Wine River Winery are a wine maker

CASE STUDY Wine River Winery are a wine maker located in Adelaide. They are a small boutique winemaker known to the local community as an employer of choice to local families. As a brand, they make most of their sales directly to visitors who enjoy the interaction with the employees, the local foods and wines. For the visitors, this is as much a cultural experience as it is a wine tasting expeerience, and the wines they take with them remind them of the time they spent at Wine River. With their annual Barreling and Maturation costs estimated to be around 20 percent of sales during the period 2017-2018, senior manager at Wine River, Soraya Williams, recognised the potential improvements in both profitability as well as customer care that might arise through better management of the Barreling and Maturation function. Barreling and Maturation are key processes undertaken at Wine River, and are grouped into a single cost centre. The Barreling and Maturation cost centre, as well as others, their typical processes and costs are described here: Crushing and pressing (C###). First, grapes are received from the vineyard to be destemmed and crushed, after which they are pressed to extract the juice. This cost centre is highly labour intensive, but also expends resources on costs associated with grape wastage as well as depreciation of pressing equipment. Other costs include things such as electricity and materials. Fermentation (F###). After the grapes have been crushed and pressed, the juice arising from those processes is then moved to the fermentation cost centre. Here, depreciation on rotary fermenters, which automate the mixing process, is considerable. In addition, the cost centre also consumes materials, such as yeast and enzymes, in the fermentation process, as well as labour. Other costs include electricity, repairs and maintenance etc. Barreling and Maturation (M###). Once the juice has fermented, it is then relocated to the Barreling and Maturation cost centre, where the fermented juice is aged. A significant portion of the costs here are expended on the laboratory, which employs a scientist full time, and requires certain types of equipment as well as consumables to allow for testing and sampling of the wine as it ages. In addition, considerable labour costs are expended in manually cleaning the barrels, pumping the wine and other activities. Depreciation costs are also considerable here, given the frequency of barrel turnover. Water, used in cleaning of the barrels, as well as some other costs also contribute to the overall costs of Barreling and Maturation. Bottling (B###). Finally, once the wine has aged for the desired time, it is transferred to the bottling cost centre. This is the most costly of the four cost centres, primarily because of the materials involved in the bottling process, which include the glass bottles, caps and labels. Additionally, costs associated with depreciation of the bottling equipment are considerable because of the capital intensive nature of the bottling process. In addition to these four production cost centres, Wine River Winery has an Administration (A###) department and all of them are in the Wine River cost centre group (WG###). The existing accounting information system had pooled all Barreling and Maturation costs into the one overhead cost pool. The lack of transparency and availability of Barreling and Maturation data arising from this pooling of costs meant, however, that Soraya was unable to accurately measure, and plan for, the overall costs of Barreling and Maturation to Wine River. Increasing competition from competitors arising from technological changes in Barreling and Maturation processes, as well as different types of oak coming onto the barrel market, meant that customers were also becoming more discerning in demanding certain types of flavour. The need to remain competitive and meet customer demands meant that Wine River needed to find a way to better manage its Barreling and Maturation costs. Soraya decided that a key to improving Barreling and Maturation cost management was the development of an information system that would permit detailed analysis of differences between actual costs and budgeted costs. Given the complexity of the different types of factors that could potentially affect Barreling and Maturation costs, Soraya decided a team should be put together that would: Develop an activity based costing model, that allowed for the analysis of Barreling and Maturation costs, so that these costs could be better managed; and Develop a variance analysis model, that allowed for variances between the actual and budgeted selling price, as well as the various costs of wine production to be measured and analysed. From the existing accounting information system, Soraya and her team estimated that the pooled Barreling and Maturation costs for the 2017-18 financial year would be $304,400. Activity based costing of the Barreling and Maturation cost centre Following an analysis carried out by Sorayas team, the team were able to identify five activities, as well as the cost drivers that contributed to the Barreling and Maturation costs. Further analysis provided estimates for the costs associated with these activities, as well as estimates for the activtiy levels of the cost drivers. These, as well as the actual costs and activity levels reported at the end of the 2017-18 period are recorded in Table 1 and Table 2 below. Table 1: Estimated and actual Barreling and Maturation costs for the 2017-18 period Activity Estimated cost Actual cost Cost driver Laboratory testing $ 108,000.00 $ 146,250.00 Laboratory hours Pumping, racking and returning $ 106,400.00 $ 145,600.00 Labour hours Barrel replacements $ 63,000.00 $ 101,250.00 No. of Barrels used Barrel cleaning $ 18,000.00 $ 27,843.75 Litres of water used Other $ 9,000.00 $ 11,250.00 Total $ 304,400.00 $ 432,193.75 No. of Barrels used [Hint: pumping, racking and returning, barrel cleaning and other costs are all treated as variable overhead costs] Table 2: Estimated and actual Barreling and Maturation activity levels for the 201718 period Cost driver Estimated activity level Actual activity level Laboratory hours 450 675 Labour hours 5,600 7,280 No. of Barrels used 180 253 Litres of water used 18,000 23,625 Variance analysis of Wine River operations Because of the concerns raised around profitability and customer care, a new marketing manager, Ricky Zheng was also hired during the period. Ricky, in consultation with Soraya and her team, decided that changes needed to be made to the pricing as well as sales strategy for the wine sold. To this end, Ricky sought to both raise prices incrementally, as well as increase sales volume. Wine River planned to produce 75,000 bottles of wine for the 2017-18 period, equating to total revenues of $1,500,000. However, production volumes increased, due to an increase in demand, so that 90,000 in total were both produced and sold. Accordingly, while it was estimated that 37,500kg of direct materials, consisting of grapes, glass bottles, caps and labells at a total cost of $9 per kg, would be needed to produce the bottles, 35,000kg of material were in fact used. Direct labour hours to support the production, were estimated at 28,000 in total, at a cost of $19 per hour; and total variable and fixed overheads were budgeted at $301,500 and $247,500 respectively. For the purpose of measuring variable and fixed overhead variances, Wine River use an allocation rate based on direct labour hours. Actual results are as follows in Table 3. Table 3: Actual results Activity Revenue / cost Cost centre charged to Sales (90,000 bottles) $ 1,980,000.00 Direct materials purchased (40,000 kg) $ 336,000.00 Crushing (C###) Total direct labour (36,400 hours) $ 728,000.00 Crushing (C###) Total variable overhead $ 432,843.75 Barreling & Maturation overhead costs to M###) and other variable overhead costs to Bottling (B###) Total fixed overhead $ 354,375.00 Administration (A###) All the actual costs (total direct labour, variable and fixed overhead) except direct material costs are posted directly in the General Ledger and charged to the cost centres shown above. Actual direct material expenses (purchased) are paid to outside suppliers based on invoices submitted by them. These are initially charged to the Crushing (C###) department. The management would like to allocate 30%, 15%, 20%, 15% and 20% of actual fixed overhead costs to Crushing (C###), Fermentation (F###), Maturation (M###), Bottling (B###) and Administration (A###) departments respectively for controlling purposes and would like this allocation to take place in the current month, with the ability to clearly show these costs in each of the receiver cost centres cost list (reports). The budgeted fixed overhead should be distributed equally amongst the five cost centres. With regards to direct material costs, however, the management would like to allocate them in proportion to the number of employees in each production department, and would not like the cost item heads to be shown in the receiver cost centre reports. Currently, there are 10, 3, 5 and 2 persons in the Crushing (C###), Fermentation (F###), Barreling & Maturation (M###) and Bottling (B###) departments respectively. At present, direct material costs budgeted for C###, F###, M### and B### departments are $127,000, $30,000, $25,500 and $155,000 respectively. In addition, the management would like to allocate the cost of providing technical services by the Administration (A###) cost centre to other departments in the company. In the current month, A### has provided 20, 80, 10 and 50 hours of technical service (TS###) to the Crushing and Pressing (C###), Fermentation (F###), Barreling and Maturation (M###) and Bottling (B###) departments respectively. Total planned activity is 150 hours per month and the service rate is $120 per hour. PART A: CASE ANALYSIS (GROUP) You are required to submit an executive report considering yourself to be the team of management accountants for the Wine River case study, as described in this document. You are submitting this report to the CEO and your report should provide an analysis of the results of the activity-based costing system developed to manage the Barreling and Maturation costs, as well as the variance analysis for total product sales and the various costs. It is imperative that whilst accurate calculations are essential, you take the time to focus on generating insightful analysis and recommendations. To analyse the results of the activity based costing system, you should: Consider variances between the costs originally estimated for Barreling and Maturation, based on the old accounting information system, and the actual costs. Once the analysis is completed, you will need to consider what recommendations you should provide to the CEO, given the concerns expressed around how Barreling and Maturation costs are impacting on Wine Rivers profitability. In doing so, you should consider where and how costs could possibly be reduced, as well as whether these might have an environmental benefit or not. You should also consider the benefit (or otherwise) of Sorayas decision to implement an activity based costing system specifically in relation to Wine River. To analyse the results of the variance analysis, you should calculate the following variances Direct materials price and efficiency variances; Direct labour rate and efficiency variances; Variable overhead spending and efficiency variances; and Fixed overhead spending and production volume variances In addition, you should consider and analyse: What the variances indicate about where Wine River Winerys profitability is being most heavily impacted (both favourably and unfavourably) and also the potential reasons behind such variances. Whether a significant investment in an automated central membrane press unit, that automates the pressing process and increases juice volumes and press yields, would be in the best interests of the company. Whether potential issues might arise from the cost allocation methods employed by management for allocating fixed overhead costs and direct material costs in SAP, as well as the strengths and weaknesses of the variance analysis you have carried out in SAP and produced in the SAP report, when compared to your manual analysis. With respect to the preceeding quantitative and qualitative analyses (a), b) and c)), you should provide recommendations for improvements to the CEO, taking into consideration both financial as well as other factors. You should attempt to be as detailed as possible, while limiting the recommendations made to those items that are likely to provide the most significant opportunities to Wine River. Your report should be set out in an appropriate format under these headings: Executive summary provides an overall succinct summary of the case including background, analysis, major findings, recommendations and limitations (so that an executive reading the report will have enough detail to attend and participate at a meeting even if he/she has not read the rest of the report in detail). Background a description of the important issues and their background that is relevant to the case and the findings. Analysis an overview of the analysis undertaken and the results and insights obtained. Significant calculations should not be included here (but in the appendices), with this section referencing the appropriate appendices. Findings detail and justify your findings/insights from the analysis (this should not be a simple repetition/rephrasing of the analysis). Take care to recognise and describe any assumptions or where additional data may be necessary to further understand the situation. Recommendations detail and justify your recommendations from the analysis and findings ensuring that the recommendations are reasonable/justifiable and directly address the case and/or the analysis undertaken above. Action Items (Next steps) map out a plan that highlights specific/concrete actions to be taken in order to implement any proposed changes based on the findings and recommendations noted. This should not be a simple repetition/rephrasing of the recommendations. Limitations detail specific limitations from the analysis such as assumptions made, any missing information, limitations (or assumptions held) regarding the data, calculations and case context. Appendices include all other relevant supporting material such as detailed calculation work (that has been referenced in the body of the report). There should be no new material or important material in the appendices. Required format of your report Cover page provide a separate cover page for both the hard copy and soft copy formats (with student names, SIDs and email addresses). Only one hard copy and one soft copy required per group. Cover pages can be found in Canvas. Executive Summary: One slide limit. Report: You are required to prepare your report using PowerPoint. The report must meet the purpose of providing details for a manager with sufficient time to sit and read the material (you will not be required to present it). The body of the report must not exceed 10 PowerPoint slides. You are encouraged to be succinct in your writing style (do not waste space on stating the obvious or including tedious calculations or including definitions of management accounting terminologies; while dot points are encouraged, the writings should be sufficiently informative). Also, remember that management would normally require as much information as would be required to help them make informed decisions, while at the same time they would not prefer information overload. To reflect this, the slides should be detailed and informative but not be crowded with words and/or diagrams. Each slide must be self-explanatory, with proper headings and sub-headings. Further details are provided in the Marking Guide. Note: The executive summary and report will be a total of 10 slides. Please also include a title slide in Power Point (with your names and SIDs); this will not be counted as one of your 10 slides. Appendices: You are encouraged to provide all supporting information as appendices (these do not need to be in Power Point you may use Word or Excel). This should be no longer than ten (10) A4 pages. Please attach the appendices at the end of the PowerPoint report. Peer evaluation: Each group is required to sign and submit ONE (1) hard copy peer evaluation form that needs to be attached to their hard copy submission. If you are in a group of three member #1 and #2 will jointly decide the contribution of the member #3; member #2 and #3 will jointly decide the contribution on member #1; member #1 and #3 will jointly decide the contribution of member #2. You will not be required to evaluate your own contribution. Contribution: Each member should be aiming for 100% contribution based on the tasks assigned by the group. Contributions of 80% and below warrants investigation by the Unit Coordinator and a potential penalty for all group members, whether deemed to have contributed or not. In other words, if you have a noncontributing group member it is your responsibility to get that individual to contribute, and hence this being a group task you risk being penalised as well. Hard copy: Print one slide per page and include page numbers. Can be black and white or colour (what is important is the analysis!). Do not forget to attach the appendices, cover page and peer evaluation. Soft copy: Create a single electronic PDF that includes the cover page, report, and appendices and submit via the Canvas submission link.

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