APMP5
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Question 2a

Vunderg: Company information
Vunderg manufactures windows and related products. The overheads in the business are high and primarily relate to procurement, customer administration and product design.

Procurement and customer administration overheads relate to all of Vunderg’s product groups. Design overheads currently relate to only two product groups, glasshouses and conservatories.

Vunderg’s current costing system has been in use for a long time and absorbs overheads into product costs on a direct labour hours basis. The current costing system does not involve identifying the factors which drive the costs of the company’s activities and allocating overheads to products based on their usage of those factors.

Current product range

Windows
For many years, Vunderg has manufactured UPVC window frames used for residential house building. Vunderg buys the glass from an external supplier, inserts it into a frame and sells the completed window units to a small number of large construction companies.

These window units all have standard designs, specifications and sizes. This market is very competitive, and Vunderg must offer a complete range of windows for sale to the construction companies.

Glasshouses
Five years ago, Vunderg developed a range of small garden glasshouses, for non-commercial use, made of attractive and high quality materials. After initial quality problems due to the use of materials and manufacturing methods new to Vunderg, glasshouse production is now efficient, quality is high and the glasshouses now command premium prices.

The glasshouses are sold nationwide through 40 retailers, who vary significantly in the size of orders they place and the level of customer support and trade discounts which they receive from Vunderg. As a result, the profitability of selling to different retailers, or types of retailer, varies significantly.

Conservatories
More recently, Vunderg began manufacturing conservatories* using the same materials as its glasshouse range. These conservatories are expensive and are made to measure for individual customers’ houses.

There are a wide range of finishes and options available to choose from. Conservatories which match garden glasshouses have become popular with customers who can afford them. Unlike Vunderg’s other products, these are sold directly to individual home owners.

* Conservatories are structures made mainly of glass, which are attached to the side of residential houses. They form an additional room in a house and are popular in cool climates.

Future product development
Vunderg is looking to move into another new market soon, as the market for making windows for houses is now saturated.

This new market will be the manufacture and design of large windows to be installed in the entrance halls of large, prestigious commercial buildings. These will be bespoke items, designed and manufactured to customers’ own specifications.

Recent performance
The CEO is concerned by a recent fall in overall net profit margin despite modest revenue growth and good control of direct costs. In particular, he has said, ‘The conservatories part of the business may not be as profitable as its positive contribution (Appendix 1) may suggest.

For example, our procurement department spends a lot of time sourcing special materials and finishes requested by customers.

Many conservatories have leaked in the rain so we have to rectify these faults and work on a new design to prevent this happening. As we have only basic information systems, it is unclear how much some of these activities are costing. Over 20% of our factory space is dedicated to manufacturing conservatories. We may be better off discontinuing these products.’

The CEO has some experience of activity based costing (ABC) in a previous role and believes that activity based management (ABM) could help to improve Vunderg’s strategic performance.

He is keen to know what the limitations are of using the ABM method for Vunderg’s products and customer types and the problems with its implementation before he makes a decision to implement it.

It is now 1 September 20X5.

Required:
(a) Advise the CEO how activity based management (ABM) could help improve the strategic performance of Vunderg. (13 marks)

Appendix 1
Contribution by product type for the year ended 30 June 20X5

Product type No. of units Total 
sold
contribution
($’000)
Windows 175,000 9,800
Glasshouses 3,800 969
Conservatories 650 910