management accounting 4.2.11.doc

8/10/2019 Management Accounting 4.2.11.doc

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P 12.8 Garden Tools Manufacturers Ltd, (GTML) produces garden tools and lawnmaintenance products that are sold through an All-India chain of stores. TheGTML manufactures more than 5 products and appro!imatel" # per cent of itsre$enue comes from selling small home garden tools such as ra%es, pruners andspades. It also manufacturers high-&ualit" lawn mo$ers, edgers and 'lowers for

professional lawn ser$ice companies. ales of these products, howe$er, ha$e not 'een a ma or source of re$enue.The *+ of GTML, arsha esai, is concerned a'out the apparent profita'ilit"of two of its products, namel", (i) a high-$olume product Model-/ spade and(ii) a low-$olume product, Model-0 mo$ers.At the 'eginning of current "ear, the total estimated manufacturing o$erhead was1s # , , , and the estimated total la'our cost was 1s 2, , , . +or thecurrent "ear, the e!pected sales re$enues from sale of Model-/ spade andModel-0 mowers are summari3ed 'elow4

Model-/ pade Model-0 Mower

#/2

6um'er of units soldales re$enueirect la'our costirect material cost

2#,51s /0,#5,2,57,8,95,

21s #, ,9 ,

#,2 ,

The GTML allocates manufacturing o$erheads to products 'ased on direct la'our cost.The products process for spades is fairl" simple. The GTML uses one supplier for themetal handle and 'lade. It produces shafts on an automatic lathe and the handles, 'ladesand shafts are assem'led '" had at single wor%station.

The production process for mowers is much more complicated. Twent" suppliersare used to suppl" the 5 components in$ol$ed in producing the Model-0 . Moreo$er,

assem'l" of mowers ma%es uses of 5 separate assem'l" wor%stations.The estimated total manufacturing o$erhead (1s # , , , ) is related to four cost dri$ers as shown 'elow4

Overhead cost item/pool

Annual cost Cost driver Estimated annual value

Cost per driver unit

(1) (2) (3) (4) (5) et up costs 1s #, , , 6um'er of

setups, 1s # ,

# Materialhandling cost

, , , 6um'er of material

re&uisitions

#, 5, per re&uisition

/ epreciationof e&uipment

5, , , 6um'er of re&uisition

# , #,5 per machine-hour

2 thers#, ,

6um'er of wor%-stations

used in production of

product

/, wor%-stations across

all products

2 , per wor%station


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The production information for 2#,5 spades (Model-/ ) and 2 Mowers(Model-0 ) is summari3ed 'elow4

Model-/ pade Model-0 Mower

#

/2

6um'er of setups

6um'er of materialre&uisitions 6um'er of machine-hours 6um'er of wor%stations

#

/2

5

5

5

REQUIRED:

+rom the a'o$e information, compute the profita'ilit" of the two products4 M-/77 spadeand M-0 mowers, using (a) traditional costing approach:s"stem and (') A;*s"stem:approach to allocate manufacturing o$erheads. *omment on the differences in (a)and (').

SOLUTION:

(a)


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(')


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to the *E ,


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The A;* team then identified the retail customer lines and 'usiness customer lines listed 'elow4

Acti$it" cost dri$er 6um'er of unitsof acti$it" costdri$er '" retail

customers

6um'er of units of acti$it" cost dri$er used '" 'usiness

customers

Total

( ) (#) (/) (2) *he&ues processed# Teller transactions/ *ustomer call centres2 eposit accounts

58, ,9, ,2,85,8,5 ,

#,#0, ,2, ,

#5,#,5 ,

#,05, ,# , ,

5, ,, ,

The a$erage re$enues (from interest earned on account 'alances) from each t"pe of account earned '" the F;L is4 (i) per retail customer account, 1s 5 and (ii) per 'usinesscustomer account, 1s # .1E FI1E 4(A) Fsing the current cost accounting practices of F;L

. compute the indirect cost allocation rate,#. determine the total indirect cost assigned to the retail customer lines and 'usiness customer lines,

/. compute the proportion of the total indirect cost assigned to the retialcustomer line and 'usiness customer line

2. determine the indirect cost per retail and 'usiness account,5. assuming that there are no direct costs, compute the a$erage profit per account

for retail and 'usiness customers.(;) Fsing the proposal A;* "stem4

. compute the indirect cost allocation rate for each of the three acti$ities4che&ues pa"ments, teller withdrawal:deposits and customer call centre,

#. calculate the acti$it"-wise total indirect costs allocated to each retail and 'usiness customer lines,/. compute the proportion of each acti$it"Hs resources used '" the retail and

'usiness customer lines,2. compute the indirect cost per retail and 'usiness customer account,5. compute the a$erage profit per account of 'oth retail and 'usiness customers.

(*) as F;LHs 'onus-'ased incenti$e plan to increase the num'er of deposit accountsa sound strateg"J In the light of the A;* anal"sis, what changes would "ousuggest in the strateg"J hat 'enefits can F;L get from the A;* anal"sisJ

12.C.2 ABC and D"st "#ut"on C&anne$ P o!"ta#"$"t% In Kanuar", current "ear, the top

management of *olor


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'u"ers, mostl" indi$iduals, place generall" small &uantit" orders '" phone or o$er theInternet.

The corporate sales orders are generall" large-&uantit" orders and are 'rought inthrough the field sales force of *olor


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internetorder

Mar%etingand salessupport

C C / C 5 C - - C

# esign - - - 7 C - C C/ Informations"stem

- C - - C 0 C C

2 Generaladministration

- - - C C 0 C

eepa%


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Kain *onsultants ha$e selected two recent orders for stud"4 (i) a ,9 unit order for a temperature monitoring instrument and (ii) an order for # harmonic anal"sers. Thecosts and price data relating to them are gi$en in E!hi'it .

E'&"#"t 1 *ost and


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'. ;ased on Kain *onsultants wor%, Ka" Engineering has introduced an A;* s"stem (as per E!hi'it #). 1ecentl", Ka" has recei$ed order from Amit" International for a uni&uedata logging de$ice, re&uiring 1s /#, of components and 1s 0, of direct la'our together with the following re&uirements4

6um'er of design-hours 5 6um'er of uni&ue parts / 6um'er of inspections # 6um'er of setups Machine-hours 9

Amit" International has indicated that the" alread" ha$e a &uote from another supplier for 1s /0, . *alculate the cost of data logging de$ice, using the A;*approach. ow does it stand in relation to the competitors &uoteJ

CASEC.1+.1 (


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III. In$entor" polic" +inished goods4 # per cent of the following &uarterHs re&uirements at the

end of each &uarter. 1aw materials4 / per cent of the following &uarterHs re&uirements at the

end of each &uarter. The film wishes to ha$e 7,# %gs of each t"pe of direct material on hand

at March / of the ne!t "ear.

I> Manufacturing cost per unitirect materials4 %g of A P 1s 5.00# %gs of ; P 1s 8.02irect la'our4 .5 ! directla'our-hour P 1s 0

1s 5.005.90 1s # .59

2.$erheads4 >alua'le ( .5 ! directla'our-hour P 1s #)+i!ed (1s 0,22, per"ear:6ormal le$el ofacti$it", , , units)Total

9.

0.22 2.222 .

The &uarterl" fi!ed manufacturing costs of 1s #, , includedepreciation totaling 1s 5 , . All production $ariances are written off as an ad ustmentto the cost of goods sold in the period in which the" occurred. The firm followsa'sorption costing method for income determination.>. elling and administrati$e costs4 *ommission and distri'ution, 1s 9 per unit sold Ad$ertising 1s , per &uarter Administrati$e, 1s # , per &uarter

>I. *ash dis'ursement polic"4 1aw materials are purchased on terms of #: , net:/ .iscount is alwa"s ta%en and purchases are recorded at netO 7 per cent of the purchasesare paid for in the &uarter of purchase and remainder are paid for in the following &uarter.The list prices of materials A and ; are 1s 9 per %g and 1s 0 per %g respecti$el". iththe e!ception of income ta!es, which are paid during the following &uarter, all other

pa"ments are made when incurred.

>II. *ash collection e!perience4 # per cent sales are for cash and 0 per cent are oncredit. The terms of sales are #: , net:9 da"s. owe$er, for pa"ments, the sales are

uarter 6e!t "ear Qear following ne!t "ear +irstecondThird+ourth

# ,/ ,2 ,# ,

/ ,


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'illed to customers on the first da" of the following &uarterO per cent of the credit salesare collected during the discount period and another 2 per cent are recei$ed after thediscount period 'ut during the &uarter in which the 'illing is doneO 8.5 per cent arerecei$ed during the following &uarter and #.5 per cent are 'ad de'ts. These accounts arewritten off at the end of the # nd &uarter following the sales. A pro$ision of # per cent of

sales is made for 'ad de'ts at the time of sales. ales discounts are recorded as adeduction from sales in the &uarter the discounts are ta%en. ;ased on prior e!perience,this deduction e&uals .0 per cent of the pre$ious &uarterHs sales ( .0 ! .5 ! . #).

>III. ther information4 Income ta! rate os 5 per cent. *ash di$idends amount to 1s 0 , at the end of &uarter # and &uarter 2. At the end of the 2 th &uarter, e&uipment coasting 1s 9, , was

purchased.


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unit)irect la'our

(1s 2 per unit)$erheads (1s

9 per unit)

/,22,79

00,

,/#,

9,72,/#

,#0,

,7#,, 7,7#

,22,

#, 9,,/9, 9

00,

,/#,9,72,/#

2,20,

9,8#,/5,/2,8#

+i!ed costs4epreciationther o$erheads

5 ,

,9 ,#, ,

5 ,

,9 ,#, ,

5 ,

,9 ,#, ,

5 ,

,9 ,#, ,

#, ,

9,22,0,22,

Total costs 7, 5, #,# ,7# /,28, 9 7, 5,/# 2/,80,8#;udgeted fi!edcostsLess4 +i!edcosts charged

(P 1s 0.22 per unit)

#, ,

,05,90

#, ,

#,8 , 0

#, ,

/, /,02

#, ,

,05,90

0,22,

7,25,#0

*apacit"$ariance

(+a$oura'le)

#5,/# 57, 0(Fnfa$oura'le )S

7#,02(+a$oura'le) SS

#5,/#(+a$oura'le)

, ,#0(Fnfa$oura'le)

SFnder-reco$er":Fnder-a'sorption of fi!ed costsOSS $er-

reco$er":o$er-a'sorption of fi!ed costs

Qua te $% Pu )&ase Bud*et o! Ra/ ,ate "a$s.uarter ,irst econd hird ,ourth otal ,ate "a$ A 4


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re&uirementLess4 peningin$entor"


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Qua te $% Se$$"n* and Adm"n"st at"3e E'4enses Bud*et.uarter ,irst econd hird ,ourth otal ales re$enueLess4


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discount period( .2 !

prior &uarter credit

sales)( . 85 !#nd prior &uarter creditsales)

ritten-off 'adde'ts ( . #5 !credit sales of # nd

prior &uarter credit sales)*losing 'alance

/,02,

,# ,

2 ,,59,

/,02,

8#,

#2,5,/9,

5,89,

8#,

#2,# ,92,

8,90,

, 0,

/9,,5#,

# , #,

/,8#,

,#2,,5#,

Qua te $% S)&edu$e Re$at"n* to Pa%ment to C ed"to s

.uarter ,irst econd hird ,ourth otal pening ;alanceAdd4 *redit purchases(net of discount)Total amount pa"a'leLess4


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Income ta!esi$idendsE&uipmentTotal cash outflows

6et cash inflowspening 'alance*losing 'alance

82,--

,/7,7# .#82,280.0

#,2 ,/, 2,280.0

75,520 ,

-5,95,#77.9

(#,80,077.9 )/, 2,280.0

/5,587.#

#, ,82--

9,0 ,/99.2,5#,#//.9

/5,587.#,08,0 #.0

#,0 ,##0 ,

9, ,7,8#,# 202,579.

,08,0 #.0#,8#,2 0.0

9,5 ,5 .,9 , .9, , .

9/,50,87 .#/#,2 0.0

#,2 , .#,8#,2 0.0

Bud*eted Ba$an)e S&eet as at ,a )& (15 Ne't -eaLia'ilities Amount Assets Amounthare capital1etainedearnings*reditorsTa!es pa"a'le

1s / ,88,2#0

#2, 2,9225,0#2.0

7 ,82

NNNNNNNNNNNN 58, 0,9/#.0

+i!ed assetsLess4AccumulateddepreciationIn$entories4irect material(Material A,

7,# ! 1s5.00)(Material ;,7,# ! 1s8.02)+inished goods(9, ! 1s 2 )e'torsLess4Allowances for

'ad de'ts (1s

92, ? 1s,/#, @ 1s.#2. )*ash

1s 52, ,

2, ,

,#9,##2

#,2 ,,5#,

8#,

1s 2 , ,

/,99,##2

,0 ,#,8#,2 0.0

58, 0,9/#.0

P.16.6 The standard la'our, and the actual la'our emplo"ment in a wee% for a o' are asunder4


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uring the 2 -hours wor%ing wea%, the gang produced ,0 standard la'our-hours ofwor%. *alculate the4 ( ) La'our efficienc" $ariance4 (#) La'our mi! $arianceO (/) 1ate of wages $arianceO and (2) Total la'our cost $ariance.

SOLUTION

Cate*o % o! /o 7e s

Standa d 6um'er ofwor%ers

6um'er ofhours

Total hours age rate Total wages

S7"$$ed /# 2 ,#0 1s / 1s /,02Sem" s7"$$ed # 2 20 # 79Uns7"$$ed 9 2 #2 #2

25000 2. 2 5090A)tua$

S7"$$ed #0 2 , # 2 2,20Sem" s7"$$ed 0 2 8# / #, 9Uns7"$$ed 2 2 9 # /#

25000 (.98 56 0. 0a our e icienc' variance 4 ( tandard la'our-hours-Actual la'our-hours) !

tandard weighted a$erage wage rate D ( ,0 @ #, ) ! 1s #.5# D 1s 5 2(ad$erse)

#. 0a our mi variance : tandard mi! of actual hours wor%ed @ Actual mi! ofactual hours) ! tandard wage rate ince standard total hours and actual total hours are the same (#, hours),there is no need to calculate a re$ised standard mi! of actual hours. Accordingl", %illed wor%ers4 ( ,#0 @ , # ) ! 1s / D 1s 20 (fa$oura'le)

emi-s%illed wor%ers4 (20 @ 8# ) ! 1s # D 20 (ad$erse) Fns%illed wor%ers (#2 @ 9 ) ! 1e D 0 (fa$oura'le) Total la'our mi! $ariance 0 (fa$oura'le

3 &ate o $a es variance ( & 6 A&) A* %illed wor%ers4 (1s / - 1s 2) ! , # D 1s , # (ad$erse) emi-s%illed wor%ers4 (1s # - 1s /) ! 8# D 8# (ad$erse) Fns%illed wor%ers (1s @ 1s #) ! 9 D 9 (ad$erse) Total la'our rate $ariance #, (ad$erse)

2. otal la our cost variance (Total standard la'our cost at standard hours @ Actualla'our cost at actual hours)

tandard la'our cost D ( tandard hours ! tandard weighted a$erage wage rate)

D ( ,0 ! 1s #.5#) D 1s 2,5/9 @ 1s 9,79 D 1s #,2#2 (ad$erse)

P.16.12 +rom the following data of A;* Ltd relating to the 'udgeted and actual performance for the month of March, compute direct material and direct la'our cost$ariances.Bud*ed data !o ,a )& 4 Fnits to 'e manufactured Fnits of direct material re&uired ('ased on standard rates)

,5 ,2,75,


18/22


19/22

The two di$isional managers are a'out to enter into discussions to resol$e theconflict, and the manager of di$ision A wants "ou to suppl" him with some information

prior to the discussions.i$ision A has 'een selling 2 , units to outsiders and , units to di$ision

;, all at 1s # per unit. It is not anticipated that these demands will change. The $aria'le

cost is 1s # per unit and the fi!ed costs are 1s # la%h.The manager of di$ision A anticipates that di$ision ; will want a transfer priceof 1s 0. If he does not sell to di$ision ;, 1s / , of fi!ed costs and 1s ,85, of assets can 'e a$oided. The manager of di$ision A would ha$e no control o$er the

proceeds from the sale of the assets and is udged primaril" on his rate of return.(a) hould the manager of di$ision A transfer its products at 1s 0 to di$ision ;J(') hat is the lowest price that the di$ision A should acceptJ upport "our decision

with detailed calculations.

SOLUTION(a) *omparati$e tatement of


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P.21.11 The A; Ltd has two di$isions, R and Q. ne of the parts produced '" di$ision Ris used in the manufacture of a product that is assem'led at di$ision Q. The part is notuni&ue and there is a readil" defined mar%et such that R can sell outside the firm and Qcan 'u" from outside. The following information is descripti$e of the normale!pectations of di$ision R4

*apacit" to produce the part (units)E!ternal sales at 1s per (units)Transfer to di$ision Q (units)*osts4 >aria'le manufacturing cost per unit >aria'le selling costs (on e!ternal sales onl" 'ut not incurred on internaltransfers) +i!ed manufacturing cost ('ased on ,#5, units) +i!ed selling cost ('ased on , , units)

,#5,, ,

#5,

1s 02

#9

The di$ision Q presents the following data on the assumption of a $olume of #5, units

(one part is needed for each unit of its own production)4>aria'le manufacturing cost per unit (e!clusi$e of transfer price or outside purchase price)>aria'le selling e!penses per unit+i!ed manufacturing cost+i!ed selling e!penseselling price of finished product

1s

9

2#2

1E FI1E 4(i) If di$ision R could sell ,#5, units at 1s each in the outside mar%et, what

transfer price would the compan" management prefer in order to pro$ide

proper moti$ation to di$ision QJ(ii) As management accountant, would "ou ad$ise di$ision Q to 'u" at the transfer price determined in part (i)J

(iii) Assume the situation and the transfer price determined in part (i). if the selling price dropped to 1s # , should Q 'u" at that priceJ ould this 'e desira'lefrom the point of the firmJ h"J

(i$) Assume that di$ision RHs product did not ha$e an outside demand in e!cess of , , units and its total fi!ed manufacturing cost could 'e reduced '"

per cent, if the $olume of production were reduced '" per cent, if the$olume of production were reduced to , , units, what is the appropriatetransfer priceJ

($) uppose that R di$isionHs ma!imum outside demand is , , units 1s ,and there is no other usage for the capacit". hat transfer price(s) should thecompan" management preferJ

($i) uppose the unit selling price of QHs product is 1s 0 O one of its customers isalso a customer of di$ision RO di$ision QH refuses to 'u" the part from theoutside mar%et at 1s since the selling price of 1s 0 would not 'e highenough to e$en co$er the $aria'le costs. If di$ision R does not lower thetransfer price, di$ision Q will not sell to this customer who, in turn, will


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pro'a'l" cancel the usual order of 5 , units to di$ision RO there is no other demand for the product and no other usage of RHs capacit"O fi!ed costs wouldnot change at either di$ision. hat is the lowest transfer price that thedi$ision R would 'e well ad$ised to acceptJ upport "our recommendationwith computations.

SOLUTION(i) +etermination o rans er Price(a)>aria'le manufacturing cost of di$ision R(') pportunit" cost (in terms of contri'ution foregone '"

transfer to di$ision Q)4 elling price Less total $aria'le costs to ma%e and sell (1s 02 ? 1s #)Transfer price

1s 09 2

70

(ii) tatement o Contri ution Per 7nit +ivision 8

elling priceLess $aria'le costs4Manufacturing cost (di$ision Q)Transfer price from di$ision R>aria'le selling e!penses

*ontri'ution margin per unit

1s 70

9

1s #2

# 2/9

Qes, di$ision Q is ad$ised to 'u" from di$ision R(iii) At 1s # selling price per unit, di$ision Q will not 'e a'le to earn a positi$e

contri'ution4

elling priceLess $aria'le costs4

6egati$e contri'ution

1s ## 2(2)

6o, di$ision Q should not 'u" at that price. Qes, it would 'e desira'le from thestandpoint of the firm also due to higher contri'ution on e!ternal sales4

Comparative %ncome tatement o the ,irm elling price per unit ut-of poc%et-costsO

i$ision R i$ision Q*ontri'ution margin

1s

09-2

1s #

029

(i$) Appropriate Transfer


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(see wor%ing note ) /08

($) Transfer

management accounting 4.2.11.doc

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