of poorer quality and tended to break.
o Consequently 20% more joints were used than expected.
At the beginning of the period Thomas entered a year-long contract with his regular
supplier to purchase the polyester fibre filling at a discount of 20% on standard price.
Thomas thought the filling looked of reasonable quality, but wasnt really sure. He

thought about seeking Nina Sullivans advice, but decided to go ahead and accept the
contract without doing so.
Purchases of the filling during the period amounted to 360,000 kilograms.
Nina complained strongly to both Thomas and James Schulz about the quality of the
polyester fibre filling, explaining that its inferior grade caused serious problems with the
stuffing machines, resulting in many production interruptions to fix the machines. He
also thought that the bears were not as soft as normal, and was worried that this might
affect sales.
In order to offset some of the increased maintenance and repair costs from having to fix
the stuffing machines, Nina decided to reduce preventative maintenance on the sewing
machines. He argued that these machines were usually very reliable, and therefore
didnt need maintaining!
Unfortunately, during the year the seams on 20,000 bears split and this fabric had to be
discarded and the bears reworked. The cost of discarded fabric has been included in
actual results.
Labour
Employees often had to work unscheduled overtime due to several of the issues already
outlined.
o This meant that the average wage rate per hour would have been on average
$10 higher per hour than standard. However Nina decided to hire less skilled
employees to manufacture the bears and as a result the average wage rate per
hour ended up being only $6 more than standard.
At the beginning of the period, it was expected that the plant would operate at normal
capacity, which was 16 hours a day, 7 days a week for 50 weeks. However with the
need for overtime, the plant was actually open 7,350 hours during the period.
Each bear was expected to require 57 minutes of machine time. However due to the
factors outlined above, actual machine hours used for the period were 224,000.

TABLE 1
Barrington Bear Division
Preliminary Statement of Divisional Operating Income
for the Year Ended June 30, 2015
Sales (units)

Master (Static) Budget

200,000

SALES REVENUE
Direct materials
Acrylic pile fabric
10-mm acrylic eyes
45-mm plastic joints
Polyester fibre filling
Total direct materials

Actual Results
240,000

$24,000,000
$600,000
154,000
260,000
450,000

$32,400,000
$823,680
194,400
432,000
672,000

$1,464,000

Direct labour
Sewing
Stuffing and cutting
Assembly
Total direct labour

$1,600,000
1,200,000
1,000,000

$2,122,080
3,456,000
2,304,000
1,728,000

$3,800,000

Variable overhead
Indirect materials
Indirect Labour
Utilities (electricity etc.)
Machine Maintenance and
Repairs
Other
Total variable manufacturing
overhead

$7,488,000

$366,000
360,000
336,000

$424,416
312,000
396,900

90,000
250,000

138,880
332,200

Operating Income

$1,402,000

$1,604,396

$17,334,000

$21,185,524

The actual operating income reported in Table 1 is a preliminary figure that has not been
adjusted for fixed costs.
b

Breakdown of Sales (units)

Retail and Catalogue
Internet
Total

Budgeted
140,000
60,000
200,000

Actual
130,000
110,000
240,000

TABLE 2
Barrington Bear Division
Standard Cost Information
Information relating to Direct Materials and Direct Labour
It was expected that a bolt of acrylic pile fabric would cost $60;

While each bear required 2 eyes, standard usage was estimated at 2.3 eyes per bear
to allow for some wastage;

Each bear was expected to use 5 plastic joints;

The standard price of the polyester fibre filling was $2.50 per kilogram;

Standard wage rate per hour is $20;

Information relating to variable overhead cost pools

Variable overhead
Input allocation base
Indirect materials

Total direct materials cost

Indirect Labour

Direct labour hours

Utility costs

Plant operating hours

Machine maintenance and repairs

Machine hours

Other

Direct labour hours

ASSESSMENT REQUIREMENTS
This assessment has four primary aims:
1.

To provide you with an opportunity to develop your understanding of standard costing

and variance analysis;

2.

To provide you with the means to further refine your analysis and problem solving skills;

3.

To provide you with an opportunity to develop teamwork capabilities;

4.

To provide you with an opportunity to develop your report writing skills.

Your Task
After considering carefully all the information Sarah has collected, you (as Sarahs assistant)
are going to prepare a report to be presented in a meeting to Michael Welling, James
Schulz, Thomas Stuart, Nina Sullivan and Sarah Tan. Within the report you need to address
the following.
1. Outline and explain the purposes and potential benefits to Barrington Bear Division of
standard cost systems and variance analysis. This will involve research into their
benefits and limitations.
Please note that your discussion of these issues MUST go beyond that contained in
the textbook and you must relate your arguments specifically to Barrington Bear
Division. If you simply restate the text you will receive a mark of zero. Marks will be
awarded based on how well you research these issues.
(9 marks)
2. Using the information in the case:
a)

b)

Prepare a flexible budget for the Barrington Bear Division for the year ended 30
June 2015;
(4.5
marks)
Calculate the following variances (show all workings);
i)

Sales volume variance;

ii)

Selling price variance;

(Note that the selling price variance has not been directly covered in lectures).
iii)

Price and quantity variances for each type of direct material;

iv)

Rate and efficiency variances for direct labour;

v)

Spending and efficiency variances for variable overhead categories;

(21 marks)

3. Using the variances you have calculated above evaluate how well Barrington Bear
Division has managed its revenue and cost performance for the year ended 30 June,
2015.
Each revenue/cost item should be discussed under a separate sub-heading in your
report. Your evaluation should do the following:
Question is continued over the page

 Use the variances calculated in part 2 as support for your arguments;

Use the information contained in the case to support your arguments;
Identify the likely causes of the variances you calculated in part 2.
Identify any interdependencies among the variances you calculated in part 2.
Raise any concerns you have with the calculation of the variances.
Please note that any simple restating of the Horngren text in this section will receive
zero marks.
(19.5 marks)
4.

Based on your discussion in part 3 identify any issues that need to be investigated
further in order to improve their profit performance.

Within your discussion ensure that you justify why you believe these issues need to
be investigated further.
(6 marks)

PREPARATION OF THE REPORT

When preparing the report please note the following.
1. You must prepare the report in a professional format that would be suitable for
presentation at a meeting of Barrington Toy Company management. Although the
preceding points are numbered, they must not be regarded as a list of Questions,
rather as a guideline of minimum issues that must be addressed in your Professional
Report.
2. The RMIT Study and Learning Centre provides on-line tutorials to help students
with their Report Writing Skills. You can find these tutorials at the following
website:
http://www.dlsweb.rmit.edu.au/lsu/content/2_AssessmentTasks/02reports.htm
3. As a general guideline your report should include the following sections;
Title Page
Contents Page
Executive Summary:
Include a summary of results (not just contents) of your report so that the reader would
understand the key issues and findings. This is not the place to discuss the business
in detail;
Introduction:
Introduce the business and provide a context/background for your report. Provide a
brief outline of the content of your report.
The Body of your Report
This section should have a number of sections, each one relating to a specific issue
you are analysing/discussing.
Each section should begin with a Heading or
Subheading. These Headings or Subheadings should give the reader a specific idea
of the issue to which the section relates, not the flow of your calculation. (e.g you should
not label your headings by the names of the variances).
Conclusion:
Draw together your discussion into a specific and concise conclusion, so that the
reader could understand the basic issues and findings of your Report by reading this
section only.
Bibliography/References:
Evidence of research. If you are unsure about how to reference, please view the
following RMIT website.
http://www.dlsweb.rmit.edu.au/lsu/content/4_W ritingSkills/05referencing.htm
Appendices: detailed calculations
Footnotes: If you have quoted or used the ideas of any text/article or other source you
must footnote this source. Otherwise you will be plagiarizing! If you are unsure about
how to footnote, please view the following RMIT website.
http://www.dlsweb.rmit.edu.au/lsu/content/4_W ritingSkills/05referencing.htm

4. Total marks for the assignment is 100 but it will be converted to 30% of your total
assessment and has a 2,500 word limit.

5. The report is due on Tuesday, December 20st at 5 pm. You report will be
submitted on TII
6. You are expected to work in groups of 4 or 5 with all students having
joint responsibility for every part of the assignment. No individual assignments will be
accepted.
PLEASE NOTE: IT IS STRONGLY ADVISED THAT YOU DO NOT ASSIGN THE
CALCULATIONS TO ONE GROUP MEMBER, AND DISCUSSION TO OTHER
MEMBERS THIS IS A TEAM ASSIGNMENT. IF YOU CHOOSE TO PREPARE YOUR
ASSIGNMENT IN THIS WAY YOU MUST ENSURE THAT YOUR DISCUSSION IS BASED
ON THE COSTS CALCULATED. NOTE ALSO THAT THE TOPIC TO WHICH THIS CASE
STUDY RELATES IS EXAMINABLE IN THE FINAL EXAM.

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