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Case Study:

As a result of effective management of costs and a focus on efficiency throughout the business at Waitrose, its Operating profit was 232.6m in 2016. Although it was down 0.8% (down 2.0% on a 53-week basis when compared to 2015), but when excluding property profits it was up 3.9% (up 2.5% on a 53-week basis), despite absorbing a greater share of centrally incurred functional costs. This profit improvement came against a backdrop of exceptionally tough market conditions and continuing food price deflation, as a result of improved productivity in its branches, reduced head office costs and operational improvements in its supply chain.

Giving customers additional reasons to visit our shops in an online age is a core part of Waitroses approach. In order to generate sustainable returns and review its current cost structure, the organization has approach Westford University College for identifying the most appropriate cost accounting method for helping its customers enjoy quality, inspiration and service they trust.

Absorption costing: Absorption costing principles must be used when preparing financial statements for external purposes. One of the key principles of absorption costing is that inventory and units produced must include a share of all production costs, both fixed and variable, incurred in getting them to their present condition.

Selling price per unit	50.00
Direct materials per unit	8.00
Direct labour per unit	5.00
Variable production overheads per unit	3.00
Details for the months of May and June 2017 are as follows:	May	June
Production of Product A	500.00	380.00
Sales of Product A (units)	300.00	500.00

Fixed production overheads are budgeted at 4,000 per month and are absorbed on a unit basis. The normal level of production is budgeted at 400 units per month.

Other costs
Fixed selling	4,000 per month
Fixed Administration	2,000 per month
Variable sales commission	5% of sales revenue

Note: - There was no opening inventory of Product A at the start of May. Prepare an absorption costing income statement.

Marginal Costing -Marginal costing principles are used for internal decision making purposes (short-term). As fixed costs are incurred regardless of the level of activity the purpose of marginal costing is to determine what contribution is been generated (sales less variable costs).

Working 1: Calculate the variable production cost
Direct materials	8
Direct labour	5
Variable production o/hs	3
Variable production cost	16

Q1: Prepare an income statement that depicts the changes in profit values & individual cost lines based on the above scenarios presented for Waitrose Plc by examining absorption costing and marginal costing scenarios. Do you believe that costing plays an important role in managing sales & eventual profitability, if so, use a range of accurate management accounting techniques in producing appropriate financial statements. Provide a range of financial reports that interpret data accurately for a range of business activities in Waitrose Plc.

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