Introduction to Management Accounting - Assignment Example

I. Professional Ethics A. What is the fundamental ethical issue in this situation? The fundamental ethical issue is the issue of objective reporting as regards the companys real financial and operational situation. Rhonda wants to forge the financial statement in order for the company to get its needed financing from the bank; however the company does not seem to be a good candidate for a loan because of its poor management. B. Discuss how Lis proposals violate accounting principles. Identify each specific concept or principle involved. According Horngren, Bamber & Stratton, Lis proposal to beef up the financial statements violate at least three ethical standards of accounting: competence, integrity, and objectivity. According to them, an accountant, or a management accountant must “perform their professional duties in accordance with relevant laws, regulations, and technical standards (1996, 23).” Lis proposal clearly violates laws, regulations and technical standards by incorporating her personal assets in order to increase the companys assets, as well as making her employee shoulder temporarily a part of the expenses in order to increase the companys income. Aside from violating the standard of competence, Lis proposal also violates the standard of integrity, which according to Horngren, Bamber & Stratton, accountant should “refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically [and to] refrain from engaging in or supporting any activity that would discredit the profession (1996, 23).” The philosophy behind accounting is to come up with reports that will show the performance of the company to people with vested interests to the company, such as the government, for the taxes, and the companys investors such as shareholders and creditors. With accounting, fair and accurate information is desired to be produced for the purpose of objectivity, another ethical standard for accounting. Only with objective information will people such as investors and creditors will put their trust on the company, investing on the company for the hope of gaining some return through competent management in the process. This will be violated with Lis proposal, as well. II. Process Costing – Weighted Average Costs and FIFO A. Using the Weighted Average method, prepare a production cost report (following the 4 steps outlined in the text) for the Strings department for October. Round to 4 decimal places for unit costs and to the nearest dollar in the production cost report. B. Prepare a production cost report for the Strings department for October using the FIFO method. C. Assume that in order to remain competitive, the company undertook a major cost-cutting program during February. Would the effects of this cost-cutting program tend to show up more under the weighted average or under the FIFO method? Explain your answer. If the company undertook a major cost-cutting program during October, the current month in which the costs are measured, the effects will more likely show up in the FIFO method. Because FIFO method segregates the periods in which certain production is made, if cost-cutting is undertaken, the costs for the current period will definitely go down and will be reflected in the prices of the works completed. III. Support Department Cost Allocation – direct, step-down and reciprocal methods A. Calculate the overhead rates per machine hour for the Molding Department and per direct labor hour for the Assembly Department. Use the direct method to allocate support department costs. B. Estimate the cost of a gauge which is produced using 3 machine hours in the Molding Department and 5 labor hours for the Assembly Department. C. Calculate the overhead rates per machine hour for the Molding Department and per direct labor hour for the Assembly Department. Use the step-down method to allocate support department costs. Allocate the Repair Departments costs first. Using these figures, estimate the overhead cost of the gauge. D. Use the reciprocal method to allocate support department costs. Using these figures, estimate the overhead cost of the gauge. E. Which of the three methods of support department cost allocation results in the most accurate overhead rates and product cost? Why? The reciprocal method allocates the overhead costs most accurately. The difference between step-down and reciprocal is that in step-down, the allocation of the first cost to be allocated will not include the allocation for it for the subsequent allocations of other costs. In reciprocal, the relationships between the costs of the support groups, aside from the production groups are emphasized and included in the analysis. Because of this, it can be said that reciprocal method shows the benefits of mutual services not only to the production groups, but also to the support groups. This way, costs are more properly allocated according to the benefits they really provide to respective groups that use those services. IV. Conventional versus Activity Based Costing A. Activity-based costing (ABC) is said to result in improved costing accuracy when compared with conventional costing procedures. Briefly explain how this improved accuracy is attained. The ABC system breaks down the cost items into activities that serve as the causes for the company to incur such costs. In other words, the cause and effect relationships between the cost items and certain items are identified in order to more accurately allocate the costs (Stratton et al 2009, 39), and the basis for allocation becomes stronger in order to make better decisions (Babad & Bala 1993). Using the ABC system, it is apparent that pricing the service according to value-adding activities to the customer, rather than only one activity reflects the true economic benefit to the customer. With this, the company sees who gets to use its facility the most and should be charged more appropriately. Under the ABC system, the share in terms of profitability from each customer is also assessed based on the cost the company incurs on them by providing them services in terms of the the significant cost activities. Therefore, it can be seen, for example, which customer to prioritize and which one to drop as judged by their share of profitability to the company. If the company loses money on one customer, decisions should be made in order to cut further losses, or on how to improve profitability under such customer. Because the company can determine the rate in terms of allocation per cost item, the company can determine which among the cost items, in relation to the cost driver has the highest rate as well. The company can identify activities that are non-value adding to the customers, and decide on how to minimize such costs in order to increase profitability. B. Assume that the firm uses conventional costing procedures, allocating total costs on the basis of billable hours. Determine the profitability of the firms e-commerce and information systems consulting services, expressing your answer both in dollars and as a percentage of activity revenue. C. Repeat requirement 2, using activity-based costing. D. Stephen Shiffer, one of the firms partners, doesnt care where his professionals spend their time because, as he notes, Many clients have come to expect both services and we need both to stay in business. Also, information systems and e-commerce professionals are paid the same hourly rate. Should Shiffers attitude change? Explain. By looking at the ABC system, it is apparent that the IT systems contribute very little to the firms profitability. By assessing the real cause-and-effect relationships between the costs and activities, it can be seen that the IT systems is more costly than he is thinking. By looking at this analysis, if he wants to increase the companys profitability, he has to look for ways to cut down on costs for this product segment if he chooses to not abandon it. This is because, the other service, the E-Commerce consulting, although reaps smaller in terms of revenue, is a better contributor in terms of profitability to the company. V. Complete analysis of cost variances, Review of Chapters 10 & 11: Manufacturer A. Prepare as complete an analysis of cost variances as is possible from the available data. References Babad, Yair M., and Bala V. Balachandran. 1993. "Cost Driver Optimization in Activity-Based Costing." Accounting Review 68, no. 3: 563-575. Business Source Premier, EBSCOhost (accessed October 6, 2009). Horngren, H., Sundem, G., & Stratton, W. 1996. Introduction to Management Accounting. New Jersey: Prentice Hall. STRATTON, WILLIAM O., D.E.N.I.S. DESROCHES, RAEFA . LAWSON, and T.O.B.Y. HATCH. 2009. "Activity-Based Costing: Is It Still Relevant?." Management Accounting Quarterly 10, no. 3: 31-40. Business Source Premier, EBSCOhost (accessed October 6, 2009). Read More