ACFI 2003
Management Accounting
Major Written Assignment
Due Date: April 16, at 5pm Sydney time.
Submit via Turnitin ONLY
Instructions:
Answer both Q1 and Q2
1
Question 1
Toni had worked as an apprentice baker in a large bakery that supplied different
types of bread – from the standard white loaf to the speciality bread such as rye,
gluten free and organic. At the end of her training, she decided to start a small
business specialising in producing cakes – in particular, cakes with ornate
decorations made from icing sugar – and Danish pastries because she did not want
to compete with the large bakeries for the “bread market”. As she was close to office
buildings, she decided to try and increase her daily cash flow by selling “fresh cut”
sandwiches.
Having spent most of her savings on purchasing equipment and supplies, renovating
shop premises, and employing two shop assistants, she did not want to spend
money for an accountant to set up an accounting system. She wondered whether
she should base her cost management system on the system adopted in the large
bakery.
As an apprentice, she had not been involved in the management aspects of
operating a bakery, and she did not know what sort of information she would need to
ensure that she did not lose her investment in her business. She was certain that
there was a ready and reasonably large market for her bakery products. She felt
that all she needed was a cash statement each week to show her what her receipts
and payments were, and an annual set of accounts to make sure that she was
operating at a profit. To ensure that she recovered her costs, she intended to follow
the product costing strategy used by the large bakery that she was an apprentice in.
The large bakery produced a variety of bread using highly automated processes. In
ascertaining the cost of its different types of bread, the large bakery treated flour as a
direct cost. All other costs were treated as indirect costs, and were allocated. It was
a simple system that Toni thought she could emulate. However, the large bakery did
not produce cakes and pastries. Cakes and pastries require highly specialised
labour skills because the processes may not be easily standardised and automated.
Required:
Toni is relying on weekly cash flow and annual financial accounts to ensure that she
remains in business in the long term. She is also attempting to ensure that her
pricing and cost management strategies are appropriate by adopting the cost
management system used in the large bakery. Do you agree with Toni’s approach?
Support your opinion by addressing the following issues:
a) How does one ensure that a cost management system provides relevant and
useful information?
(5 marks).
b) Toni is relying on financial feedback, and the product costing method adopted by
the large bakery. What are the strengths and weaknesses of these approaches?
(10 marks).
2
c) Outline any changes you would recommend that would help Toni to manage her
business. Explain how your changes would address the weaknesses that you have
identified in Toni’s proposed system.
(5 marks).
When answering Question 1, please maintain the 3 parts (a to c above). The word
length: the answer to each part should address the question for the marks awarded
to each part.
[Total: 20 marks]
Question 2
Zubick Corporation produces and supplies 2 types of component parts to industrial
equipment manufacturers. These parts are known as X123 and R907.
There are 2 departments in the factory: the machining and assembly departments.
The machining department has highly automated operations, while assembly has
labour intensive operations.
Table 1: Annual production data by product
Product X123 Product R907
Units produced 1,000 2,000
Total direct labour hours
(DLH) consumed per unit 5 DLH 15 DLH
Total machine hours (MH)
consumed per unit 15 MH 5 MH
The overhead cost incurred in the Machining department was $1,300,000, while the
overhead cost in the Assembly department was $350,000.
Table 2: Annual overhead costs and production activity by department
Machining dept Assembly dept Total
Overhead cost $1,300,000 $350,000 $1,650,000
Direct labour hours
(DLH) consumed
per dept
5,000 DLH 30,000 DLH 35,000 DLH
Machine hours
(MH) consumed
per dept
23,000 MH 2,000 MH 25,000 MH
The manager, Rex, decided to allocate costs to the 2 products in the following
manner: he divided the total overhead costs of $1,650,000 by the total number of
labour hours utilised in the factory (ie (1000 x5) plus (2000 x 15) = 35,000 DLH).
Therefore his overhead rate was $1,650,000/35,000 = $47.14 per DLH.
3
The overhead allocated to each product using Rex’s rate was as follows:
Product X123 = 5 DLH x$47.14 = $235.70
Product R907 = 15 DLH x $47.14 = $707.10
But Rex was losing sales of product R907 to his competitor who was able to sell a
similar product at a lower price, and recover all costs of production.
Additional information:
Tables 3 and 4 show how much direct labour and machine time is consumed by
each product in each production department.
Table 3: Machine hours (MH) consumed by each product in production departments.
Machining dept Assembly dept Total per unit of
product
Per unit of product
X123 14.5 MH 0.5 MH
15 MH per unit of
X123
Per unit of product
R907 4.25 MH 0.75 MH
5 MH per unit of
R907
Table 4: Direct labour hours (DLH) consumed by each product in production
departments.
Machining dept Assembly dept Total per unit of
product
Per unit of product
X123 2 DLH 3 DLH
5 DLH per unit of
product X123
Per unit of product
R907 1.5 DLH 13.5 DLH
15 DLH per unit of
product R907
Required:
i) Do you agree or disagree with Rex’s overhead allocation method? Explain. You
should draw on information provided in Tables 1 to 4 to help explain and support
your answer.
(5 marks).
ii) How would you improve it? Calculate alternative rates that you would use and
explain why you think it would help Rex. You should draw on information provided in
Tables 1 to 4 to support your recommendation.
(15 marks).
[Total: 20 marks]
4
Attachments:
Major Written….pdf