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Lara Australasia Ltd owns Victory Mowers a manufacturer of gardening

equipment which is sold domestically within Australia and to an increasing export market. Victory Mowers manufactures two different models of lawnmowers: the cheaper 'Lawnmaster' and the environmentally-friendly and more expensive 'Green Machine'. A dispute has arisen between senior management at Victory Mowers over the strategic direction of the company. The CEO of Victory, a former marketing executive, wishes to focus more strongly on developing the environmentally friendly 'Green Machine' as he believes it has a higher gross margin and is more profitable than the 'Lawnmaster'. The 'Green Machine' is sold as a premium product through specialist mower dealers while the mass produced 'Lawnmaster' is sold as a basic model through the Bunnings Hardware chain. In contrast to her CEO the divisional management accountant has argued that the standard costing system is not suited to these products and may produce misleading results.


The Strategic Management Committee of Lara Australasia Ltd has asked for an analysis of the costing system to provide advice regarding the two models. Currently, Victory Mowers operates a standard costing system where identifiable direct costs are charged to each product and manufacturing overheads are allocated using direct labour hours (DLH) as the sole cost driver.


The following data is provided for the 2020 financial year:
2020 Sales and Cost estimates Lawnmaster Green Machine
Forecast Sales (Units) 200,000 25000
Selling price per unit($) $200 $300
Prime Costs per unit $100 $150
DLH per Unit 2.5 2.5


The activity costs budgeted for overhead for the 2020 financial year and related activity cost drivers were as follow:

Amount of Cost Driver


OH Activity OH Cost Cost Driver Lawnmaster Green Machine
Set Ups $493,750 Number of Set ups 25 50
Laser Cutter $1,100,000 Machine Hours 30,000 10,000
Machining. $2,100,000 Machine Hours 50000 15000
Assembly $1,250,000 Labour Hours 50,000 25000
Packing $1,800,000 Number of Orders 1000 500


Required:
(a) Using the current standard costing method of applying overhead using direct labour hours develop a spreadsheet to calculate for each model the expected:
i. Gross Profit per unit,
ii. Gross Profit margin ($GP/$Sales),
iii. Total Gross Profit per Model, and
iv. Total Firm Gross Profit.


(b) Using the overhead activity and cost data provided conduct the same analysis utilising Activity Based Costing (ABC) techniques to allocate activity-based costs and again calculate for each model the expected:
i.  Gross Profit per unit,
ii. Gross Profit margin ($GP/$Sales),
iii. Total Gross Profit per Model, and
iv. Total Firm Gross Profit.
 
(c) What advice would you give the Strategic Planning Committee and the management of Victory Mowers regarding the appropriate costing system and the comparable profitability of the two products? Provide an analysis explaining the reasons for the different outcomes achieved between using Standard Costing overhead allocation and ABC overhead allocation. 

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