# [Solution]Assignment: MANAGERIAL ACCOUNTING

This assignment is worth 35 % of the total assessment.   General Instructions   This is an individual assignment. All answers must be presented in…

This assignment is worth 35 % of the total assessment.

General Instructions

This is an individual assignment.
All answers must be presented in a professional format acceptable to the professional business environment.
Theory questions must be written in Microsoft Word (or equivalent) and be in 1.5 spaced lines, 12pt, Arial font and with the APA referencing style.
Assignment format should include at a minimum:

Title Page
Introduction
Conclusion
References in the APA Referencing Style.

Submit the assignment through Moodle. A hard copy of this assignment in PDF form must be also submitted to the lecturer.
Reference all ideas, quotes and information which you obtain from various sources using the APA system.
The assignment should have the AIS coversheet attached to it.
Please sign and date the plagiarism form and hand in to the lecturer.

Assignment Topics

Question 1
Cost Volume Profit Analysis             25 marks

Question 2
Budgetary Pressure and ethics        10marks

Question 3
Activity Based Costing

Question 1Cost Volume Profit Analysis25 marks

Operating Leverage, Change in Income (9 Marks)

Income statements for two different companies in the retail shoe industry are as follows:

Duncan                                             Macduff

Sales
\$
375,000
\$
375,000

Total variable costs
300,000
150,000

Contribution Margin
75,000
225,000

Total Fixed Costs
50,000
200,000

Operating Income
25,000
25,000

Required:
(a)   Compute the degree of operating leverage for each company.
(b)   Compute the break-even point in dollars for each
company andexplain why the break-even point for Macduff is higher.
(c)   Suppose that both companies experience a 30% increase
in revenues. Compute the percentage change in profits for each company. Explain why the percentage increase in Macduff ’s profits is so much larger than that of Duncan.

(B)    Cost Volume Profit Application(16 marks)

RonSmith works for Wellington Design Paperworks Limited, as a  marketing managerfor a division that produces a variety of paper products.  He is considering the divisional manager’s request for a sales forecast for a new line of paper napkins. The divisional  manager  has  been  gathering  data  so  that  he  can  choose  between  two  different  production processes. The first process wouldhave a variable cost of \$10 per case produced and total fixed cost of \$100,000. The second process would have a variable cost of \$6 per case and total fixed cost of \$200,000. The selling price would be \$30 per case. Ron had just completed a marketing analysis that projects annual sales of 30,000 cases.
Ron is reluctant to report the 30,000 forecasts to the divisional manager. He knows that the first process would be labor intensive, whereas the second would be largely automated with little  labor  and  no  requirement  for  an  additional  production
supervisor.  If  the  first  process  is chosen,  Jerry  Johnson,  a  good  friend,  will  be  appointed  as  the  line  supervisor.  If  the  secondprocess is chosen, Jerry and an entire line of laborers will be laid off.
After some consideration, Ron revises the projected sales downward to 22,000 cases.
He believes that the revision downward is justified. Since it will lead the divisional manager to choose the manual system, it shows a sensitivity to the needs of current employees—a sensitivity that he is afraid his divisional manager does not possess. He is too focused on quantitative factors in his decision making and usually ignores the qualitative aspects.

Required:
(a)  Compute the break-even point in units for each process.    (4 marks)
(b)  Compute the sales volume for which the two processes are equally profitable.
(3marks)
(c) Identify the range of sales for which the manual process and the automated process is more profitable.Why does the divisional manager want the sales forecast?
(3 marks)
(d)Do you agree with Ron’s decision to alter the sales forecast? Justify your answer.
(6 marks)

Question 2                   Budgetary pressure and ethics                    (10 marks)

Belco Industries produces and distributes industrial chemicals. Belco’s earnings increased sharply last year, and bonuses were paid to the management staff for the first time in several years. Bonuses are based in part on the amount by which reported profit exceeds budgeted profit.
Jim Kern, the finance director, was pleased with Belco’s earnings and thought that the pressure to show financial results would ease. However, Ellen North, Belco’s managing director, told Kern that she saw no reason why this year’s bonuses should not be double those of last year. As a result, Kern felt great pressure to increase reported profit well above the budgeted profit. This would assure increased bonuses.
Kern met with Bill Keller of Pristeel Ltd, which supplied most of the company’s manufacturing supplies and small equipment. Kern and Keller have been close business contacts for many years. Kern asked Keller to invoice all Belco’s purchases of perishable supplies as equipment. Kern told Keller that Belco’s managing director had imposed stringent budget constraints on operating costs but not on capital expenditures. Keller agreed to do as Kern had asked.
Kern planned to capitalise the purchase of perishable supplies and include them with the equipment account in the statement of financial position. This way, Kern could defer the full expense recognition for these items to later years. This would increase reported profits, leading to increased bonuses.
While analysing the financial statements for the second quarter of the current year, Gary Wood, Belco’s accountant, noticed a large decrease in the cost of supplies compared with that of last year. Wood reviewed the supplies account and noticed that very few supplies had been purchased from Pristeel, a major source of supplies. However, there had been large purchases of equipment from Pristeel. Wood, who reports to Kern, immediately brought this to Kern’s attention. Kern told Wood of North’s high expectations and of the arrangement made with Bill Keller of Pristeel. Wood told Kern that his action was an improper accounting treatment for the supplies purchased from Pristeel. Wood requested that he be allowed to correct the accounts and urged that the arrangement with Pristeel be discontinued. Kern refused the request and told Wood not to become involved.
After clarifying the situation in a confidential discussion with an objective and qualified peer within Belco, Wood arranged to meet with North, Belco’s managing director. At the meeting, Wood disclosed the arrangement Kern had made with Pristeel.

Required:
(a) Explain why the use of alternative accounting methods to manipulate reported earnings is unethical.
(3 marks)
(b) Is Gary Wood, Belco’s accountant, correct in saying that the supplies purchased from Pristeel were accounted for improperly? Explain your answer.
(3 marks)
(c) Explain why the actions of Gary Wood, Belco’s accountant, were appropriate.
(4 marks)

Question 3Activity-based costing (25 marks)
Cravings for Cakes Pty Ltd manufactures a wide range of delicious cakes and pastries. At the annual Christmas party, the company’s owner, I.M. Craving, treated his employees to a nostalgic review of the firm’s history. He told them:
Twenty years ago we had only three product lines—pies, finger buns and lamingtons. We were flat out producing large volumes of each product, using very simple machinery and a lot of hard work.
My, how things have changed! We still make and sell a lot of pies and lamingtons, but we also produce a wide range of low-volume lines, such as Danish pastries, donuts and vanilla slices. I hear you sighing, and no wonder; these low-volume products are a pain in the neck. They are complex to produce and their short production runs involve a lot of extra machinery setups and material handling. But the accountants tell me that these specialty lines have wonderful profit margins, so we must not complain.
Craving then outlined the dramatic changes that had occurred within the business over the past 20 years. In the factory he had seen the introduction of computer-controlled mixing machines and ovens that replaced a lot of the direct labour operations, and an increased emphasis on quality and delivery performance. Indeed, right across the business, more and more effort had been placed on keeping the customer happy.
However, his speech cast a gloomy shadow across the Christmas festivities when he warned:
Despite all this progress, the company seems to be struggling. Our profits are declining, and if things don’t improve over the next few months, this may be our last Christmas together. To survive we must all work very hard. We must focus on increasing sales, particularly of our high-margin specialty products.
The company’s management accountant, Ursula B. Bright, had become concerned about the conventional product costing system at Cravings for Cakes. The manufacturing people were also sure that the costing system was distorting product costs.

Required:

a.
Describe the changes in cost structure that are likely to have occurred at Cravings for Cakes over the last 20 years, and explain their causes.                (6 marks)

b.
Do you think that the existing costing system understates or overstates the cost of

(i)
Lamington?

(ii)
Danish pastry?

c.
Explain how activity-based costing could overcome the deficiencies inherent in the existing costing system.(2marks)

d.
What factors should U.B. Bright consider when deciding whether to use a

simple activity-based costing system to assign manufacturing overhead to products or anactivity-based system that includes both manufacturing overhead and non-manufacturing costs?(2marks)

(B)  Traditional costing system versusActivity based costing system (11 marks)
Physical Fitness Services Limited manufactures exercise equipment of commercial quality. The chief accountant has proposed a change in the costing system from a traditional costing system to an activity-based costing system. The financial director is not convinced of making the changes, so she requests that both the systems of costing be applied for the benefit of next order of large equipment for the purposes of comparison and analysis. An order from Healthy Salons for 150 low impact treadmills is received and identified as the order to be subjected to dual costing. The following cost data relate to Healthy Salon’s order:
Data relevant to both costing systems
Direct Materials                    \$55,500
Direct Labour Hours                                820
Direct Labour Rate per hour      \$18

Data relevant to the traditional costing system
Predetermined overhead rate is 300% of direct labour cost.

Data relevant to the activity-based costing system

Activity cost pool
Cost drivers
Expected use of cost drivers per treadmill

Engineering design
Engineering hours
\$30 per hour
330 hours

Machine set-up
Set-ups
\$200 per set-up
22 set-ups

Machining
Machine hours
\$25 per hour
732 hours

Assembly
Number of
subassemblies
\$8 per subassemblies
Subassemblies

Packaging and shipping
Packaging and shipping hours
\$15 per hour
152 hours

Building  occupancy
Machine hours
\$6 per hour
732 hours

Required:

Calculate the total cost of the Healthy Salon’s order using the following:
Activity based costing system      (6 marks)
Which costing system is Physical Fitness Services likely to adopt? Why?

(2 marks)

2.236 Managerial Accounting
Semester 3, 2018

Name: __________________________                    ID Number:   ___________

1.     Introduction (3)

2.    Question 1 Cost Volume Profit Analysis
a.    Operating Leverage and change in income  (9 marks)
b.    Cost Volume Profit Analysis Application (16  marks)
3.    Question 2 Ethical Issues: Overhead Costs
a.         Use of alternate accounting methods explained. (3)
b.         Appropriate explanation given. (3)
c.         Reasons for the actions explained (4)
4.     Question 3
(A) Activity Based Costing; Traditional Costing: manufacturer
a.    Description of changes in the course structure and their causes explained (6)
b.    Appropriate reasons given for the change in costs (4)
c.     Explanation for overcoming the deficiencies (2)
d.    Number of factors considered (2)
(B)  Activity Based Costing; Traditional Costing versus Activity Based Costing
a.    Total cost calculated: Traditional costing system (3)
b.    Total cost calculated: Activity based costing system (6)
c.    Valid reason given for choosing a particular system (2)
5. Organisational Structure
Order of presenting information (4)
Effective and logical structure of paragraphs/steps and transitions. (3)
6. Conclusion
Summarizes the topics attempted and solved (5)
7.  Presentation and referencing
Neatly typed according to the general writing requirements (2.5)
Accurate use of spelling and grammar (2.5)
Conforming with APA referencing requirements (2.5)

Total Assignment mark

Course mark

/3

/25

/10

/14

/11

/7

/5

/10

/85

/35

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