2010_SPR_22746_v3_standard_city_19-7-10

22746 Managerial Accounting

Subject Outline

UTS: BusinessSpring 2010; cityCredit points: 6cp

Result type: Grade and marks

Subject coordinator

Dr David Brown Associate Professor, School of Accounting Room C311A Telephone (02) 9514 3773 [email protected]

Teaching staff

Paul ThambarSchool of Accounting Room C311 Telephone (02) 9514 [email protected]

Subject description

Management accounting information systems are one of the main decision-support systems inorganisations. This subject equips students with the skills and knowledge to design and use effectivemanagement accounting information for planning and controlling organisational activities. Topicsinclude absorption costing, cost behaviour and cost-volume-profit analysis, budgetary planning andcontrol, differential costs, activity-based costing, and standard costing and variance analysis.

Subject objectives

On successful completion of this subject students should be able to:

understand the role of management accounting in organisations 1.understand basic cost concepts and techniques 2.understand how management accounting assists in planning and controlling business activitiesand how it provides decision support

3.

understand the fundamentals of product costing and to prepare costing schedules 4.prepare budgeted profit and loss and cash flow statements 5.analyse production operations by using standard product costing for the analysis of costvariances

6.

understand profit planning techniques using cost-volume-profit concepts and their applicationto support various decision contexts

7.

understand the design of performance measurement systems to conform to and advanceorganisation goals.

8.

19 Jul 2010 © University of Technology Sydney Page 1 of 6

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mailto:[email protected]

Contribution to course aims and graduate attributes

Management accounting information systems are one of the main decision support systems inorganisations. This subject equips students with the skills and knowledge to design and use effectivemanagement accounting information in planning and controlling organisational activities. Topicsinclude traditional product costing, activity-based costing, cost behaviour and cost-volume profitanalysis, budgetary planning and control, differential costing and capital budgeting, standard costingand variance analysis and performance measurement systems.

Teaching and learning strategies

The subject will be taught using a combination of lectures and workshops. Students are also requiredapply the knowledge they have acquired in the course to study a particular application ofmanagement accounting systems in their organisation contexts and present their findings both to theclass and in a formal report.

Content

Role of management accounting in organisations Cost concepts and product costing systems Conventional overhead cost allocation+ Activity-based costing Budgeting Standard cost for control Cost-volume-profit analysis Accounting information for decision making Capital expenditure decisions Accounting information for managing performance.

Program

Week Dates Description Notes

1 2 Aug Introduction to management accounting Reference: L-S, T, HChapter 1–2

2 9 Aug Cost volume profit analysis and cost behaviour Reference: L-S, T, HChapter 3 and 18

3 16 Aug Product costing Reference: L-S, T, HChapter 4

4 23 Aug Cost allocation — Plant-wide and Departmentalmethods of allocation of overhead costs

Reference: L-S, T, HChapter 7

5 30 Aug Activity-based costing and activity-basedmanagement



6 6 Sept Budgeting: master, operating and cash budgets Reference: L-S, T, HChapter 9

7 13 Sept Standard costing 1- Material and Labour variances Reference: L-S, T, HChapter 10

8 20 Sept Mid-semester exam week No classes

9 27 Sept Mid-semester break No classes

10 4 Oct Standard Costing 2 - Manufacturing and GeneralOverhead


11 11 Oct Pricing decisions and Relevant costing Reference: L-S, T, HChapter 19 and 20

10 18 Oct Performance evaluation — financial performancemeasures

Reference: L-S, T, HChapter 13Kaplan and AtkinsonChapter 9 and 10

11 25 Oct Contemporary performance evaluation methods Reference: L-S, T, HChapter 14Kaplan and AtkinsonChapter 8

12 1 Nov Revision

Assessment

Students will be expected to obtain an overall pass in all three components of the assessment for thissubject.

Assessment item 1: Mid-Semester Examination

Objective(s): 2-8

Weighting: 30%

Task: Exam

Assessment item 2: Final Examination

Objective(s): 1, 4, 6, 7, 8

Weighting: 60%

Task: Exam

Further


Furtherinformation:

Students will be required to achieve a pass in both the overall marks for thecontinuous assessments and the final examination to satisfy the requirementsof the subject.

Assessment item 3: Homework

Objective(s): 1-8

Weighting: 10%

Task: Homework will be completed in arrears of 1 week (ie: homework for Lecture 1will be due in class in Lecture 2).Students will be expected to complete solutionsto Workshop questions and provide a typed copy for collection and marking. Handwritten solutions will not be accepted. Homework for Lectures 10 and11 will be case studies which will be done and presented in groups (students areencouraged to form into groups of 4 early in order to be ready to complete thesecase studies). Late submissions will not be accepted - if students miss a class forvalid reasons, it is expected that homework will be submitted by email in the dueweek.

Examination material or equipment

All examinations will be close-book examinations.

Required texts

Langfield-Smith, K, Thorne, H, and Hilton, RW, 2009, Management Accounting — Information forManaging and Creating Value, 5e, McGraw-Hill

Indicative references

Hopwood, A.G., (1976), Accounting and Human Behaviour, Prentice-Hall. Pp. 57-68(657.019HOPW) Kaplan, R. S. and Atkinson, A. A., (1998), Advanced Management Accounting, Upper SaddleRiver, N. J., Prentice-Hall International. Kaplan, R. S., and Norton, D. P., (1992), The Balanced Scorecard - Measures that DrivePerformance, Harvard Business Review, pp. 71-79 Kaplan, R.S. and Norton, D.P, (1996), Using the Balanced Scorecard as a StrategicManagement System, Harvard Business Press, pp. 75-85. Macintosh, N.B., (1985), The Social Software of Accounting and Information Systems, Chapters2 & 3 Wiley, (658.40388MACI)

Other resources

Articles for relevant topics will be posted on UTS online and students will be expected to read,analyse and be prepared to discuss key points in class.

Academic liaison officer

Wing Bui, School of Finance and Economics, telephone: 9514 7717 Katie Schlenker, School of Leisure Sport and Tourism, telephone: 9514 5303


Katie Schlenker, School of Leisure Sport and Tourism, telephone: 9514 5303 Dr Paul Wang, School of Marketing, telephone: 9514 3692 Dr Brian Farrell, School of Accounting, telephone: 9514 5226 Dr Neil Barnwell, School of Management, telephone: 9514 3612

Any arrangements should be negotiated within the first six weeks of semester.

Support

Student Services Unit/Counselling: Student Services provides a range of free and confidentialprofessional services to support different aspects of your life and learning at UTS(www.ssu.uts.edu.au). These services include counselling for personal and learning problems orissues. If you are experiencing difficulties with your overall study program, for whatever reason,phone 9514 1177 (City) or 9514 5342 (Kuring-gai).

Students with Disabilities or Ongoing Medical Conditions: If you are a student who has adisability or ongoing medical condition that requires support services (www.ssu.uts.edu.au/sneeds)you are encouraged to contact the Disability Support Officers or Special Needs Service (9514 1177)for a confidential interview. Supporting documentation regarding your disability or ongoing medicalcondition is required if you wish to apply for assessment adjustments, including alternativeassessment conditions. Each Faculty has appointed Academic Liaison Officers (ALOs) who areresponsible for approving assessment adjustments. Meeting with the Disability Support Officers orSpecial Needs Service before seeking assessment adjustments from your ALO is required.

Improve your academic and English language skills: Marks for all assessment tasks such asassignments and examinations are given not only for WHAT you write but also for HOW you write. Ifyou would like the opportunity to improve your academic and English language skills, make anappointment with the ELSSA Centre.

ELSSA Centre: The ELSSA Centre provides academic and professional language assistance, incollaboration with faculties. Students who need to develop their written and/or spoken English shouldmake use of the free services offered by the ELSSA Centre, including vacation courses and individualappointments (www.elssa.uts.edu.au).

Careers Service: The UTS Careers Service aims to actively support the career development needs ofall UTS students (www.ssu.uts.edu.au/careers).

Statement on plagiarism

Plagiarism is a broad term referring to the practice of appropriating someone else's ideas or work andpresenting them as your own without acknowledgment. Plagiarism is literary or intellectual theft! Itcan take a number of forms, including:

copying the work of another student, whether that student is in the same class, from an earlieryear of the same course, or from another tertiary institution altogether copying any section, no matter how brief, from a book, journal, article or other written source,without duly acknowledging it as a quotation copying any map, diagram or table of figures without duly acknowledging the source paraphrasing or otherwise using the ideas of another author without duly acknowledging thesource

Whatever the form, plagiarism is unacceptable both academically and professionally. By plagiarisingyou are both stealing the work of another person and cheating by representing it as your own. Anyinstances of plagiarism can therefore be expected to draw severe penalties and may bereferred to the Faculty Student Conduct Committee.

Cheating means to defraud or swindle. Students who seek to gain an advantage by unfair meanssuch as copying another student's work, or in any other way misleading a lecturer about their


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http://www.ssu.uts.edu.au/sneeds/

http://www.elssa.uts.edu.au/

http://www.ssu.uts.edu.au/careers/

such as copying another student's work, or in any other way misleading a lecturer about theirknowledge or ability or the amount of work they have done, are guilty of cheating.

Students who condone plagiarism by allowing their work to be copied will also be subject to severedisciplinary action.

Avoiding plagiarism is one of the main reasons why the Faculty of Business is insistent on thethorough and appropriate referencing of all written work.


19 July 2010 University of Technology, Sydney Page 7 of 30

Subject Content – Detailed Tutorial Guide Week: Date Tutorial Topics

Week 1

No tutorial, week 1!

Week 2

Introduction to Management Accounting

Self study questions: L-S.T.H. Chapter 1 Questions 1.14, 1.15, 1.18, 1.19 Exercises 1.28

L-S.T.H. Chapter 2 Questions 2.3, 2.7, 2.8, 2.16 Exercises 2.22, 2.24, 2.25 Problem 2.28, 2.29

Home-work questions: Work-Shop Questions: 1-2 (reference – L-S.T.H. Chapter 1&2)

Week 3

Cost Volume Profit Analysis & Cost Behaviour

Self-study questions: L-S.T.H. Chapter 18 Questions 18.1, 18.2, 18.6, 18.7, 18.17 Exercises 18.28, 18.29, 18.33 Problem 18.43

Home work questions: Work-Shop Questions: 3-4-5 (reference – L-S.T.H. Chapter 18)

Week 4

Product Costing Systems

Self-Study Questions:

Langfield-Smith et al Chapter 4 Questions 4.2, 4.5, 4.6, 4.7, 4.8

Exercises E4.26, E4.27, E4.29 (parts 1,2,3 only)

Problems P4.38 Homework Questions:

Workshop questions 6-7

Week 5

Cost Allocation – Using Predetermined Overhead Application Rates

Self study questions: L-S.T.H. Chapter 7 Questions 7.1, 7.2, 7.3, 7.5, 7.13, 7.15 Exercises 7.26, 7.28 Problem 7.43

Homework questions: Work-Shop Questions: 8-9 (reference – L-S.T.H. Chapter 7)


Week 6

Cost Allocation- Activity Based Costing & Activity Based Management

Self study questions: L-S.T.H. Chapter 8 Questions 8.1, 8.2, 8.5, 8.19, 8.23, 8.24 Exercises 8.27, 8.38 Problem 8.48

Homework questions: Work-Shop Questions: 10-11

(reference – L-S.T.H. Chapter 8)

Week 7

Budgeting: Master, Operating and Cash Budgets

Self study questions: L-S.T.H. Chapter 9 Questions 9.1 to 9.22 Exercises 9.26

Homework questions: Work-Shop Questions: 12-13 (reference – L-S.T.H. Chapter 9)

Week 8&9

Standard costing 1&2

Homework Questions: Questions: 10.1,10.4, 10.6, 10.9, 10.12, 10.17, 11.1, 11.3, 11.12 Exercise: 10.28, 11.27 Problem: 10.38, 11.41

Workshop questions 14-16 (reference – L-S.T.H Chapter 10 &11)

Week 10

Pricing Decisions and Relevant Costing

Self study questions: L-S.T.H. Chapter 19, 20 Questions:19.1to19.27; 20-1 to 20-16 Problem: 19.42,19.44; 20.40, 20.45, 20.48 Case: 19.58, 20.54

Homework Questions:

Workshop questions 17-19 (reference – L-S.T.H Chapter 19 & 20)

Week 11

Performance Evaluation - Financial Performance Measures

Self study questions: L-S.T.H. Chapter 13 Questions 13.2 to 13.19 Exercise 13.30, 13.31 Problem 13.39

Kaplan & Atkinson Chapters 9 & 10 Homework case: Western Chemical Corporation: Divisional Performance Measurement, Kaplan & Atkinson, pp. 544-550

(reference – L-S.T.H. Chapter 13 – Kaplan & Atkinson Chapter 9 & 10)


Week 12

Performance Evaluation Kaplan & Atkinson Chapter 8 Homework case: Chadwick Inc. The Balanced Scorecard (based on the information in the case study; identify 4 performance measures in each of the 4 perspectives discussed in the chapter), Kaplan & Atkinson, pp. 380-383

(reference – L-S.T.H. Chap.14 – Kaplan & Atkinson Chap. 8 – Kaplan & Norton 1992,96)


GENERAL INFORMATION

Accounting for Manufacturing Operations In a manufacturing organisation the flow of costs in the accounting system may be represented as follows:

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TRANSACTION JOURNAL ENTRY

1 Purchase of Raw Materials Debit Stores Control Credit Accounts Payable

2 Issue of Direct Materials Debit Work in Process Credit Stores Control

3 Issue of Indirect Materials Debit Factory Overhead Control Credit Stores Control

4 Incurrence of Direct and Indirect Labour costs.

Debit Work in Process Debit Factory Overhead Control Credit Accrued Payroll

5 Payment of Salaries and Wages to employees

Debit Accrued Payroll Credit Cash Credit Taxation Withholdings Credit Other Withholdings (Union Fees

etc)

6 Employer Related Payroll Costs (i) Workers Compensation (ii) Payroll Tax

Debit Factory Overhead Control Credit Accrued WC Insurance Credit Accrued Payroll Tax

7 Actual Factory Overhead Incurred (i) On Credit (deferred payment) (ii) Depreciation of factory plant

and equipment (iii) Insurance Expired

Debit Factory Overhead Control Credit Accounts Payable Debit Factory Overhead Control Credit Accumulated Depreciation Debit Factory Overhead Control Credit Prepaid Insurance

8 Application of OVERHEAD to production (using a predetermined overhead rate)

Debit Work in Process Credit APPLIED Factory Overhead

9 Completed Production Debit Finished Goods Credit Work in Process

10 Recording SALES at : (i) Cost Price (ii) Selling (Retail) Price

Debit Cost of Goods Sold Credit Finished Goods Debit Accounts Receivable Credit Sales Revenue

11 Accounting for UNDERAPPLIED Overhead (Actual overhead exceed Applied Overhead)

Debit APPLIED Factory Overhead Debit Cost of Goods Sold Credit Factory Overhead Control

12 Accounting for OVERAPPLIED Overhead (Actual overhead is less than Applied Overhead)

Debit APPLIED Factory Overhead Credit Cost of Goods Sold Credit Factory Overhead Control


Manufacturing Statement, Cost of Goods Sold and Income Statement The above journal entries are summarised periodically in the following financial statements: (i) Manufacturing Statement (ii) Cost of Goods Sold Summary (iii) Income Statement These financial statements disclose in summary form Manufacturing, Trading and Profit Performance for a specified period of time. The format to be used for the preparation of these statements is as follows:

MANUFACTURING STATEMENT

Direct Materials Used Direct Labour Incurred Applied Factory Overhead Current Cost of Manufacturing Add: Work in Process at Start Total Manufacturing Costs Incurred Less : Work in Process at End COST OF GOODS MANUFACTURED

--------------------- --------------------- ---------------------

COST OF GOODS SOLD STATEMENT

Opening Stock of Finished Goods ADD: Cost of Goods Manufactured COST OF GOODS AVAILABLE FOR SALE LESS: Closing Stock of Finished Goods UNADJUSTED Cost of Goods Sold Add UNDER applied Overhead or Deduct OVER applied Overhead COST OF GOODS SOLD

--------------------- --------------------- ---------------------

INCOME STATEMENT

Sales Less Cost of Goods Sold Gross Profit Less Operating Expenses Net Profit

--------------------- ---------------------


Introduction to Managerial Accounting

Work-Shop Question 1 – Cost Terminology

Discuss the meaning of the following terms: Direct costs Period costs Cost Behaviour Patterns Indirect costs Variable costs Cost Estimation Cost of goods sold Contribution margin Cost driver Gross profit (margin) Fixed costs Cost management Product costs Capacity costs Pre-paid expenses Work-Shop Question 2 – Cost Concepts A company revealed the following cost information: Direct materials used $4,000 Direct labour 2,000 Indirect materials used 2,500 Indirect labour 1,500 Rent for factory 3,000 Depreciation on factory equipment 3,000 Marketing expenses 2,000 Administration expenses 1,200 Units produced 5,000 units Required: (a) Calculate unit prime costs. (b) Calculate the total conversion costs. (c) Calculate the manufacturing cost per unit.


Cost Volume Profit Analysis and Cost Behaviour Work-Shop Question 3 – Cost-Volume-Profit Analysis

An excerpt from the income statement of Global Park Ltd. follows: Income Statement - Year Ended 30 June Sales (400,000 units) $2,000,000 Operating Expenses Cost of Goods Sold $950,000 Selling & Administrative Expenses 450,000 $1,400,000 Net Income before tax $ 600,000 Less Tax (40%) $ 240,000 Net Profit after tax $ 360,000 Estimated Fixed Costs and Fixed Expenses during the year were $440,000. Manufacturing Capacity is 500,000 units per year. Required:

(a) Calculate the Contribution Margin per unit and the Contribution Margin ratio. (b) What is the breakeven point in Units for Global Park Ltd.?

(c) Given an annual sales volume of 420,000 units, calculate the selling price per unit, necessary to achieve an after tax profit equal to $420,000.

(d) (Revert to original data). At a selling price of $5.50, calculate the number of units that need

to be sold in order to earn a net profit after tax equal to $500,000.

(e) The SELLING PRICE required to earn a net profit after tax equal to 10% of sales revenue assuming 250,000 units are manufactured and sold.

(f) The number of units that need to be sold at a selling price of $8.00 per unit to earn a net

profit after tax equal to 15% of total costs.


Work-Shop Question 4 – Cost-Volume-Profit Analysis Voice Manufacturing Pty Ltd manufactures and markets a single product. Cost and expense relationships have been summarised as follows: Variable Costs & Expense Direct material $2.50 Direct Labour $2.00 Variable Overhead $1.50 Variable Expenses $2.00 Fixed Costs & Expenses Factory Overhead $50,000 Selling Expenses $30,000 Administrative Expenses $20,000 Normal Manufacturing Capacity is 100,000 units per year. The tax rate is 40 per cent. For planning purposes, inventories are not considered. As such all units manufactured are presumed to

sold in the period REQUIRED (a) Given a Selling Price of $12.00 how many units need to be sold in order to break-even? (b) Given an annual sales volume of 90,000 units, calculate the selling price necessary to achieve a net

profit before tax of $40,000 (c) Given a selling price of $12.50, how many units need to be sold in order to earn an after tax profit equal

to 10 per cent on sales revenue. (d) At a selling price of $10.00, what will the after tax net profit amount to if the company sells 60,000

units. (e) The company has been approached by an overseas company to purchase 12,000 units per year at a price

of $10.00 per unit. Given a total capacity utilisation of 80 per cent (including the overseas order), what would be the minimum price that the company must charge on its sales to the domestic market in order to achieve an after tax profit equal to 8 per cent on total sales revenue?


Work-Shop Question 5 – Cost-Behaviour Mark & Jane Pty. Ltd. is a single product firm. The following profit summary has been extracted from the accounts of the company. Jan. Feb. Mar. Apr. Sales (units) 1080 1140 1350 2000 Finished goods inventory at end of month (units) 1200 1000 l500 1600 -------------------------------------------------------------------- Total Revenue $ 43200 45600 54000 80000 -------------------------------------------------------------------- Total material $ 14724 6952 12230 13680 Total labour costs $ 20470 10085 17138 19075 Other production costs $ 18126 10823 15782 17145 Total expenses $ 5340 5520 6150 8100 -------------------------------------------------------------------- Other information: • Total materials usage and total labour costs above; include both direct and indirect

components. • Price levels have been constant throughout the above period. • Total conversion costs were $39,505 during April. • There was no work in process at the end of each month. • There was no opening inventory of finished goods in January. • Prime costs are equal to 60 per cent of variable costs. • Total expenses are all selling expenses. • The company uses the first-in-first-out method to value finished goods inventory. Required: From the above data use high-low analysis to calculate estimates for: (i) Direct labour costs per unit, (ii) Direct material costs per unit, (iii) Variable overhead costs per unit,

(iv) Fixed overhead cost per month.


Product Costing Work-Shop Question 6 – Product Costing The management of Production Life Pty. Ltd. receives an Interim financial report on June 29th, 2003. The report covered all activities for the financial year from July 1st, 2002. Inventories of Work-In-Process and finished goods were $74,500 and $146,000 respectively as of July 1st, 2002. All Jobs on hand had been completed on the 29th June 2003, except for one large job; No. 276. The job cost sheet for this job indicated to date direct labour of $12,000 and direct material of $10,000 had been used. Records for the last day of the financial year showed that direct labour costs of $5,000, direct material costs of $3,000 and factory overhead costs of $2,000 were incurred on that day. Job No. 276 was still incomplete. Up to the close of business on the 29th June 2003, the work in process account had been charged with $500,000 of direct material. Factory overhead is applied at 150% of direct labour costs. Factory overhead of $850,000 had been incurred up to the close of business on 29th June 2003. Sales for the period were $3,300,000, representing a mark-up of 50% on factory cost. There were no sales recorded on the last day of the period. Closing balance of finished goods was $34,000. Required: Incorporate records for the last day of the financial period and for the full financial period prepare: (a) A cost of goods manufactured statement (b) A cost of goods sold statement (c) A Statement of Financial Performance


Work-Shop Question 7 – Product Costing The Black Corporation operates a Job Cost System and provides you with the following details relating to November 2003 operations. Balance Brought Forward Finished Goods $8,000 Job No. 38 $3,200 Job No. 39 4,800 Work In Process $9,000 Job No. 40 $6,500 Job No. 41 2,500 Transactions for the month of November: Raw Material and stores purchased on credit $32,000 Raw Material and stores issued Job No. 40 $ 1,500 Job No. 41 500 Job No. 42 21,000 Job No. 43 6,300 Indirect 700 Time sheet summary $17,000 Job No. 40 $ 1,000 Job No. 41 300 Job No. 42 11,000 Job No. 43 2,800 Indirect 1,900 Other factory overhead incurred $ 4,900 Factory overhead recovery rate - 50% of direct labour cost Jobs charged out to customers $23,000 Job No. 38 $ 5,000 Job No. 39 4,500 Job No. 40 9,900 Job No. 41 3,600 Job No. 42 was finished during November, but was not delivered by November 30 Job No. 43 was in process at the end of November Required:

(a) Prepare a Statement of Cost of Goods Manufactured (b) A Statement of Cost of Goods Sold, and (c) A Statement of Financial Performance for the month showing any under or over applied overhead


Cost Allocation, Using Predetermined Overhead rates

Work-Shop Question 8 - Cost Allocation New Town Constructions Pty. Ltd. has two producing departments and two service departments. Monthly budget estimates are as follows: Producing Departments Service Departments Machining Assembly Stores Office Dept. overhead $ 82,000 $ 52,000 $12,000 $ 9,000 Direct material $ 92,000 $ 16,000 Indirect material $ 4,500 $ 1,700 $1,000 Number of employees 12 20 5 3 Direct labour hours 1,540 2,800 Indirect labour hours 360 400 800 Floor area (sq.m.) 1,000 1,600 2,400 600 Labour charge rates: direct (per hour) $12.00 $10.50 indirect (per hour) $10.00 $9.00 $11.00 The company uses the step-method to re-allocate service department overheads and has decided to use number of employees to re-allocate factory office overheads and to use the cost of materials issues to re-allocate the stores department overheads. In addition to the above budgeted department overhead costs the following plant-wide overhead costs are expected each month: Allocation Basis. Insurance (buildings) $ 1,500 floor space. Electricity $ 2,000 number of employees. Transport/freight $ 3,600 prime cost. Canteen subsidy $ 1,250 labour hours. Overhead is applied on the basis of direct labour hours. Required: (a) Calculate the factory overhead applied for each producing department assuming an activity level of

1660 direct labour hours for the machining department and 3000 direct labour hours in the assembly department.

(b) Calculate the overhead applied in (a) above if the company had allocated overhead on a plant-wide

basis.


Work-Shop Question 9 - Cost Allocation Overton Industries Ply. Ltd. manufactures motor vehicle accessories. The company has three production departments (machining, assembly and finishing departments) and two service departments (stores and maintenance departments). The company has decided to use pre-determined overhead application rates calculated on a departmental basis. Annual budget data and other information are as follows: General Factory Overhead Basis of re-allocation. electricity $85,000 number of machines supervision 284,000 number of employees equipment insurance 22,000 cost of machines depreciation (building) 136,000 floor space rent 240,000 floor space transport/dispatch 175,000 prime costs Other Budget Details. Machining Assembly Finishing Stores Maint. direct labour $616000 $484000 $290000 indirect labour $110000 $ 66000 $ 40000 $120000 $250000 direct materials $820000 $260000 $138000 indirect materials $ 15000 $ 22000 $ 8000 $ 46000 other overhead $265000 $320000 $110000 $ 50000 $ 70000 direct labour hours 44000 38720 26280 direct machine hours 27500 14000 9000 Other Information. number of machines 25 12 8 - 15 number of employees 32 25 21 6 10 floor space (sq.m.) 2000 3000 1400 5000 600 cost of machines $450,000 $125000 $100000 $280000 It has been decided that the appropriate basis for re-allocating the stores departments overhead costs is the budgeted cost of materials used and to use wages paid to re-allocate the maintenance departments budgeted overhead costs. Required : (a) Calculate a plant-wide predetermined overhead application rate based on direct labour cost. (b) Calculate pre-determined departmental overhead application rates using the step-method for

re-allocating service department costs to production departments, (Allocate stores department first). Use the following absorption bases for applying overhead to production units:

Machining: Machine hours. Assembly: Direct labour hours. Finishing: Direct labour cost.


Activity Based Costing (ABC) and Activity Based Management (ABM) Work-Shop Question 10 – ABC Millionaire National Bank had operated for years under the assumption that profitability can be increased by increasing dollar volumes. Historically, Millionaire’s efforts had been directed towards increasing total dollars of sales and total dollars of account balances. In recent years, however, Millionaire’s profits had been eroding. Increased competition, particularly from savings and loan institutions, was the cause of the difficulties. As key managers discussed the bank’s problems, it became apparent to them that they had no idea what their products were costing. Upon reflection, they realised that they have often made decisions to offer a new product, which promised to increase dollar balances without any consideration of what it cost to provide the service. After some discussion, the bank decided to hire a consultant to compute the costs of three products: cheque accounts, personal loans and the gold VISA card. The consultant identified the following activities, costs, and activity drivers (annual data):

Activity Activity Cost

Activity Driver Activity Capacity

Providing ATM service $100,000 No. of transactions 200,000 Computer processing 1,000,000 No. of transactions 2,500,000 Issuing statements 800,000 No. of statements 500,000 Customer inquiries 360,000 Telephone minutes 600,000

The following annual information on the three products was also made available:

Cheque Accounts

Personal Loans

VISA

Units of product 30,000 5,000 10,000 ATM transactions 180,000 0 20,000 Computer transactions 2,000,000 200,000 300,000 Number of statements 300,000 50,000 150,000 Telephone minutes 350,000 90,000 160,000

In light of the new information, Steve Dollar, the bank president, wanted to know whether a decision made two years ago to modify the bank’s cheque account product was sound or not. At that time the service charge was eliminated on accounts that had an average annual balance greater than $1,000. Based on increases in the total dollars in cheque accounts, Steve felt good about the new product. The cheque account product is described as follows:

(1) Cheque account balances greater than $500 earn interest of 2% per year, and (2) A service charge of $5 per month is charged for balances less than $1,000.

The bank earns 4% on cheque account balances. Fifty percent of the accounts are less than $500 and have an average balance of $400 per account. Ten percent of the accounts are between $500 and $1,000 and average $750 per account. Twenty five per cent of the accounts are between $1,000 and $2,767; the average balance is $2,000. The remaining accounts carry a balance greater than $2,767. The average balance for these accounts is $5,000. Research indicates that the $2,000 category was by far the greatest contributor to the increase in dollar volume when the cheque account product was modified two years ago. Required: 1. Calculate cost driver rates for each activity. 2. Using the rates computed in Requirement 1, calculate the cost of each product. 3. Evaluate the cheque account product. Are all accounts profitable? Compute the average annual

profitability per account for the four categories of accounts described in the problem. What recommendations would you make to increase the profitability of the cheque account product?


Work-Shop Question 11 – ABC Nexus Industries produces three products G, B and H. which pass through three departments. Activity based cost pools have been established and a budget prepared for the following year, as shown below:

ABC Cost Pool Budget Cost Pool $ Maintenance 58,500Stock handling 151,000Energy 55,550Quality Control 18,249 283,299

Normal capacity production estimates for the coming year and the flow of production for each product through the three producing departments are as follows:

Units Processed Product Total Units Dept. 1 Dept. 2 Dept 3 G 1,750 Nil. 1,750 1,750 B 3,000 3,000 3,000 3,000 H 3,500 3,500 Nil. 3,500

Cost Driver Information Energy consumption is driven by Kilowatt Hours and the consumption pattern is estimated as follows:

Dept. 1 Dept. 2 Dept. 3 Kilowatt Hours 105 165 260

Energy costs are first allocated to each department and then reallocated to products based on machine hours, which are seen as the major causal factor. Departmental machine hours applicable to each product are:

Machine Hours per unit Product Dept. 1 Dept. 2 Dept. 3 G Nil. 1 1 B 1 2 2 H 1 Nil. 2

Stock handling cost pool is driven by distribution of parts. Numbers of parts per unit are:

Product Parts per unit G 8 B 10 H 9

Inspections which are seen as the cost driver for Quality Control are carried out in Department 3 at the rate of one inspection per 250 units. Maintenance costs are directly related to machine set-ups, with departmental set-ups for each product estimated as follows:

Departmental Set-ups Product Dept. 1 Dept. 2 Dept. 3

G Nil. 1 7 B 2 1 12 H 2 Nil. 14

Required: (a) Calculate to four decimal places, overhead application rates for each cost driver. (b) Determine the overhead cost applicable to one unit of each product, G, B and H. (c) Determine the overhead cost applicable to one unit of each product G, B and H, if a plant-wide overhead rate,

based on machine hours, had been used.


Budgeting: Master, Operating and Cash Budgets

Work-Shop Question 12 – Operating and Cash Budgets

1. The management accountant of Efficient Manufacturing Ltd. has estimated the following actual cost and expense functions to prepare flexible budgets:

Materials $ 4,000 + $22.00 per unit produced Labour $ 6,400 + $15.00 per unit produced Other factory overhead $12,000 + $25.00 per unit produced S & A Expenses $ 4,970 + $10.00 per unit sold

2. Eighty per cent of the variable cost of materials and labour are prime costs; the remainder is indirect costs. Depreciation of production machinery is $2,000 per month and depreciation of office equipment is $1,000 per month. The company tax rate is 33%. The selling price is $150.00. The Denominator Level of Activity is 400 units.

3. The following balances are available for the month of July 200X:

Opening Balance Closing Balance Finished Goods 40 units 60 units Material $3,255 $2,635 Wages payable $3,500 $4,250 Accounts Payable $21,554 CR Accounts Receivable $60,000 DR Cash at Bank $26,710 CR

Accounts payable and accounts receivable refer to amounts accrued during the month of June 200X

4. Sales collections are made as follows:

40 per cent during the month of sale;

58 per cent during the next month;

2 per cent un-collectable (to be written off at the end of the month following the sale to the provision for doubtful debts. Bad debt expenses are provided for in the month of sales as financial expenses).

5. Purchases of material are paid for in the month in which they are incurred. Factory overheads and selling and administration expenses are paid thirty per cent in the month in which they are incurred and seventy per cent in the following month.

Required

Assume that during the month of July 200X the company will sell 350 units at the selling price of $150.00 per unit. Prepare a budgeted income statement and a cash budget for the month of July 200X.


Work-Shop Question 13 – Operating Budget The profit and loss account for Forte for the last financial year is given below:

Forte Profit and Loss Statement

For Year ended 30 June 2004 Sales revenue 1,904,000 Cost of goods sold Beginning inventory 345,000 Variable Fixed Material 295,200 20,000 Labour 557,600 120,000 Overhead 98,400 312,000 951,200 452,000 1,403,200 Goods available for sales 1,748,200 Ending inventory 379,500 1,368,700 Gross profit 535,300 Selling & Administration expense 96,000 150,000 246,000 Net profit 289,300

Additional information on the profit and loss statement Sales revenue is based on sales of 8,000 units. The beginning and ending inventory were 2,000 and 2,200 units respectively The unit absorption cost was based on a normal capacity of 8,000 units of output Depreciation accounted for half of the fixed manufacturing overhead and a quarter of the fixed selling

and administration expenses Information relevant for the preparation of next year's budget Forte has invested in new manufacturing equipment. This will increase the current depreciation expenses

in fixed manufacturing overhead to four times its current level. This is the only new investment in fixed assets made by Forte.

This new investment resulted in an increase in the efficiency of direct labour of 20 per cent and savings in direct material of 5 per cent

Forte will increase advertising expenditure by $50,000 in an effort to boost sales As a result of the improve quality of the product and services resulting from the new equipment and

because of increased advertisement, the sales volume is expected to increase by 25 per cent and the unit selling price by 10 per cent

All current spending is expected to increase at the rate of 4 per cent Ending inventory at 30 June 2005 will be 3,000 units. Use a denominated level of output of 10,000 for

the year 2005 to value ending inventory. Required Prepare a budgeted profit and loss statement for the year ended 30 June 2005. (Note: show all your workings clearly)


Standard Costing Work-Shop Question 14 – Standard Costing Towers Pty. Ltd. use a standard cost system and a flexible budget for factory overhead. Normal volume (denominator level) is 8400 standard direct labour hours per month. Standard cost details for the companies single product are as follows: Direct Material $ 12.30 Direct Labour $ 49.92 Factory Overhead $ 43.68 Total Standard Cost per Unit $105.90

Factory overhead is applied on the basis of standard direct labour hours and raw materials inventories are kept at standard cost.

The standard cost of material is $4.92 per Kg. Direct labour is charged at the standard rate of $10.40 per hour.

For the month of June:

6000 Kgs. of raw material were purchased at a cost of $30600. Issues of direct material were 5000 Kgs. Direct labour usage was 9600 DLH's at a cost of $10.64 per DLH. The factory overhead budget for June was $83460 for a budgeted 2000 unit production level. Factory overhead incurred was $81,276 of which $30,000 was considered to be fixed. Total factory overhead was over applied by $3900.

Required: (i) Prepare a schedule of all relevant standard cost variances and give appropriate journal entries to

record direct materials, direct labour and factory overhead (use 4 variance method for overhead analysis).

(ii) In the forthcoming budget period the company expects fixed overhead to change to $32500 per

month. Variable overhead is expected to be $6.20 per DLH. New production methods will reduce standard labour times by 10% and labour rates are expected to increase by 10%. Material usage is expected to increase by 5%. The normal production level (denominator level) will change to 1800 units per month.

Adjust the standard cost sheet to reflect fully these expected changes.


Work-Shop Question 15 – Standard Costing A standard cost system is in operation at the Newcastle plant of Lewis & Smith Fabrications Limited. A summary of standard cost data and costs of operation during 2008 are as follows: Standard Cost Data (per unit of product) Direct material (3kg at $4.00/kg) $12.00 Direct Labour (1.5 hours at $9.00/DLH) $13.50 At a normal annual operating capacity of 84,000 machine hours, the plant should produce 140,000

units of product. The Flexible Overhead Budget used was: $252,000 + $3.10 (per machine hour) Actual Cost Data

During 2008 the plant operated at 77,700 machine hours and produced 119,500 units of product. 480,000kg of direct material was purchased during the year (300,000kg at a price of $4.25/kg and

the remainder at $3.90/kg). Opening stocks of direct raw material were 8,000kg and closing stock was 125,000kg. The plant operated at 185,600 direct labour hours and the actual labour rate was $9.40 per direct

labour hour. Actual Overhead Costs incurred amounted to :

Fixed $247,000 Variable $248,200 Required: (a) Prepare a report disclosing all standard cost variances for direct materials, direct labour and factory

overhead for 2008. (Calculate 4 variances for overhead). (b) For January, 2009 a new machine is expected to be introduced to replace an older and less efficient

machine. As a result of the new machine the fixed overhead budget is expected to increase by $1,000 per month and direct labour times are expected to reduce by 10% with direct labour rates expected to increase by 15%. No changes are expected to the material price. Due to a market upturn normal operating levels (in units) will increase by 5% for the year.

Adjust the standard cost sheet to reflect fully these changes.


Work-Shop Question 16 – Standard Costing Stanton and Main Pty. Ltd. use a standard cost system in accounting for the manufacturing costs of its single product. Standard cost data for one unit of product is as follows; Direct materials, 16 kgs. @ $1.65 per Kg. $ 26.40 Direct labour, 1.8 hrs. @ $14.00 per hr. 25.20 Factory Overhead Applied 48.00 $ 99.60 The company purchased 5,000 Kgs of material during the month at a cost of $8,600. Any materials price variance is recorded when materials are purchased and all inventories are carried at standard cost. There were no opening stocks of raw materials at the beginning of the month. A physical check of inventory showed 600 kgs of raw material stock on hand at the end of the month. During the month employees worked a total worked a total 450 hours at a cost of $6,550. Factory overhead is applied on the basis of direct labour hours. Factory overhead totalling $15,000 was incurred during the month; $5,000 of this amount was classified as fixed overhead with the remaining amount treated as variable overhead. A total of $144,000 was budgeted for factory overhead for the year; the break up of this amount was 40% fixed and 60% variable. There were no opening or closing inventories of work in process during the month. Total overhead was under applied by $2,520 during the month. Required (a) Prepare a schedule of standard cost variances for the month. (b) In the forthcoming period a new machine will be introduced into the production line which will have

the following effects: (i) Raw Materials cost will increase by 15 cents per kilogram and the quantity required

will reduce to 15 kilograms per unit of finished product. (ii) Direct labour times will reduce by 20% and with the increased productivity, direct

labour workers will receive a 15% pay rise. (iii) The variable overhead rate per hour will remain unchanged. (iv) Total budgeted fixed overhead will increase by 25% and normal capacity will

increase by 33.333% (v) Overhead will still be applied on the basis of direct labour hours.

Calculate the new standard cost per unit.


Information for Tactical Decisions

Work-Shop Question 17 – Relevant Information Decision Clearview Company’s engineering, manufacturing, and accounting departments have prepared a report for management in response to the idea of manufacturing digital cameras. Below is some analysis, which includes the estimate for an assembly run of 5,000 digital cameras. Additional production employees would be hired to manufacture the sub-assembly. However, no additional equipment, space or supervision would be needed. The report states that total costs for 5,000 units are estimated at $957 000 or $191.40 a unit. The current purchase price is $130.00 a unit, so the report recommends a continued purchase of the product. Components (outside purchases) $120,000 Assembly labour* $300,000 Factory overhead** $450,000 General and administrative overhead*** $87, 000 Total costs $957 000 *Assembly labour consists of hourly production workers. **Manufacturing overhead is applied to products on a direct labour dollar basis. Variable overhead costs vary closely with direct labour dollars. Fixed overhead 50% of direct labour dollars Variable overhead 100% of direct labour dollars Manufacturing overhead rate 150% of direct labour dollars ***General and administrative overhead is applied at 10% of the total cost of material (or components), assembly labour and manufacturing overhead. Clearview Company has purchased 40,000 digital cameras annually from Zoolander Enterprises Ltd The price has increased each year and reached $132.00 per unit last year. Because the purchase price has increased significantly, Clearview management has asked that an estimate be made of the cost to manufacture the digital camera in Clearview facilities. Clearview products consist of stamping and moulding. The company has little experience with products requiring assembly. Required:

1. Was the analysis prepared by Clearview Company’s engineering, manufacturing, and accounting departments and their recommendation to continue purchasing the digital cameras correct? Explain your answer and include any supporting calculations you consider necessary.

2. Briefly discuss three guidelines that relate to this make or buy decision and why they are important.


Work-Shop Question 18 – Relevant Information Decision Harry Moss, administrator of David’s MDC Hospital, requests your assistance in preparing a cost analysis for a proposed additional to the telemetry unit. The hospital presently has 10 telemetry units in operation on a 40-bed floor. A telemetry unit monitors patients who had heart attacks or have cardiac problems. This unit allows a patient to move about freely in that particular hospital wing without being confined to a hospital bed. The present 10-unit telemetry monitoring system is located in the nursing station that can accommodate the proposed 8 additional units without renovation. Telemetry units represent a step down in the level of care from cardiac intensive care rooms. Telemetry units not only offer patients more freedom but also offer a considerable cost saving. Cardiac care rooms average $300 per day, while the telemetry unit charge is the regular room charge of $120 plus an additional $80 to $120 daily. Expected revenue. Hospital management is undecided whether to charge a $80 or $120 differential a day for the proposed unit. Also, there is lack of consensus among the managers regarding the rate of utilisation. The expected range is from 40 to 60 percent. A 10 percent allowance for bad debts and insurance discount is estimated. Expected cost. Space for the unit will be obtained by converting a wing of the hospital presently being used for medical-surgical patients; the regular room rate is charged for this wing. The equipment’s total cost is expected to be $44,570; the life is estimated to be only five years due to technological changes. Straight-line depreciation will be used. The administrator indicates that you are to determine total cost for the five-year period for each cost element and then divide by five years to obtain an average for the five-year period. Service contract costs for routine maintenance and service call costs for overtime, labour, and parts are expected to be $3,060 and $2,400 respectively in Year 2, with an increase of 10 percent per year thereafter for inflation; no such costs are expected for Year 1 since the equipment will be under warranty during this time. Costs of supplies will be $2,800 for the first year, with a 12 percent annual increase thereafter due to inflation and aging of the equipment. One registered nurse earning $25,000 annually, and two licensed practical nurses, each earning $17,000 annually, will staff the eight-bed unit. Personnel cost the hospital industry has increased 8 percent annually in the last few years. For simplicity, assume the service contract, service call, suppliers, and personnel costs are fixed, unaffected by changes in volume. Required: (a.) Determine differential margin that will be received and the annual percentage return on equipment using a: (1) $80 charge per day and a 40 percent use rate (2) $80 charge per day and a 60 percent use rate (3) $120 charge per day and a 40 percent use rate (4) $120 charge per day and a 60 percent use rate (b.) Advise management as to the alternative to choose explaining why you think this is the right choice. (c.) List two other factors that should be considered before installation of the unit explaining why they are important. (d.) Discuss three guidelines that help a management accountant to determine what the relevant information is when he or she is confronted with an alternate choice decision. Explain why these factors are important.


Decision Process and Pricing Decisions Work-Shop Question 19 – Product Mix Decision & Special Order Fashionable produces four products, shirt, skirt, trousers and jacket that it sells directly to retailers. The unit selling price and costs are given below: Shirt Skirt Trousers Jacket Unit selling price $ 21.00 $ 35.00 $ 45.00 $ 75.00 Unit direct material

3.80

8.80

10.00

15.00

Unit direct labour @ $5 per labour hr 5.00 7.50 10.00 20.00 Unit variable overhead 1.50 2.25 3.00 6.00 Fixed overhead @ $30 per machine hr 2.50 5.00 7.50 12.50 Unit cost of sales 12.80 23.55 30.50 53.50 Gross profit margin

8.20

11.45

14.50

21.50

Unit variable S & A expenses

1.20

1.80

1.80

3.20

Unit fixed S & A expenses 2.10 3.50 4.50 7.50 Total unit S & A expenses 3.30 5.30 6.30 10.70 Net profit margin

$ 4.90

$ 6.15

$ 8.20

$ 10.80

At the moment Fashionable produces 2,000 shirts; 600 skirts; 600 trousers and 200 jackets - this uses up all the available machine hours. The maximum quantities of shirts, skirts, trousers and jackets that Fashion can sell as well as the minimum quantities that it must sell because of contractual arrangements are given below: Shirt Skirt Trousers Jacket Maximum number of unit of sales 3,000 800 750 300Minimum number of unit of sales 1,000 400 400 100 There is a limited supply of machine hours. Required (a) How many units of shirts, skirts, trousers and jackets should Fashionable produce to maximise profit?

What is the profit at the optimal product mix? Support your answers with appropriate calculation. (b) If Fashionable receives a special order for 50 jackets, what is the minimum unit selling price it would be

willing to accept for this order? (c) If 100 extra machine hours are available, what are the maximum amounts that Fashionable would pay for

each machine hour?

2010_SPR_22746_v3_standard_city_19-7-10

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