Fantori Ltd has been in business for few years manufacturing sewing machines. It currently manufactures two models, the basic and advance. Last year, 2017 they made good profit and they were happy their business is running well. They are about to enter a new phase in their business, selling to an overseas buyer. However, they are a bit confused as to why the buyer is only interested to buy the advance model and not the basic or both. For product costing purposes the business uses the traditional costing system and machine hours to assign indirect cost to the sewing machines as they are fairly new in business and don’t want to spend too much money to implement a more refined costing system-they are making profit, why change things?
However, the owner of the business, Tony Mans is a bit concerned as to the reason why the overseas buyer is not interested in buying the basic model and has appointed you to get to the bottom of this. He had been advised by fellow business buddies to implement Activity Based costing from the beginning but ignored it. He is thinking maybe it’s time.
The following information has been supplied to you regarding the business for the year 2017.
Units produced and sold: 1700
Direct material cost per unit: $350
Direct Labour cost per unit: $175
Units produced and sold: 1600
Direct material cost per unit: $580
Direct labour cost per unit: $280
The total indirect/overhead costs and activities are as follows:
Inspection: $30 000
Assembly: $100 000
Production Scheduling: $110 000
Machine set-up: $40 000
The models use the activities in the following ways:
Basic Model Advance Model
Inspection 210 760 Inspections
Assembly 4700 3500 machine hours
Production scheduling 60 510 Runs
Machine set-up 120 270 set up
Other operating expenses for the advance model are: selling and administration $300 200, interest expense $40 500 and office rent $42 800.
Required: Calculations in two decimal places
1) Calculate cost per unit of the two models of sewing machines under the current traditional costing system.
2) Calculate cost per unit of the two models of sewing machines under Activity based Costing.
3) Sewing easy sells the advance model at a price of total cost (under the current costing system) plus 30% and is willing to give the same selling price to the overseas buyer. The overseas buyer wants to purchase only the advance model. Prepare December 2017 Profit and Loss Statement for the advance model where (a) traditional costing is used to calculate the product cost (b) Activity Based Costing is used to calculate the product cost. Analyse why the overseas buyer is interested to buy only the advance model. In your discussion you should highlight the importance of accurate product costing.
4) Discuss why actual overhead and applied overhead may be different at year end and state three ways to deal with under/over applied overhead costs (no journal entries are required).
5) Assume actual overhead is $300 000 and applied overhead is $210 000 and also assume that at the end of the year the inventory and the cost of goods sold accounts are as follows:
Work-in-process: $60 500
Finished goods: $90 000
Cost of goods sold is $1 850 000
Calculate the under/over applied overhead and using the proration method dispose the under/over applied overhead (no journal entries are required)
A great criticism of the OSI is in its complexity and its length. This makes the administration of the scale a timely process. In response to this, Faragher, Cooper and Cartwright (2004) purpose an alternative, two-stage, risk assessment process. This involves an initial screening questionnaire for all employees of a given work place, and then conventional risk assessment tools are used to evaluate in detail just those individuals identified as having a potential stress problem. There are three main sections of the questionnaire which measure employee perceptions of their job, organizational commitment and employee health. This shorter version of the Occupation Stress Indicator is termed the ASSET – A Shortened Stress Evaluation Tool. Tests of just under 10,000 employees in 100 public and private sector organizations within Britain found ASSET to be quick and easy to complete, generating a high response rate. Thus in comparison to the OSI, the evaluation of the ASSET provides evidence that it possesses good reliability (a small number of reliable factors which increases the ease of interpretation) and has good reports of validity. However, it could be regarded that this shortened scale may have negative consequences for its validity. For example, the ASSET is put forward as a two stage ‘risk assessment’. This implies that the scale is administrated to assess the employee’s susceptibility to feeling stressed. Therefore, this ignores that there is an interaction between the environment and the person, but instead, puts heavy emphasis on the person’s ability to cope in a given environment. Therefore, this type of risk assessment may be perceived as more of a ‘test’ – rather than a support mechanism. Therefore, the validity of the screening scale itself is put into question – as it is highly likely that participants will want to answer in a socially acceptable manner to avoid incrimination. . Another scale that has adopted a shorter format is the Pressure Management Indicator. Williams & Cooper, (1996) cite this model as more reliable, more comprehensive, and shorter than the OSI. The Pressure Management Indicator did infact evolved from the Occupational Stress Indicator. Therefore, the comparisons between the two scales here, opposed to the ASSET scale, are more valid and useful. Therefore, its inventors regard it as the replacement indicator of occupational stress. Williams and Copper (1998) examined existing measures of stress (directly and indirectly related to work) – these included questionnaires on mental health (e.g., Crown & Crisp, 1979), job satisfaction (e.g., Warr, Cook, &Wall, 1979), and locus of control (e.g., Rotter, 1966) and worked from the original OSI to produce a standardized, reliable, compact, and comprehensive instrument to measure work-related stress. The PMI incorporates three main scales; stress-outcome, stressor and the moderator factor. The stress-outcome scales measure, job and organizational satisfaction, organizational security, organizational commitment, anxiety-depression, resilience, worry, physical symptoms, and exhaustion. The stressor scales cover pressure from workload, relationships, career development, managerial responsibility, personal responsibility, home demands, and daily hassles. The moderator variables measure drive, impatience, control, decision latitude, and the coping strategies of problem focus, life work balance, and social support. To overcome the limitations of the original OSI, Williams and Copper (1998) embarked on a comprehensive analysis of the scale, ranging from analysis of the name of the scale – e.g. it was found that the mention of ‘stress’ in the title of the original scale implied there was a ‘stress problem’ in the organisation. Thus changing the name to ‘Pressure’ intended to imply a more neutral term (opposed to stress – the negative consequence of pressure – William 1994). Through the extensive analysis of the OSI Williams and Copper (1998) revealed the main attributes of the original scale that existed as its weakness – and purposed to find solutions to these problems. For example, as stated the scale could be interpreted as threatening and time consuming. Thus a shortened version was essential. Another issue highlighted with the use of such a lengthy scale – was infact the possibility that a large number of items would increase the co-efficient alpha rating – and thus making the scale appear more reliable than it actually is. Therefore, the production of the PMI was designed to revise the questionnaires and number of items, without sacrificing its psychometric properties. Furthermore, it may be felt that the items on the OSI were bias towards white-collar or executive levels – ignoring the stress felt at lower levels of the organisation. The length and complexity of the OSI may have been bias towards workers who took on reading activities regularly – opposed to the more manually skilled employee’s with more hands on day to day tasks. With this diversity in mind – it is essential that a vast number of employment scenarios are covered on any stress indicator scale. It may be interpreted that the original OSI was not so diligent in representing such diversity in the work-force. Williams and Copper (1996) were careful to use an extremely diverse data set representing over 100 different organisations from the public and private sectors. Incorporating diversity, it is also important to eradicate cultural boundaries in the questioning material. For example, the acknowledgement and understanding that many companies want to investigate work-related stress across national and ethnic boundaries is important. Therefore, can the OSI be regarded as a multi-cultural measure of occupational stress? It may be suggested that the mere fact it was based on a very small sample of just over 150 people, that it is impossible that is has gained a representative view of the world and the people and organisations within it. Furthermore, the consideration that the world of work is always changing means that the questions on the scales need to reflect changes in demand such as job insecurity and technology. The fact that, the original OSI scale has not been amended since its production renders it out-of-date in many respects. To combat these downfalls, William and Copper (1996), attempt to combine the questionnaires with organization-specific items, in hope of identifying sources of pressure and the use of coping mechanisms. The original scale lacks the ability to provide a cross-occupational and cross-company analysis. The solution was to develop a standardized measure covering all aspects of the stress-strain relationship that is, stressors, moderating factors, and stress outcomes (William and Copper, 1996). The new PMI questionnaires are intended also to help raise awareness of occupational stress at the individual and organizational level, identify those individuals who need remedial help, and provide information for the design of appropriate interventions In light of the discussion above, the Occupational Stress Indictor has presented many weaknesses – in particular reference to its design, practical administration, validity and reliability. Many have questioned the length and complexity of the original self-report questionnaire. This has led to a revised version of the scales in the form of the PMI (Williams and Copper, 1996). The PMI, developed just under ten years after the original OSI, intended to combat many of its methological concerns – such as shortening the administration process and taking into account cultural and occupational differences of its users. It would appear that through the quest to appeal to a wide audience – i.e. a diverse work base, the original OSI flawed due to its lack of ability to be able to offer a reliable source of stress indicator in reference to the individual’s perception of the situation and how they perceive they are coping. Although the original OSI was giving an accurate representation of job satisfaction, mental and physical health, and the sources of pressure – i.e. concrete certainties that are easily measurable, the scale was not so reliable in measuring more abstract properties such as perceptional qualities. Therefore, it may seem a valuable option to concentrate on the perceptual properties of the scale itself to produce more reliable scale that measures how the individual feels, opposed to just how the individual acts in their environment– hence the development of the Pressure Management Indicator. This goes hand in hand with the theoretical assumptions that underpin the measurement scales – e.g. Lazarus transactional model of stress – purposing that there is a transaction between the environment and the person – which in turn may render the interaction as a stressful one or not. It is important to take into account that stress is an interactive process between the stressor and the moderator and the stress outcome. The newly revised PMI scale is more advanced than the original OSI scale in that it takes into account this interaction. An important factor highlighted by the ASSET scale is that the administration of an Occupation Stress Indicator or Pressure Management Indicator needs to be as impartial as possible. A large weakness that needs to be overcome about any type of stress indicator is that it is not measuring the person’s ability to cope in stressful situations. For example, the scale is not intended to assess or question personality or to test the personal attributes of the individual, but instead, to provide an indication of how one perceives their working environment and how a number of variables interact to produce potentially stressful effects for the individual. The overall aim of a stress indicator scale is to identify physical and psychological areas of concern that can be highlighted to encourage an optimal balance of stress, coping strategies and support in the work place. References Books Cooper, C. L., Sloan, S. J., & Williams, S. (1988). Occupational Stress Indicator. Windsor, England: NFER- Nelson. Lazarus, R. S. (1966). Psychological stress and the coping process. New York: McGraw-Hill. Lazarus, R.S. (1975). The healthy personality: a review of conceptualizations and research. In Levi, L (Ed). Society, stress and disease, vol 2. Oxford. Oxford University Press. Pratt, L. I., & Barling, J. (1988). Differentiating between daily events, acute and chronic stressors: A framework and its implications. Cited in Hurrell, J.J., Murphy, L.R. Sauter, S.L., & Cooper, C.L (1998) (Eds.), Occupational stress: Issues and developments in research. London: Taylor & Francis. Williams, S. (1994). Managing pressure for peak performance. London: Kogan Page. Williams, S., & Cooper, C. L. (1996). Pressure Management Indicator. Harrogate, England: RAD. Williams, S., & Cooper, C. L. (1997). The Occupational Stress Indicator. In R. J. Wood & Zalaquett, C. (1997) (Ed.). Evaluating stress: A book of resources. Huntsville, TX: Sam Houston State University.>GET ANSWER