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Select an organisation with which you are familiar, and outline some of the main changes that gave taken place in its business environment in recent years.
Select an organisation with which you are familiar, and outline some of the main changes that gave taken place in its business environment in recent years.
Explain how specific aspects of management accounting systems may be used to motivate employees and managers.
Identify the factors that may influence management accounting system design according to contingency theory.
Briefly describe changes in the focus of management accounting that have occurred since the beginning of the twenty-first century.
Briefly summarize the professional qualifications required to become a member of one of the three major Australian professional accounting bodies.
Complete each of the following statements by selecting the best answer. In each case, explain your selection.
1. Management accounting:
(a) Often involves predicting future outcomes
(b) Is based on objective, verifiable information
(c) Emphasises the importance of accuracy
(d) Is based on financial information only
(e) None of the above.
2. Management accounting:
(a) Has changed very little since the 1950s
(b) Is tailored to the needs of the managers
(c) Involves aggregate rather than detailed analysis of information
(d) Is another name for cost accounting
(e) None of the above.
3. Management accounting:
(a) Often causes information overload for managers
(b) Is not relevant to strategy decisions
(c) Is an exact science
(d) Can have very little influence on the behavior of employees
(e) None of the above.
Classify each of the following statements as true or false. In each case, provide reasons to explain your answer.
1. Management accounting systems provide managers with all the information they need to make decisions.
2. Management accounting systems need to be flexible enough to provide information for financial statements.
3. Management accounting systems may draw on data that are internal and external to the organisation.
4. Management accounting systems are concerned with the quality of products produced by the organisation.
5. Management accounting systems need to produce information that is objective and verifiable.
For the 10 activities listed below indicate whether each is likely to form part of the duties of the following roles:
(a) Management accountant
(b) Financial accountant
(c) Cost accountant
(d) None of the above.
Activities:
1. Preparing a balance sheet.
2. Preparing a profit forecast by product line.
3. Estimating the depreciation expense for a factory's equipment.
4. Monitoring the effects of a quality improvement program.
5. Estimating the cost of goods produced.
6. Estimating the cost of a prototype for a new product being developed.
7. Preparing a sales forecast.
8. Monitoring the effects of a waste reduction program.
9. Preparing a report on customer satisfaction.
10. Preparing an income statement.
Use the internet to find a job advertisement for a management accountant. Identify the key roles and the applicant's qualifications required for this position.
Give an example of management accounting information that could be used by a manager to make each of the following decisions. Remember to consider non-financial information where relevant.
1. The manager of a discount department store is deciding how many cleaning staff to employ.
2. A local council is deciding whether to add a 'green' waste recycling service.
3. The CEO of a major football organisation is contemplating changing the timing of the football season to start and finish one month earlier from next year.
4. The director of nursing at the local hospital is deciding whether to hire short-term agency staff or employ additional full-time nurse to service an increase in the number of patients admitted to the hospital.
Classify each of the following statements as true or false. In each case, provide reasons to explain your answer.
1. The growth of the manufacturing sector in Australia has led to the widespread development of new management accounting techniques.
2. As hierarchical organisational structures give way to team-based structures, management accountants need to learn how to provide their services to employees at all levels of the organisation.
3. Management accounting has a major role to play in developing measures of customer satisfaction.
4. Advances in information technology have changed the way that many businesses conduct their operations, and the way that management accountants supply information to managers.
Outline the major processes that management accounting systems use to create value and manage resources.
Identify management accounting information that could assist managers in making each of the follow, decisions. Remember to consider non-financial information where relevant.
1. A marketing manager is considering whether or not to launch a new product.
2. A travel company is considering whether it should increase its staff numbers by one-third.
3. A production team leader is considering whether an important customer order should be production next week, or during overtime hours tonight.
4. A fast-food chain is considering a site for a new store.
Give two examples of management accounting information that would be prepared on a regular basis, and two examples of management accounting information that might be prepared on an ad hoc basis.
According to institutional theory, a number of factors may influence the design of management accounting systems.
1. Explain the implications of institutional theory for management accounting system design.
2. Give an example of how organisations may use a management control system for legitimacy purposes.
You are the financial controller of a large manufacturing organisation and intend to approach the human resources (HP) manager seeking to create two new positions: a financial accountant and a management accountant.
Required:
1. Prepare a briefing document for the HP manager which explains the differences between these two roles.
2. Formulate (and answer) the five likely questions that you anticipate the HP manager will ask you about these two positions when you meet.
You have just been appointed as the new management accountant to manage the transition of the existing Royal Adelaide Hospital to the proposed new site. The hospital has a number of separate departments responsible for direct patient care, such as Accident and Emergency, Intensive Care, Neurology, and Cardiology, as well as a number of support departments such as Radiology and Patient Records. You are a little uncertain as to what your role will be in this new hospital, as consultants have been engaged to design the new management accounting systems. You thought that as a management accountant you would be responsible for developing the new systems!
Required:
1. Write a report to senior management explaining how you, as the management accountant. may contribute to the design and operation of the new management accounting systems for the new hospital.
2. Outline the types of management accounting information that you believe senior managers may require on a regular basis (say, weekly and monthly) to manage the operations of the new hospital. Consider both financial and non-financial information.
3. The new hospital plans to invest in the latest computer technology to run various aspects of the organisation, including the management information systems. Discuss the opportunities that this may present for the way in which you supply weekly and monthly reports to managers.
You and your best friend intend to go into business together as owners of a sports equipment store.
Required:
Identify specific types of financial and non-financial information that would help you to run this business effectively.
You are recently appointed as the senior management accountant for a large organisation. In your first meeting with the CEO you suggest that you should be included in the strategic leadership team (SLT). The CEO is surprised by this suggestion as the previous incumbent had been happy to submit monthly financial reports to the SLT rather than being a member of the team. He asks you to prepare a report making a case for your inclusion in the SLT.
Required:
Prepare the report for the CEO identifying the contribution that you could make as a management accountant to the activities of the SLT.
Information for management Joe Murphy retired a few years ago at the age of 48, having built up a substantial retirement portfolio through a range of entrepreneurial activities. He moved to the Snowy Mountains to follow his dream of peaceful mountain life. However, after a few months, Murphy became restless and opened a ski equipment store. This single store soon grew into a chain of four outlets spread from the Snowy Mountains to the Victorian Alps. As Murphy put it, 'I can't believe how fast we've expanded. It's basically been uncontrolled growth-growth that has occurred in spite of what we've done.
Although business was profitable, the chain did have its share of problems. Sales tended to be seasonal, with a slowdown once the snow had disappeared. Murphy therefore added fishing and camping equipment to his product line. The need to finance required inventories seemed to be bulgier and left cash balances at very low levels, occasionally giving rise to short-term bank loans.
Part of Murphy's business focused on skiing trips, which were arranged through local ski lodges, an included ski hire, lessons and lift passes. Reports from the company's financial accounting system seemed to indicate that this part of the business was losing money because of increasing costs, but Murphy could not be sure. 'The traditional income statement is not too useful in assessing the problems, he noted. 'Also, my gut feeling is that we are not dealing with the best suppliers in terms of quality, delivery reliability and prices.' Additional complications were caused by an increasingly competitive marketplace, with many former customers now buying equipment through the Internet.
Murphy was not sure what to do. The company's accountant was very good at keeping the books and preparing the financial statements and tax return, but she did not understand the way the business really worked.
Required:
1. Describe the types of information that Murphy needs to run his business more effectively.
2. Murphy approaches the accountant to seek her help in gathering and analysing this information, but she responds: 'You must be joking-I'm an accountant. My job is to look after the money side of the business!' Do you agree with this statement?
3. What actions would you recommend that Murphy takes?
1. Use the internet to find a vision and mission statement for an organisation.
2. Identify objectives and strategies for this organisation. (If this information is not included in the website, suggest some likely objectives and strategies for this organisation. Explain your suggestions.)
You have just been appointed as the management accountant for Close Up and Personal (CUP) , a company that sells pottery items, jewellery and cool clothing, featuring personal digital photos, this company employs a team of 12 designers who design the pottery items, jewellery and clothing These products are manufactured by independent companies. CUP then prints the customer ordered photos onto the products and sells them to customers through six sales outlets located in shopping malls.
Required:
1. Identify the specific types of management accounting information that may be needed by the following employees, on a monthly basis, to help them control operations:
(a) Manager of each retail outlet.
(b) Manager of the design team.
(c) Marketing manager responsible for planning advertising campaigns and identifying customer needs.
(d) Manager who manages and renegotiates contracts with the outside manufacturers.
2. The managing director of CUP is interested in developing more sophisticated planning system, but has some doubts over the value of undertaking strategic planning. Prepare a report outlining the importance of planning system, In your report, consider the interrelationships between the objectives of the company, its strategies and short-term planning function of the company.
Explain the concept of competitive advantage and provide examples of the different types of business strategies that can be used to achieve it.
Janet Kaniva is the head of the sales department for a large book distributor. She manages a team of five salespeople, including her close friend, Ima Lyer. Each salesperson is responsible for particular product lines and is entitled to receive an annual salary bonus provided that he or she exceeds the profit forecast for his/her product group by more than to per tent. Profit for each product group is estimated by deducting from sales revenue the cost of the books sold, plus a charge for corporate overheads. Corporate overheads are allocated as a percentage of sales revenue, using a complex formula based on different percentages of revenue for different product lines: and salespeople can never make any sense of their annual overhead charge.
As the year end approaches, Lyer, who sells religious and philosophical texts, learns from the accountant. Stanley Piteous, that she will not receive a bonus, as she will not achieve her annual profit forecast. She is feeling very frustrated, as she has heard that the rest of the sales team will come in more than 20 per cent above their forecast.
Lyer approaches Piteous suggesting that an accounting entry is made to move some of the overhead charges to the other salespeople, who, after all, will still earn their bonus. Piteous refuses on the grounds that he is a CPA. but he is subsequently instructed by Kaniva to make this journal entry.
Required:
1. Explain how the bonus system is leading to unintended behavioural outcomes.
2. What relevance does Piteous' CPA status have to this situation?
3. Now should Piteous respond to Kaniva's instruction to move overhead charges from Lyer to the other salespeople? Explain your answer.
Examine the definition of management accounting, and explain what is meant by customer value and shareholder value.
Cakes P Us operates a series of bakeries in Canberra that specialise in supplying a range of cakes to restaurants and coffee shops. Major products include lamingtons, scones, éclairs and custard tarts. Until last year, sales levels were fairly stable. However, sales have been decreasing for the last 18 months. Ralph Slick, the marketing manager of Cakes R Us. is worried, and has visited major customers to find out the reasons for their decreasing sales orders. The comments of the owner of one of the most popular Canberra coffee shops sum up the general response: 'Ralph, your style of cakes is old-fashioned. They are not what people want any more. Our customers prefer lighter, tastier food. They want variety, and are willing to pay more for high quality innovative creations.
At a recent meeting, Slick stated that the company should expand its product offerings, or there may be no future for the company. Specifically he believes that there are untapped markets for gourmet pies. The managing director is uncertain; he states: 'I really don't think that we can afford to invest time and money into fads. We sell cakes, we are not a gourmet caterer!' Slick points out that it is these new items that customers are asking for, so it makes sense from a strategic point of view to develop these products. However, the managing director is still uncertain: 'I have no idea whether we are going to make a profit this year, and cash is always tight. We don't need strategies, I prefer to just sell good products.
Slick understands why the managing director is resisting his plea to be more innovative with products-the bakery has been producing the same line of cakes for 30 years. Slick also knows that there has never been any formal planning undertaken within the company. or consideration of objectives or strategies.
Required:
1. Ralph Slick has asked for your help. As the new management accountant, prepare a report for the managing director outlining the advantages of implementing processes to determine organisational objectives, strategies and planning systems.
2. Consider the nature of the control system that you could design to report on monthly performance What types of information do you think may be of interest to Slick and the managing director? Consider both financial and nonfinancial data.
Enron was a large US energy company which failed spectacularly in late 2001 after being involved in extensive accounting fraud.
Requirement:
1. Search the internet using the term Enron and identify the unethical actions of Enron's accountants.
2. Which of the principles set out in the Australian Accounting Professional and Ethical Standards Board's code for Professional Accountants did each of these actions contravene?
Briefly describe the key differences between financial accounting and management accounting.
Explain the key differences between cost accounting and management accounting.
The 'Peal life' scenario highlights the turbulent competitive environment faced by many airlines. Explain how such events might impact the type of information provided by management accountants in those organisations.
All accountants should be located in the head office of a company so that they can be closer to the senior management. Do you agree with this statement? Provide reasons for your answer.
Based on the 'Real life, describe some of the qualities that a successful chief financial officer (CFO) should possess.
Give examples of how management accounting information could assist in managing resources the Australian Football League.
What types of management accounting information might assist management in a business that followed a strategy based on cost leadership?
What types of information might a management accountant provide to assist management in a business that considered product quality to be of key strategic importance?
Explain how a budget can be used to assist managers in planning and controlling.
'Planning systems and control systems are unrelated parts of a management accounting system.' Do you agree? Explain your answer.
The cost of inventory is the only cost that managers need to consider when making product-related decisions. Discuss.
Describe the key components of traditional management accounting systems. How do these differ from modern management accounting systems?
Identify three costs that could be classified as direct costs of chemical production plant indirect costs of the chemical produced.
List three costs that are likely to be controllable by the chief executive officer (CEO) of the Australian Football League. List three costs that are likely to be uncontrollable by the CEO.
Describe each segment of the value chain and explain why information about costs in the variance segments of the value chain can be useful to managers.
Refer to the value chain in Exhibit 2.4. Consider a manufacturer of computers and give two examples of costs for each segment of the company's value chain. Which of these costs would be included in an estimate of the cost of the computers on hand at the end of the year, as shown in the company's balance sheet?
Exhibit 2.4
Describe the three main components of product cost. Focusing on a pair of Calvin Klein jeans, provide examples of costs that would be classified under each of these three cost components.
Distinguish between product and period costs and give three examples of each.
Outline the four major steps in the flow of costs through a manufacturing company.
In a manufacturing context, explain how product costs can be classified as an asset, and then as an expense. What are the underlying principles behind this accounting treatment?
Using examples from the 'Peal life stories, explain why management accounting systems pay so much attention to costs.
In your own words, explain the difference between cost of goods manufactured and cost of goods sold.
For each of the costs listed below, indicate whether it is:
(a) A direct or indirect cost of the equipment maintenance department.
(b) At least partially controllable by the department supervisor.
Costs:
1. Depreciation on the building space occupied by the maintenance department.
2. Idle time of maintenance department employees.
3. Plant manager's salary, which is allocated to the maintenance department.
4. Property taxes and council rates allocated to the maintenance department.
5. Electricity used in the maintenance department.
For each of the costs listed below, indicate whether it is:
(a) A product or period cost
(b) A variable or fixed cost
(c) A manufacturing or non-manufacturing cost.
1. Advertising costs of Nike.
2. Straight line depreciation on factory machinery of Airbus Industries.
3. Wages of assembly-line personal of GM Holden.
4. Delivery costs on customer shipments of Streets ice-cream.
5. Newsprint consumed in printing the Adelaide Advertiser.
6. Plant insurance costs of Levi Strauss.
7. Glass costs incurred in light-bulb manufacturing of General Electric.
8. Tyre costs incurred by Subaru.
9. Sales commissions paid to the sales force of Dell Inc.
10. Wood glue consumed in the manufacture of Simply Pine furniture.
11. Hourly wages of refinery security guards employed by BP.
12. The salary of a financial vice president of Microsoft.
For each of the costs listed below, indicate whether it is:
(a) A product or period cost
(b) A variable or fixed cost
(c) A manufacturing or non manufacturing cost.
1. Handbrake pads manufactured by Standish Cycles.
2. Inwards shipping costs incurred by Toshiba.
3. Oil consumed by sewing machines at Levi Strauss.
4. Hourly wages of cleaners at the Royal Adelaide Hospital.
5. Salary of the financial controller of clothing manufacturer P.M. Williams.
6. Advertising costs of Qantas.
7. Straight-line depreciation on factory machinery of Toyota.
8. Wages of assembly line workers processing Inghams chickens.
9. Delivery costs on customer shipments of retailer David Jones.
10. Printed circuit boards used in manufacturing Dell notebooks.
11. Plant insurance costs of glass maker Pilkington.
12. Grain costs incurred in manufacturing Sanitarium cereals.
Classifying costs: value chain manufacturer Igloo Icicle Company produces and sells ice-cream. Classify the costs listed below, using these value chain classifications:
(a) Research and development
(b) Design
(c) Supply
(d) Manufacturing
(e) Marketing
(f) Distribution
(g) Customer service
Costs:
1. The cost of cream and sugar used to make the ice-cream.
2. Electricity. The cold room that stores the completed ice-cream accounts for most of the electricity consumed.
3. The cost of fuel for delivery trucks.
4. The wages paid to staff who mix the ingredients to make the ice-cream.
5. The wages paid to the manager's mother who works part-time in the kitchen developing recipes for new ice-cream flavours, based on 'family secrets handed down by her mother.
6. The cost of advertising in the food trade magazines.
A foundry employee worked a normal 38 hour week, but six hours were idle due to a small fire in the plant. The employee earns $29 per hour.
Required:
1. Calculate the employee's total wages for the week.
2. How much of this amount is a direct costs? How much is manufacturing overhead? Why?
3. Under what circumstances would the weekly wage for this employee be treated as an indirect labour costs?
A loom operator in a textile factory earns $30 per hour, and $35 for each overtime hour, The operate worked 48 hours during the first week of May, instead of the normal working time of 38 hours.
Required:
1. Calculate the loom operator's total wages for the week.
2. Calculate the operator's total overtime premium for the week.
3. How much of the operator's total wages for the week is direct labour costs? How much is overhead? Explain why?
4. Under what circumstances would the normal hourly rate be treated as an indirect labour cost?
1. Determine the missing amount in each of the independent cases above.
2. Explain the components of cost of goods manufactured.
1. Determine the missing amount in each of the independent cases above.
2. Explain the relationship between the schedule of cost of goods manufactured and the schedule of cost of goods sold and an organisation's financial accounting statements.
Matilda Surf Gear, a manufacturer of sports and beach wear, had the following inventory balances at the beginning and end of the year.
During the year, the company purchased $240,000 of raw material and spent $420,000 for direct labour, Manufacturing costs were as follows.
Indirect material........................................$12,000
Indirect labour............................................22,000
Depreciation on plant and equipment...............110,000
Utilities....................................................23,000
Other......................................................35,000
Sales revenue was $210,000 for the year, Selling and administrative costs for the year amounted to $105,000. The firm's tax rate is 35 per cent.
Required:
1. Prepare a schedule of cost of goods manufactured.
2. Prepare a schedule of cost of goods sold.
3. Prepare an income statement.
4. Construct an Excel® spreadsheet to solve all of the preceding requirements. Show how both cost schedules and the income statement will change if the following data change: direct labour is $410,000 and utilities cost $24,000.
Give three examples of non-financial information that could be useful for the managers of Tennis Australia in running the Australian Open tennis tournament each year.
Australian Aluminum Company. a manufacturer of recyclable soft-drink cans, had the following inventory balances at the beginning and end of the current year:
During the year, the company purchased $600,000 of raw material and spent $960,000 on direct labour. Manufacturing overhead costs were as follows:
Indirect material........................................$12,000
Indirect labour............................................22,000
Depreciation on plant and equipment...............110,000
Utilities....................................................23,000
Other......................................................35,000
Sales revenue was $2,652,000 for the year. Selling and administrative expenses for the year amount to $264,000. The firm's tax rate is 40 per cent.
Required
1. Prepare a schedule of cost of goods manufactured.
2. Prepare a schedule of cost of goods sold.
3. Prepare an income statement.
Wholly Donuts Ltd is a medium-sized doughnut manufacturer.
1. Apply value chain and other classifications to the costs listed below. (More than one classification may be appropriate for each cost item.)
Cost classification:
(a) Research and development
(b) Design
(c) Supply
(d) Production
(e) Marketing
(f) Distribution
(g) Customer service
(h) Direct material
(i) Direct labour
(j) Manufacturing overhead
(k) Selling and administrative expenses
(l) Other (if other, explain).
Costs:
1. Flour
2. Depreciation on cooking vats
3. Cooking oil
4. Sugar
5. Wages of a doughnut week
6. Repair costs of a cooking vat
7. Packaging for doughnuts
8. Cartoons for shipping doughnuts
9. The accountant's salary
10. The accountant's manager's salary
11. Advertising
12. Oil for the factory conveyor system
13. Fuel the delivery truck used to ship doughnuts to customers
2. Do you think these costs cover the complete value chain for Wholly Donuts? Explain your answer.
The following cost data for the current year relate to Heartstrings Pty Ltd, a greetings card manufacturers
Required:
Calculate each of the following costs for the year:
1. Total prime costs.
2. Total manufacturing overhead costs.
3. Total conversation costs.
4. Total product costs (for external reporting purpose).
5. Total period costs.
Indicate, for each of the costs listed below, whether it is:
(a) Product cost
(b) Period cost
(c) Conversion cost
(d) Prime cost
(e) Direct material cost
(f) Direct labour cost
(g) Manufacturing overhead
More than one classification may apply to each item.
Costs:
1. Cost incurred by a department store chain to transport goods purchased for resale to its stores.
2. Cost of grapes purchased by a winery.
3. Depreciation on pizza ovens in a pizza restaurant.
4. Wages of aircraft mechanics employed by an airline.
5. Wages of drill press operators in a manufacturing plant.
6. Cost of food in a frozen packaged dinner.
7. Salary of a plant manager in a computer production facility.
8. Wages of security personnel in a department store.
9. Cost of electricity and gas in a manufacturing facility.
10. Depreciation of computers used in a sales department.
11. Depreciation of computers used to control production equipment.
Direct and indirect labour: manufacturer Sharpedge Cutlery manufactures kitchen knives. One of the employees. whose job is to cut out wooden knife handles, worked 49 hours during a week in January. The employee earns $21 per hour for a 40-hour week. For additional hours the employee is paid an overtime rate of $28.50 per hour. The employee's time was spent as follows:
Regular duties involving cutting out knife handles....................41 hours
General shop clean-up duties................................................6 hours
Idle time due to power failure..............................................2 hours
Required:
1. Calculate the total cost of the employee's wages during the week described.
2 Determine the portion of this cost to be classified in each of the following categories:
(a) Direct labour.
(b) Manufacturing overhead (idle time).
(c) Manufacturing overhead (overtime premium).
(d) Manufacturing overhead (indirect labour).
3 Under what circumstances would the normal wage of this employee be treated as an indirect cost?
Madigan Company commenced operations at the beginning of the current year. One of the company's products, a refrigeration element, sells for $185 per unit, Information related to the current year's activities follows.
Madigan carries its finished goods inventory at the average unit cost of production and is subject to a 30 per cent income tax rate. There was no work in process at year end.
Requirement:
1. Determine the cost of 31 Determine finished goods inventory.
2. Calculate Madigan's net profit for the year ended 31 December.
3. If next year's production decreases to 23,000 units and general cost behavior patterns do not change, what is the likely effect on:
(a) Direct labour cost of $37 per unit? Explain why.
(b) Fixed manufacturing overhead cost of $600,000? Explain why.
(c) Fixed selling and administrative cost of $860,000? Explain why.
(d) Average unit cost of production? Explain why.
Inventory estimates, partial data: manufacturer On April 12, after the close of business. Goldstein & Sons had a devastating fire that destroyed the firm's work in process and finished goods inventories. Fortunately, all raw materials escaped damage because materials owned by the firm were stored in another warehouse. The following information is available:
Sales revenue, 1 January to April 12..................................$330000
Income before taxes, 1 January to April 12............................68,000
Direct labour cost, 1 January to April 12..............................120,000
Cost of goods available for sale, 1 January to 12 April.............275,000
Work in process inventory, 1 January..................................21,000
Finished goods inventory, 1 January...................................37,000
Gross profit margin.................................................30% of sales
The firm's accountants determined that the cost of direct materials used normally averages 25 percent of prime costs. In addition, manufacturing overhead is so percent of the firm's total manufacturing costs.
Required:
Goldstein & Sons is in the process of negotiating a settlement with its insurance company. Prepare an estimate of the cost of work in process and finished goods inventories that were destroyed by the fire.
The following data refer to Flintoff Fashions for the current year:
Required:
1. Required the schedule of cost of goods manufactured for Flintoff Fashions.
2. Prepare the schedule of cost goods sold for Flintoff Fashions.
3. Prepare the income statement for Flintoff Fashions.
4. Construct an Excel® spreadsheet to solve all the preceding requirements. Include formulas in your spreadsheet wherever possible. Show how both cost schedules and the income statement will change if:
(a) Raw material purchases amounted to $110,400.
(b) Indirect labour was $9600.
The following data refer to Maximus Manufacturing Ltd for the current years:
Required:
Prepare Maximus manufacturings:
1. Schedule of cost of goods manufactured.
2. Schedule of cost of goods sold.
3. Income statement.
Give four examples to illustrate how the managers in the head office of Qantas could use cost information for planning and controlling costs.
Refer to the schedule of cost of goods manufactured prepared in problem 2.39.
Problem 2.39 data
Required:
1. How much of the manufacturing costs incurred during the current year remain in work in process inventory on 31 December?
2. Suppose Maximus manufacturing had increased its production in the current year by 20 per cent. What effect would this change have on the direct material cost shown in the schedule of cost of goods manufactured? Why?
3. Answer the same question as in requirement 2 for depreciation on the factory building.
4. Suppose that only half of the $72,000 in depreciation on equipment was related to factory machinery, and the other half was related to selling and administrative equipment. How would this have changed the schedule of cost of goods manufactured?
Colonial Tap Company (CTC) is a manufacturer of taps and fittings for the plumbing trade, located in Brisbane. The company was established by Ken Hall in 1951, with a workforce of 10, to meet the needs of the postwar housing boom. Its product range was fairly limited but the company had an excellent reputation for quality.
Nowadays, CTC manufactures an extensive range of high-quality brass and chrome taps. The company is managed by Ken's son Michael and employs 20 people. It has annual sales averaging approximately $1 million, although it has been consistently profitable. CTC has experienced increasing pressure from competitors since the early 2000s. The company uses a cost-plus approach to pricing but is having to reduce its markup constantly in order to maintain market share.
Both Ken and Michael qualified as engineers. The business is small and has never been able to employ an accountant. Instead, a bookkeeper calculates monthly profit as sales revenue minus expenses. Prices are based on rough estimates of cost of direct material and direct labour inputs plus a 50 per cent markup. With the decline in profit and constant pressure on prices. Michael began to feel uneasy about the way costs and profits were calculated. The results for the month just ended were:
Additional information:
■ There was virtually no beginning inventory of raw material, work in process and finished goods.
■ At the end of the month, to per cent of the materials purchased remained on hand, work in process amounted to 20 per cent of the manufacturing costs incurred during the month, and finished goods inventories were negligible.
■ The factory occupies 8o per cent of the premises, the sales area 15 per cent and administration 5 per cent.
■ Most of the equipment is used for manufacturing, with only 5 per cent of the equipment being used for sales and administrative functions.
■ Almost all of the electricity is consumed in the factory.
■ The truck is used to deliver finished goods to customers.
■ Michael Wall spends about one-half of his time on factory management, one-third in the sales area and the rest on administration.
Required:
Michael Pall asks you to review the results for the month and evaluate the company's approach tc estimating product costs. In doing so, you should:
1. Comment on the cost classifications used in CTC's income statement.
2. Estimate the cost of goods manufactured and sold.
3. Prepare a revised income statement for the month.
4. Explain the differences between your income statement and the one above.
5. IF possible, suggest a more useful format for analysing costs than that used in your revised inc statement.
6. Evaluate the usefulness of product costs based on direct materials and direct labour for detour, selling prices.
7. Make recommendations for changes to be made to the company's approach to product costing reporting profit.
On 1 January, Bob Earl set up Earl's Gyms Ltd to manufacture and sell children's outdoor play gyms. He was an engineer by profession but he understood the importance of accounting information and kept his accounting records meticulously throughout the year. At the end of the year he prepared the following income statement for the year:
Although disappointed, Earl was not surprised. He knew that expenses were higher than sales because throughout the year, he had been unable to generate a cash surplus. Ills bank overdraft had blown out and his bank manager has asked him to present his financial statements for the year to the bank.
Required:
You are the bank's accountant and the bank manager has asked you to:
1. Review the performance of Earl's Gyms Ltd for the current year and make a recommendation as to whether Earl's overdraft facility should be cancelled.
2. Prepare a report for Earl explaining the errors he made in his income statement.
To perform this analysis you will need to update Earl's income statement. The Following information may be useful:
■ The factory occupies 80 per cent of the rented building. the sales area 15 per cent and the administration area 5 per cent.
■ All the company's non-current assets are estimated to have a useful life of five years and no salvage value at the end of their life.
■ Earl spends 50 per cent of his time as factory manager and spends the remaining time equally on sales and general administration.
■ Electricity costs are consumed almost entirely by the factory.
■ At 31 December, the following inventories existed:
Raw material............................$24,000
Work in process...........................48,000
Finished goods.............................1,800
Traditional management accounting systems classify costs as fixed and variable. Define these terms and provide three examples of each for a bank.
When analysing cost behaviour, what do we mean by 'level of activity'?
What are cost objects? Give four examples of cost objects from the various 'Peal life' situations described in this chapter to explain why managers might be interested in knowing their cost.
What is a direct cost? What is an indirect cost? List three direct costs of the IT department in firm. List three indirect costs of the department.
Speedy Copy Centre operates a chain of photocopy centres near several major universities. The firm's accountant is accumulating data to be used in preparing its annual budget for the coming year. The cost behaviour pattern of the firm's equipment maintenance costs must be determined. Data regarding number of photocopies, maintenance hours and costs for last year are as follow:
Required:
1. Use Excel* and multiple regression analysis to estimate the behaviour of Speedy Copy Centre's maintenance costs.
2. Calculate R2 and interpret this statistic.
3. Calculate the total variable cost and the fixed cost per maintenance hour at 1500 hours of maintenance and 255,000 photocopies. Explain the problems that might occur when using fixed cost per hour in decisions.
Motomation Pty Ltd plans to acquire several retail automotive parts stores as part of its expansion program. Motomation carries out en extensive review of possible acquisitions prior to making any decision to approach a specific company. Projections of future financial performance are one of the aspects of such a review. One form of projection relies heavily on using past performance (normally 10 prior years) to estimate future performance.
Currently, Motomation is conducting a review of Atlas Auto Parts, a regional chain of retail automotive parts stores. Among the financial data to be projected for Atlas is the future rental cost for its stores. The schedule below presents the rent and revenues (both in millions of dollars) for the past 10 years.
The following three methods were trialled for estimating future rental expense:
Method A
A regression analysis using time as the independent variable was performed. The resulting formula is as follows:
Rental expense = 0.93 + 0.0936T
where T = the year
Method B
The annual rental expense was related to annual revenues, using regression analysis. The formula for predicting rental expense in this case is as follows:
Rental expense = 0.5597 + 0.02219X
where X is equal to revenues divided by 1,000,000 (for example, X for Year 10 is 60).
Method C
Rental expense was calculated as a percentage of revenues using the average for the 10 year period.
Required:
1. Calculate for each of the three methods the rental expense estimate for Atlas Auto Parts for the next year, assuming the projected revenue will be the same as the Year 10 revenue (that is, $60 million).
2. Discuss the advantages and disadvantages of each of the three methods for estimating the rental expense for Atlas Auto Parts.
3. Identify one method from A, B or C that you would recommend Motomation to use in order to estimate rental expense. Explain why you selected this method, using the two criteria for evaluating regression equations outlined in the chapter.
4. Suggest another method which may improve the estimate 0f future rental expense.
Why did Holden Engine Company adopt five different levels of cost drivers, as described in the 'Peal life' on p. 77? Why might these differ from the hierarchy of cost drivers for activity-based costing described in this chapter?
Austral Fine Furniture manufactures high-quality furniture. During the past year, the company's design department developed new product, a marble-topped dining table. This would be the first time that Austral would work with marble. The company's existing products were made of timber, sometimes in conjunction with glass. The design department selected a team of experienced tradespersons to manufacture a trial batch of 10 marble-topped tables. A task analysis of the processes used to produce this batch of tables indicated the following direct inputs and average costs per table:
Direct material.........................................................$300
Direct labour.............................................................200
The average hourly labour rate for the team of tradespersons was $20 per hour.
Required:
Assuming an 8o per cent learning curve':
1. Estimate how many direct labour hours will be required to produce a second batch of 10 marble-topped dining tables.
2. What is the direct labour cost per table for this second batch?
3. Will the last table produced in the second batch take the same amount of direct labour time as did the first table in the batch? Why?
4. Assume that after completing and selling these first two batches Austral receives an order from a wholesaler for a batch of 60 tables. Wow many direct labour hours will be required to produce this batch of tables?
5. What is the direct labour cost per table for the order from the wholesaler?
6. Austral uses a cost plus 'margin' approach to pricing its products. What implications does the learner curve effect have for the price of the marble-topped dining table?
'I don't understand this cost report at all', exclaimed Jeff Mahoney, the newly appointed administrator of Bunyip General Hospital. 'Our administrative costs in the new pediatrics clinic are difficult to understand. One month the report shows $8300, and the next month it's $16,100. What's going on?'
Mahoney's question was posed to Megan McDonough, the hospital's accountant. 'The main problem is that the clinic has experienced some widely varying patient loads in its first year of operation. There seems to be some confusion in the public's mind about what services we offer in the clinic. When do they come to the clinic? When do they go to the outpatients' department? That sort of thing. As the patient load has varied, we've frequently changed our clinic administrative staffing. Also, we have found that the number of emergency procedures varies each month, and emergency procedures cause additional staff costs.'
Mahoney continued to puzzle over the report. 'Could you put some data together, Megan, so we can see how this cost behaves over a range of patient loads?'
'You'll have it this afternoon', McDonough responded. Later that morning, she gathered the following data:
McDonough does not believe that the first year's widely fluctuating patient load will be experienced again in the future. She has estimated that the clinic's relevant range f monthly activity in the future will be 600 to 1200 patients.
Required:
1. Draw a scatter diagram of the clinic's administrative costs and patient loads during its first year of operations.
2. Mark the clinic's relevant range of activity on the scatter diagram.
3. Use the high-low method to estimate the behaviour of the clinic's administrative costs based on patient load within the relevant range. Use an equation to express the results of this estimation method.
4. What is your prediction of the clinic's administrative cost during the month when 800 patients visit the hospital? When 300 patients visit?
5. Identify the number of emergency procedures, patient load, and administrative costs, for each month within the relevant range.
6. Construct an Excel spreadsheet, and use regression analysis to estimate:
(a) An equation with patient load predicting administrative cost, within the relevant range.
(b) The clinic's administrative cost during the month when 800 patients visit the hospital.
(c) An equation with both activities-patient load and the number of emergency procedures- predicting administrative cost, within the relevant range.
(d) The clinic's administrative cost during the month when 800 patients visit the hospital and there are 12 emergency procedures using the equations from part c.
7. Does the inclusion of the additional cost driver of 'emergency procedures' improve the model? Explain your answer.
8. How confident should McDonough be about the three cost models (high-low, simple regression and multiple regression) that she has developed? Explain your answer.
Greenscape Pty Ltd provides commercial landscaping services. Linda Drake, the firms owner, wants to develop cost estimates that sh. can use to prepare bids on jobs. After analysing the firm's costs. Drake has developed the following preliminary cost estimates for each 1000 square metres of landscaping:
Direct materials...................................................$400
Direct labour (5 direct bbour hours $19 per hour)...............95
Overhead (e 818 per direct labour hour)...........................90
Total cost per 1000 square metres..............................$585
Drake is quite certain about the estimates for direct materials and direct labour, but she LS not as comfortable with the overhead estimate. As indirect costs, overhead costs cannot be traced directly to landscaping. Instead, Drake has used a common method of estimating an overhead rate per direct labour hour. However the estimate for overhead is based on the overhead costs that were incurred during the past 12 months, as presented in the following schedule. The estimate of $18 per direct labour hour was determined by dividing the total overhead costs for the 12-month period ($648,000) by the total direct labour hours (36,000).
Drake believes that overhead is affected by total monthly direct labour hours. She decided to perform a regression analysis of overhead (OH) on total direct labour hours (DIM). The following regression formula was obtained:
OH = $26,201 + $9.27DLH
Required:
1. The overhead rate developed from the regression analysis is different from Linda Drakes preliminary estimate of $18 per direct Labour hour. Explain the difference in the two overhead rates.
2. Using the overhead formula that was derived from the regression analysis, determine a total variable cost estimate (or each 1000 square metres of landscaping.
3. Linda Drake has been asked to submit a bid on a landscaping project for Melbourne City Council consisting of 50,000 square metres. Drake estimates that 30 per cent of the direct labour hours required for the project will be on overtime, Calculate the variable costs per 1000 metres of landscaping that should b. included in any bid that Drake would submit on lhs project. Use the overhead formula derived from the regression analysis.
4. Should Greenscape rely on the overhead formula derived from the regression analysis as the basis for the variable overhead component of its cost estimate? Explain your answer.
5. After attending a seminar on activity-based costing. Drake decided on a further analysis of Greenscapes activities and costs. She discovered that a more accurate portrayal of the Firm's cost behaviour could be achieved by dividing overhead into three separate cost pools-administration, seeding and individual planting-each with its own cost driver. After discussions with some of the landicapers who work within the firm, Drake came to the conclusion that possible cost drivers for each of these cost pools were-direct labour hours (DLH), the number of square metres of turf seeded (STS), and the number of individual trees and shrubs planted (TSP), respectively. A separate regression equation was estimated for each overhead cost pool, with the following results
Administration OH1= $10,000 + $4.10DLU
where DLH denotes direct labour hours
Seeding OH2 = $9100 + $13.50STS
where STS denotes the number of square metres of turf seeded (in thousands)
Planting OH3 = $8000 + $6.60TSP
where PL denotes the number of individual plantings (such as trees and shrubs)
Assume that 5 direct labour hours are needed to landscape each 1000 square metres, regardless of the specific planting material that is used.
(a) Suppose the landscaping project for the city will involve seeding all 000 square metres of turf and planting 70 trees and shrubs. Calculate the variable overhead cost that Drake should include in the bid.
(b) Recalculate the variable overhead cost For the city's landscaping protect, assuming that half of the 50000 square metre landscaping area will be seeded and there will be 230 individual plantings.
(c) Explain why the costs differ in requirements (a) and (b).
After a more sophisticated analysis of Greenscape's costs, Drake has access to the following additional data.
Required:
Refer to the data in the previous case, as well as the additional data above.
1. Use the data for the three cost drivers to formulate a single multiple regression equation to predict total overhead cos.
2. Does the new cost model provide a more accurate estimate of total overhead cost compared to the equation formulated in the prior case? Explain your answer.
3. Consider which cost, drivers should be included in the regression equation to provide the more accurate cost model. Explain your choice.
The 'Peal life describes some of the steps that BP took to reduce costs. Describe four root-cause cost drivers that a petroleum company like BP might identify to help them reduce costs.
Explain the impact of a decrease in the level of activity on:
(a) Total fixed cost.
(b) Fixed cost per unit of activity.
Explain why managers need to take care when making decisions using product costs that include unitised fixed costs.
You are the management accountant for Brideshead Tyres and have identified a linear relationship between the total direct material cost and the quantity of rubber used in production. Provide answers to the following questions, including reasons to explain your answer.
(a) Is this cost a variable cost or a semi-variable cost?
(b) Is this cost a unit level cost or a batch level cost?
(c) Is the quantity of rubber a useful cost driver for cost management?
Outside of the relevant range, cost behaviour patterns may not hold.' Explain this statement.
A cost analyst showed the general manager a graph that portrayed the firm's electricity cost as semivariable. The general manager looked at the graph and said: 'This fixed-cost component doesn't look right to me. If we shut down the plant for six months, we wouldn't incur half those costs'. If you were the cost analyst, how would you respond?
Is direct labour likely to be a fixed cost or a variable cost in the current business environment? Explain your answer by referring to the examples discussed in the 'Peal life' on p. 87 which explores the different ways that labour costs might behave in the contemporary business environment.
Describe how the 'account classification method' may be used to estimate costs.
Some businesses use only approximations when estimating cost functions. What are some possible reasons for this?
Explain how multiple regressions can be used to estimate a cost function. Select an example of a cost and two cost drivers that could form a multiple regression equation.
Explain the relevance of the R2 statistic to the evaluation of a multiple regression equation.
Describe some of the problems that are often encountered when collecting data for cost estimation.
In explaining cost behaviour we refer to the 'level of activity' as a cost driver. What do we mean by 'level of activity' and why is it a cost driver? What role do cost drivers play in identifying cost behaviour patterns?
Friendly Skies Travel is a travel agency that has branches in many major shopping centres. A typical branch employs five full-time staff: a manager and four customer service staff. Casual customer service staff is called in for periods of high demand and are normally employed for three-hour shifts. Customer service staff book flights for customers on most major airlines. These staff also assists in identifying accommodation and rental car options for customers.
Required:
1. Prepare a list of five major costs likely to be incurred by Friendly Skies Travel.
2. For each cost, suggest a possible cost driver that could be used to estimate cost functions and predict cost behaviour.
3. Haying identified these cost drivers, describe the cost behaviour pattern that you would expect for each cost, giving your reasons.
On the Ball Pty Ltd manufactures footballs. Its fixed costs per month are $75,000, and its raw materials costs are $60 per finished ball.
Required:
1. Draw a graph of the firms raw material cost, showing the total cost at the Following production levels: 10,000 units, 20,000 units and 30,000 units.
2. Prepare a table that shows the unit cost arid total cost of raw material at the following production levels 10000 units, 20,000 units and 30,000 units.
3. Draw a graph of the company's fixed production cost showing the total cost at the following production levels: 10,000 units, 20,000 units and 30,000 units.
4. Prepare a table that shows the unit cost and the total cost for the firm's fixed production costs at the following production levels: 10 000 units, 20 000 units and 30 000 units.
The behaviour of the annual repair and maintenance cost for the Blue 1-lills Bus Company is shown by the solid line in the following graph. The dashed line depicts a semivariable cost approximation of the company's repair and maintenance cost.
Required:
1. What is the actual (curvilinear) and estimated (semivariable) cost shown by the graph for each of the following activity levels?
(a) 20,000 kilometres
(b) 40,000 kilometres
(c) 60,000 kilometres
(d) 80,000 kilometres
2. How good an approximation does the semivariable cost pattern provide if the company's expected level of activity falls between 40,000 and 60,000 kilometres per month? What if the expected range of activity is 20,000 to 90,000 kilometres per month?
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