The Managerial Accounting - Term Paper Example

Question No QUESTION Carey Manufacturing, Inc., is considering reorganizing its plant into manufacturing cells. The following estimates have beenprepared to evaluate the benefits from the reorganization: Before the change After the change Total annual sales $700,000 $850,000 Costs as percentage of sales: Direct materials 10% 9% Direct labor 6% 4% Support costs 9% 7% Work-in-process inventory $200,000 $120,000 Inventory carrying costs are estimated to be 12% per year. Required: a) Why do the layout reorganization estimates include 1. a decrease in work-in-process inventory? 2. a decrease in direct material costs as a percentage of sales? 3. an increase in sales? b) As a result of the layout reorganization, what amount of annual change is projected 1. from carrying reduced levels of work-in-process inventory? 2. for incremental manufacturing costs? 3. in total benefits? Note: Show your calculations in details. (a) A decrease in the work in process inventory represents that the reorganization is likely to increase the operations of the company. The resultant increase in the operations will increase the production capacity. If the production capacity is increased, the company will require more and more items of finished goods, thus it is predicted that the WIP inventory will be decreased. This is because the use of manufacturing cells improves material flow and is especially suited for batch production, even in relatively low volumes. Usages of manufacturing cells are also likely to enhance the effective allocation of the resources. Due to this particular fact, the prices of the material as a percentage of sales have decreased. Keeping the reorganization into consideration, the sales revenue will increase due to the increase in the production. (b) Before the Change After the Change Net Effect In carrying reduced level of inventory 200,000 120,000 80,000 incremental manufacturing cost 175,000 170,000 5,000 total benefit 501,000 665,600 164,600 As per the above analysis, the level of inventory has decreased, whereas the incremental manufacturing cost has also increased. The net benefit from the reorganization amounts to $164,600 Question No. 2 QUESTION 2 a) Identify and explain each of the three major cycles of the total-life-cycle costing approach. b) How does the total-life-cycle costing approach differ from traditional product costing? Explain. (a) The three stages in the product life cycle costing are as follows 1. Product designing and planning phase 2. Product manufacturing and sales phase 3. Product sales service and adornment phase In the first phase of the cycle, all the committed costs are incurred. Committed or locked in costs are those cost that have not been incurred currently, but they will be incurred in the future based on the decisions that have already been taken in relation to the product. The examples of cost incurred in the first phase of the product life cycle designing are cost product’s material and labor input and the production process. These costs are very difficult to alter once they have been committed to. In the second phase of the product life cycle costing, cost incurred is included. Costs are incurred when a resource is used or sacrificed. In the second phase of the cycle, only such costs are recorded that have been incurred. An analysis of the life cycle costing system would present the fact that 80% of the cost of any product is committed into in the first phase of the cycle, whereas the second phase of the cycle present such cost which have been incurred. Majority of these costs are the same which were already committed in the first phase of the project. In the life cycle costing cost can be effectively managed in the first phase of the cycle in which the planning of the product design and planning takes place. In the third phase of the product life cycle, the post sales service cost are estimated such as warranty costs, installation charges and the cost for discontinuing the operations at the end of the economic life cycle of the product. (b) In the traditional product costing system, the management accounting systems are focused primarily on the manufacturing stage of a product’s life cycle. The cost which have been incurred before manufacturing, such as the research and development costs and design cost are treated as period costs. In addition to this, the post manufacturing and adornment costs are also recognized as the period costs. These cost are not accounted for in the product cost calculation, nor these cost are subjected to the conventional management accounting control procedures. In the life cycle costing system, cost over the life of a product is estimated and accounted for in order to determine whether the profit that will be earned during the life of the entire product would be enough to cover the cost that will be incurred over the life of the product. This method assist the cost accounted in identifying the cost incurred in the different stages of the product’s life provides an insight about the total quantum of cost and help in managing it over the entire period of such product’s life. Question No. 3 QUESTION 3 Lance Allot, vice-president of Arthur Industries, a computer manufacturer in England, has been trying to figure out whether one of his branch managers, Ms. Gwen, has been achieving the company-wide return on sales target of 20 percent. Mr. Allot has just been given data from his new target costing system regarding Ms. Gwens operations. Ms. Gwens estimated target sales volume is 30,000 computers with a target-selling price of $1,000. The data also show that Ms. Gwens unit target cost is $750 per unit. Required: a) Help Mr. Allot determine whether Ms. Gwens return on sales target has been met. b) Has Ms. Gwen done a good or a poor job? Explain. Note: Show your calculations in details. Total Sales of computers by Ms. Gwen (units) 30,000 Selling Price 1,000     Total Sales (A) 30,000,000     Direct Cost per Computer 750     Total Direct Cost (B) 22,500,000     Net Profit (A-B) 7,500,000     Return on sales (Net profit /A) 25% Based on the above analysis it is quite apparent that Ms. Gwen achieved the target sales return of 20%. Not only did she achieved the target, but she did better than expected as her return on sales was 25% which was 5% more than the target she was assigned. This could be due to the fact that Ms Gwen was able to price the product in a way so as to maximize the sales revenue but at the same time, she was able to manage her direct costs as well. If her cost would be more than $800, then the return on sales would have declined below 20%. Thus, based on the above data it can be concluded that Ms. Gwen did a fine Job Question No. 4 QUESTION 4 a) Describe some of the drawbacks of using the operating budget as a control device. b) What is stretch budgeting? Why is it used? c) What is budget slack? What are the pros and cons of building slack into the budget from the point of view of (a) an employee and (b) a senior manager? (a) The budgetary control is widely used by the organization all around the world in order to monitor their progress and at the same time plan for the future. Budgets greatly assist the organization in co-coordinating the activities and the allocation of resources among various departments. However, with immense advantages, the budget also comes with a few disadvantages as well. One of the major disadvantages of operating budget is that these can see by the labor force as a method of imposing pressure by the management thus it weakens the relationship. The rift created between the management and the employees can significantly affect the operations of an organization. In addition, another disadvantage of the budget, which is witnessed the most, is that conflicts arise between departments over the matter of resource allocation. Every department desires that the best and optimum resources are allocated to them so that they can perform to their maximum potential. However, in an organization, the demands of everyone cannot be cater simultaneously. Thus if the departments are unable to achieve their targets due to the resource allocation problem, they blame other department which eventually affect the operations of the company. In addition, while preparing budgets, it is also very difficult to reconcile the personal and corporate goals. In addition to the above, the administration of the budget is a very tedious process and may require the use of expertise. The company needs to constantly revise the budgetary control in order to cater for the changing environment and the changing conditions. If these budgets are not updating with the passage of time, then there is no use of using the outdated budgets and measuring the performance of the company against such budgets. (b) Stretch budget can be defined as a budget which is based on the forecasted or the future sales that the company currently foresees in the coming period. An example of the stretch budget would be the forecast of the sales which is likely to take place 12 months from now if there is 2% increase in the level of inflation. Stretch budgets are highly complex as it involves intricate forecasting and techniques of predicting the future events. The primary use of stretch budgeting is to prepare the company for the highly unpredictable conditions. These budgets are usually not prepared for estimating expenditures, rather they are prepared as a cautionary measures in order to be prepared if some highly unusual event takes place. (c) Budgetary Slack is a term that refers, in business finance, to padding the budget by overestimating expenses and underestimating revenue or sales when developing a budget. Following are the pros and cons of budgetary slack from the point of view of an employee and a senior manager   Employee Senior Manager Pros The introduction of the budgetary slack is likely to assist the employees to operate in unknown circumstances. From the senior managers perspective, the utility of slack is higher. The slack budget is an effective tool which can be utilized in order to increase the pressure to meet the current year’s earnings per share target by postponing the expenditures in to the future years and devising strategies to increase the sales revenue into the current year. Cons From the perspective of an employee, the budgetary slack is likely to decrease the ability of an employee to highlight weakness in the operations of the company and to take corrective actions promptly. By Building budgetary slack in the budgets, the corporate planning is likely to suffer. Actions such as pricing changes or reduced promotional spending may be taken from a perceived need to improve earnings when eliminating the budgetary slack could accomplish the same objective without marketplace changes. The budget slack is also likely to reduce the objective evaluation of departmental managers Question No.5 QUESTION 5 The following information pertains to Ortega Corporation: Month Sales Purchases July $15,000 $5,000 August 17,000 6,000 September 19,000 7,000 October 21,000 8,000 November 24,000 9,000 December 30,000 10,000 *Cash is collected from customers in the following manner: Month of sale (2% cash discount) 30% Month following sale 50% Two months following sale 15% Amount uncollectible 5% *40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month. Required: a) Prepare a summary of cash collections for the 4th quarter (October – December). b) Prepare a summary of cash disbursements for the 4th quarter (October – December). Note: Show your calculations in details. (Amount in $) Cash Collection July August September October November December Sales 15,000 17,000 19,000 21,000 24,000 30,000 Month of Sale 4,200 4,760 5,320 5,880 6,720 8,400 Month Following Sale - 7,500 8,500 9,500 10,500 12,000 Two months following sale - - 2,250 2,550 2,850 3,150 Total Cash Collected 17,930 20,070 23,550 Cash Disbursement July August September October November December Purchases 5,000 6,000 7,000 8,000 9,000 10,000 40% in the current month 2,000 2,400 2,800 3,200 3,600 4,000 60% in the following month   3,000 3,600 4,200 4,800 5,400 Total Cash Disbursed 7,400 8,400 9,400 Question No. 6 QUESTION 6 a) Compare and contrast the users and uses of management accounting and financial accounting. b) What is the purpose of management accounting? c) Explain the role of management accounting in helping an enterprise develop and implement its strategy. (a) The users of financial accounting are primarily external users who want to understand and evaluate the financial outlook of the company. These primarily include the following users Government Creditors Shareholders Corporate Investors These individuals are the stakeholder in any company and their primary purpose of to safeguard their interest in the operations of the organization. For example, the government would be interested in the financial information from the financial accounting perspective in order to evaluate whether the company is complying with all the accounting conventions and operating in accordance with the guidelines and regulation issued. Similarly, the shareholders of the company are interested in financial ratios of the company such as current ratio, net profit margin and earnings per share etc. The users of management accounting on the other hand are mostly internal user such as employees, managers, and executives of the company. They want to evaluate the proper functionality of the operations of the company. The major concern of any organization is the maximization of profit and curtailment of cost. The management accounting information provides necessary information to its users how the cost is being managed and how the products are priced. (b) The primary purpose of the management accounting is to plan for the future. By using the financial information that is provided to the managers and executives of the company, budgets are planned in order to control the profitability of the company, implement strategies and increase the profitability. Another effective use of the management accounting is the motivation of the employees. The management accountant works as a liaison between the employees and the upper level organization in order to cater their queries and provide them with useful information. (c) The use of management account gin is quite significant in the strategic implementation of any organization. The prime and foremost utility of a management accountant is to ensure that the company has adequate and ample supply of capital, in order to effectively execute its operations, throughout the year. Management accounting’s utility can be analyzed from several perspectives. The first and foremost use of management accounting is to manage the financial assets of the company. A management accountant needs to prudently allocate its resource to obtain the best possible outcome. This can include tasks such as investing in the post feasible and lucrative ventures, organizing research and development activities in order to identify the lowest cost production method. The optimum allocation of the financial resources is subjective and depends upon the type of organization. Another important task which the management accounting addresses is the planning process for the future periods. A management accountant needs to setup various budgets for the coming financial years, in order to ensure that the expenses are curtailed and profits are maximized. These budgets must be submitted by the management accountant to the board of director or trustees of the company in order to gain their approval. Strategic planning is another area where the use of management accounting is vital. This includes a proactive approach rather than a reactive one. Keeping into consideration the general economic scenario and the financial capability of the company, a management accountant needs to plan how the organization is going to financially strengthen itself in the near future. Whether the expansion and the financial stability will be organic or through acquiring any other entity, are some questions which the finance director needs to prepared for beforehand. The finance director also needs to perform the analysis of the. Management accounting also assists in the monitoring of the financial performance which is very crucial as without it the company would be heading into hap hazard directions with utmost uncertainty. Question No. 7 QUESTION 7 Grapevine Corporation plans to grow by offering a cellular phone model, the QWERTY Touch Screen, which is superior and unique from the competition. Grapevine believes that putting additional resources into R&D and staying ahead of the competition with technological innovations are critical to implementing its strategy. Required: a) Is Grapevines strategy one of product innovation and leadership, lowest total cost, or complete customer solutions? Briefly explain. b) Identify at least one key element that you would expect to see included in Grapevines Balanced Scorecard: (1) for the financial perspective; (2) for the customer perspective; (3) for the process perspective; and (4) for the learning and growth perspective. c) What is the key ingredient to successful Balanced Scorecard implementation? Explain. d) What is a key performance indicator scorecard and how does it differ from the Balanced Scorecard? Which is more effective? (a) The Grapevines strategy is of product innovation and leadership. The company is planning to invest heavily in the research and development of the product in order to create to a product which is not already in the market and will the customer a complete new experience. By investing heavily in technology the company would be able to introduce new features into the product which will assist it maintain the market share and thus eventually becoming the leader of the industry. (b) financial perspective customer perspective; process perspective learning and growth perspective Allocated budget for the research and development activity and the return on investment What after sales services will be provided What technical expertise will be required for the manufacturing of the product and whether the company currently has such expertise Identification of the market for the use of QWERTY Touch screen market abroad so to export the product and earn additional revenue (c) An effective balance scorecard contains the following main ingredients: First and foremost, an effective balance scorecard should contain a strategic foundation. The strategic foundation should include a plan for communicating and aligning the organization with the strategy. This is step is vital to the balance scorecard approach. The strategic foundation also includes determination of major strategic areas and scopes on which the attention of the organization should be focused on. The other important ingredient for a balance score card is establishment of measurement criteria against which the outcome of the plan is measured. This measurement criterion is used by the organization as a feedback control. When outcomes are measured against the predetermined or set target, it tells how far the company is from the optimum track or how well the company has been performing that it has surpassed the expectations. Another important ingredient in the balance scorecard approach is the deployment of the strategy. (d) Key performance indicators or KPI are usually used by the organization for the performance measurement. This particular tool is utilized by the organization to evaluate the success of a particular activity or the organization as a whole. In order to choose the right KPIs for the performance evaluation, it is imperative that to know what is important for the company. Most commonly used KPIs in the performance evaluation of any organization are as follows • Quantitative indicators • Practical indicators • Directional indicators • Actionable indicators • Financial indicators The difference between the KPI and the balance scorecard approach is that KPI is usually used for the day to day evaluation of the performance of the company such as the daily sales target, expenses limit and return on sales achieved etc. Whereas the Balance scorecard approached is utilized by the top management of the company for making long term strategic decision. Balance scorecard assists the management of the company in assessing how well the company is operating in order to achieve its overall corporate strategy. There is no definite way of determining the effectiveness of the KPI or the balance scorecard method approach, but on a comparative basis balance scorecard approach is more effective as it is more flexible as you are able to specify relative importance of indicators, Question No. 8 QUESTION 8 Sunshine, Inc. sells a single product. The companys most recent income statement is given below. Sales (4,000 units) $120,000 Less variable expenses (68,000) Contribution margin 52,000 Less fixed expenses (40,000) Net income $ 12,000 Required: a) Contribution margin per unit is _______________ b) If sales are doubled to $240,000, total variable costs will equal _______________ c) If sales are doubled to $240,000, total fixed costs will equal _______________ d) If Sunshine is past the breakeven point and 10 more units are sold, profits will increase by _______________ e) Compute how many units must be sold to break even. _______________ f) Compute how many units must be sold to achieve a profit of $20,000. _______________ Contribution Margin Per Unit 13 If sales are doubled to $240,000, total variable costs will equal 136,000 If sales are doubled to $240,000, total fixed costs will equal Will remain the same If Sunshine is past the breakeven point and 10 more units are sold, profits will increase by 130 Compute how many units must be sold to break even. 3,077 Compute how many units must be sold to achieve a profit of $20,000. 4,500 Question No. 9 QUESTION 9 Poseidon Company produces customized sailboats. The company uses a job order costing system. Its plant has three production departments: cutting, machining, and assembly. The estimated manufacturing overhead cost and direct labor cost for each department for 2011 follow: Cutting Machining Assembly Manufacturing Overhead cost $600,000 $800,000 $100,000 Direct labor cost $300,000 $200,000 $500,000 In May 2011, the company received an invitation from Duluth Sailing Company to bid on an order of five luxury sailboats that must be delivered by the end of September 2011. This Duluth Job would require direct manufacturing costs in the three departments as follows: Cutting Machining Assembly Direct material cost $12,000 $ 800 $ 4,600 Direct labor cost $ 7,000 $2,000 $15,000 Required: a) Assume that a single, plantwide predetermined manufacturing cost driver rate based on direct labor cost is used. Determine the manufacturing cost driver rate and manufacturing overhead costs applied to the Duluth Job. b) Assume that separate, departmental predetermined manufacturing cost driver rates based on direct labor cost are used in each department. Determine the departmental manufacturing cost driver rates and manufacturing overhead costs applied to the Duluth job. c) Assume that Poseidon has a policy to add a 60% markup to estimated job costs to arrive at the bid price. Determine the bid price for the Duluth job using: 1. a plantwide manufacturing overhead cost driver rate; and 2. departmental manufacturing overhead cost driver rates. d) Review the bid prices computed in (c). Why do the two bids differ? e) What are the possible consequences of overbidding a job? Underbidding a job? (a) Total Manufacturing Overhead Rate 1,500,000 Total Direct labor cost 1,000,000 Single Plant wide predetermined manufacturing cost driver rate 1.50 Cost to be applied to Duluth Job 36,000 (b)   Cutting Machining Assembly Manufacturing Over head cost 600,000 800,000 100,000 Labor Cost 300,000 200,000 500,000 Overhead Rate 2.00 4.00 0.20 Direct Labor Cost 7,000 2,000 15,000 Cost to be applied to Duluth Job 14,000 8,000 3,000 Total cost 25,000 (c)   Cutting Machining Assembly Direct Material 12,000 800 4,600 Direct Labor 7,000 2,000 15,000 Plant wide manufacturing Over head rate 10,500 3,000 22,500 Total Cost 29,500 5,800 42,100 Bid Price 47,200 9,280 67,360 Total bid price 123,840       Cutting Machining Assembly Direct Material 12,000 800 4,600 Direct Labor 7,000 2,000 15,000 Department wise manufacturing Over head rate 14,000 8,000 3,000 Total Cost 33,000 10,800 22,600 Bid Price 52,800 17,280 36,160 Total bid price 106,240     (d) The two bids differ due to the difference in the overhead rate. The bid of $123,840 uses a plant wide overhead rate of 1.5 whereas the other method of calculation of bid price uses the department wise overhead rate which is different for each department. The difference can further be analyzed as follows:   Bid Price Single OH Rate 123,840 Department wise OH Rate 106,240 Difference 17,600 Impact of profit (60%) 6,600 Actual Difference 11,000     Total OH cost applied to the Job (single rate) 36,000 Total OH cost applied to the Job (Department rate) 25,000 Difference 11,000 (e) Underbidding a Job The company can lose on the opportunity of earning a higher profit and thus a higher return on its investment Low bid is considered to be a sign of low quality product or service by certain types of customers Company is not able to recover its cost to the fullest Overbidding a Job The company would not be able to find a buyer if it quote higher price The employees of the company might sees the overbidding of the job as a sign that the company is making profit. They will require more compensation from the management resulting in the increase of the cost of production for the company, Question No. 10 QUESTION 10 a) Explain how activity-based costing systems can provide more accurate product costs than traditional cost systems. b) Do activity-based costing systems always provide more accurate product costs than conventional cost systems? Why or why not? (a) The traditional system of costing often relies on the arbitrary allocations of indirect costs. To be more exact, they rely broadly on volume-based allocations. In most manufacturing concerns, many indirect costs are not volume-based, if volume-based allocation bases are used, high volume products are more likely to be allocated with greater proportions of indirect costs than they have actually consumed whereas on the other hand low volume products will be assigned a lower proportions. In these circumstances traditional costing system will overcast high volume products and low volume products will be under cost. In contrast, Activity Based Costing (ABC) systems recognize that many indirect costs vary in proportion to changes other than production volume. By particularly identifying the cost drivers that causes the costs to change and assigning cost to cost objects on the basis of cost driver usage, costs can be more accurately traced. Thus in activity based costing, it is claimed that this cause-and-effect relationship provides a superior way of determining relevant costs. ABC systems classify activities along a cost hierarchy consisting of unit-level, batch-level, and product-sustaining and facility-sustaining activities. Unit-level activities are performed each time a unit of the product or service is produced. (b) Although the ABC costing system has proved to be better than the traditional costing system in the allocation of overhead over the production of various items, there are certain drawbacks of this approach as well. One of the drawbacks in determining the product cost through this system of is that activity based costing data can be easily misinterpreted and it must be used with utmost care when it is utilized in the decision making process. In activity based costing system, the cost assigned to products and other cost objects are only potentially relevant. Therefore, before making any significant decision based on the information provided by the activity based costing system, the managers must bear in mind that all of these costs are only relevant to certain extent and are not appropriate for absolute decision making. References [1] Accountingcoach.Com (2012). Activity Based Costing | AccountingCoach.com. 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