ACC5213: Management Accounting with a Strategic Perspective - Assessment Answers

Question 1 a) Cash collection schedule from sale  

Cash sale (‘000)	April	May	June	July
April	200
May		240
June			400
July				456

 

Credit sale (‘000)	April	May	June	July
April	90	120	90
May		108	144	108
June			180	240
July				205.2

 

Discount 5% for credit sale (‘000)	April	May	June	July
	4.5	5.4	9	10.26

  Pat’s Tennis Supplies Company Cash collection schedule from sales For the month of July  

(‘000)			July
May			108
June			240
July			650.94
Total			998.94

  b) Cash payment schedule for purchase Pat’s Tennis Supplies Company Cash payment schedule for purchase For the month of July  

(‘000)			July
June			148.2
July			156
Total			304.2

  c) Cash budget Pat’s Tennis Supplies Company Cash Budget For the month of July  

(‘000)	July
Beginning cash balance	127
Cash receipts
Sales	998.94
Old equipment sold	35.2
Total cash receipts	1,161.14
Cash payment
Purchase	304.2
Operating expense	350
New equipment purchased	175
Total cash payment	829.2
Ending cash balance	331.94

  Question 2 Actual direct materials purchased and used = 1,020/1,000 = 1.02/unit Actual direct labor hour = 3,000/1,000 = 3 hours / unit Actual variable overhead cost = 4,200/1,000 = 4.2 a) Material price variance = actual quantity x actual price – actual quantity x standard price = 1.02 x 6.3 – 1.02 x 5.9 = 0.408 (Favorable) Material efficiency variance = actual quantity x standard price – standard quantity x standard price = 1.02 x 5.9 – 1.1 x 5.9 = -0.472 (Favorable) b) Labor price variance = actual quantity x actual rate – actual quantity x standard rate = 3 x 6.45 – 3 x 6.3 = 0.45 (Unfavorable) Labor efficiency variance = actual quantity x standard rate – standard quantity x standard rate = 3 x 6.3 – 3.1 x 6.3 = -0.63 (Favorable) C c) Variable overhead spending variance = actual manufacturing overhead cost – actual hours x standard variable overhead rate per hour = 4.2 – 3 x 1.2 = 0.6 (Unfavorable) Variable overhead efficiency variance = standard hours x standard variable overhead rate per hour – actual hours x standard variable overhead rate per hour = 3.1 x 1.2 – 3 x 1.2 = 0.12 (Favorable) d) Fixed overhead spending variance = actual fixed overhead – budgeted fixed overhead = 4,200 – 4,300 = 100 (Unfavorable) Fixed overhead production-volume variance = actual output x fixed overhead absorption rate per unit – budgeted output x fixed overhead absorption rate per unit Fixed overhead absorption rate per unit = budgeted fixed manufacturing overhead/budget hours = 4,200/(3.1 x 1,000) = 1.35 It is assumed that the actual annual output and the budgeted output were 1,000. Therefore, fixed overhead volume variance = 0 (Favorable). The variance is favorable because it means the manager predicts accurately the real output. e) Needles and Crosson (2013) define the direct materials efficiency variance as the multiplying difference between standard and actual material quantity and standard price. Thus, the direct material efficiency variance probably steams from the difference of expected and actual material amount. The efficient workers and monitor practices may lead to the difference of material quantity. The direct materials price variance is calculated by the difference of standard price and actual price of materials multiplying actual quantities purchased (Needles & Crosson 2013). The direct materials price variance is caused when the difference takes place. Manager of company may not negotiate at the excepted price and it results in the variance of prices. f) There is a possible linkage between direct labor variance and direct material variance. The low price purchased materials would contribute negative attributes to the production even though it achieves a favorable material variance. The negative attributes from low quality materials might add more hours to complete. So, it will lead to unfavorable direct labor efficiency variance. As a result, the relationship between direct labor and material variance is built. Question 3 a) The amount of overhead allocated to Job 60 using the current costing system Manufacturing cost overhead per hour = total manufacturing cost overhead/machine hours = 289,000/10,000 = 28.9 The overhead of manufacturing cost (Job 60) = 28.9 x 40 = 1,156 b) The amount of overhead allocated to Job 60 using ABC costing system The overhead unit cost of material move = material handling/material moves = 40,000/500 = 80 The overhead unit cost of machine hour = machine maintenance/machine hours = 231,000/10,000 = 23.1 The overhead unit cost of product inspection = product inspection/inspections = 18,000/1,200 = 15 For Job 60 The overhead cost of material move = 80 x 10 = 800 The overhead cost of machine hour = 23.1 x 40 = 924 The overhead cost of production inspection = 15 x 9 = 135 The total overhead cost = 800 + 924 + 135 = 1,859 c) In the traditional cost system, it can only traces after direct materials and labor costs to the production, while in ABS system, the activities performance such as products, customers and services and the cost of these activities to the final product are linked together (Akyol, Tuncel & Bayhan 2007). The ease of use and simple system of the traditional accounting cost differs from specific activities costs involved in production line of the ABS cost method. The ABS cost model is more detailed than the old one by determining cost drivers measuring the activities like number of units product, labor hours, machine hour or number of orders (Akyol, Tuncel & Bayhan 2007). Furthermore, the ABS system classifies activites as value-added and non-value-added activities (Akyol, Tuncel & Bayhan 2007). This means the ABS model deals with more costs compared to the traditional one, which results in more accurate cost and information. Because of simple calculation of the traditional costing system, it only engages in the direct activities of production such as direct materials and direct labors. The cost may not cover all loss or profit of processing products, so it ought to produce less correct costs. Although the advantage of the ABC system is more accurate information, there are some limitations of it such as more efforts to obtain cost of these activities and more cost to determine the needed information. d) Value-added, non-valued added and grey areas (partly value-added and partly non-value added) 1. Grey areas:

• Material moves: it does not value to the quality of final products, but it can increase the product units by smooth movement.
• Inspections: it helps to find out defective products, but it will not add value to the products. 2. David (1999) claims that there are some essential non-value added activities existing. Those activities do not add value to the customers, but they are essential for production line. For example, the cost of transporting and storing raw materials for production does not add value to the customers; however, it cannot be removed. This action will definitely contribute to the processing of product, so it may be seen as a value-added activity or grey area.

Managerial decision-making can be improved by using the ABC information via 4 ways (Hasen, Mowen & Guan 2007):

• Activity elimination tries to get rid of non-value-added activities. For instance, customers’ needs have to be done with the activity of expediting production. If the manufactory boosts its cycle time, it may eliminate the cost for expediting cost.
• Activity selection is to choose a variety of activities caused by company strategy. To illustrate, different product design plans will request noticeably alternative activities. Therefore, the company can create a strategic plan and the reduction cost flows.
• Activity reduction aims to decrease time and resources needed for an activity. For example, by development of product quality, customer satisfaction will be grown. So, the non-valued added activity will be removed by improving the efficiency of activities.
• Activity sharing targets to rise the productivity by adopting economic scale. In other words, the total cost of activities will be retained, whereas the amount of the cost driver is improved. For instance, a new product can be produced with used components of other products. With the existing parts, the corporation can prevent the additional cost to a whole new set of activities.