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Advanced Diploma of Accounting Assessment Answer

Advanced Diploma of Accounting


Answering Assessment Questions

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Short Answer Questions

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Note: If you are submitting handwritten assessments all questions must be completed in blue or black pen. If assessments are received in pencil or with illegible handwriting, a resubmission will be required.

Short Answer Question 1:

What are the recent changes in the management accounting environment that have, in part, made traditional management accounting systems inadequate for the modern business environment?

Short Answer Question 2:

XYZ Pty Ltd manufactures a wide range of products and has adopted many aspects of Advanced Manufacturing Technology (AMT). A factory-wide direct labour hour rate has traditionally been used to absorb all production overheads into product costs.

Provide three reasons why a direct labour hour rate might not be appropriate for a company such as XYZ Pty Ltd.

Short Answer Question 3:

Suggest a suitable cost driver for each of the following overhead costs.

  • machine set-up costs
  • short-run variable overhead costs
  • materials receiving costs
  • materials handling costs
  • quality control costs

Short Answer Question 4:

Your production director has stated: ‘Now that we are using ABC we have completely accurate product unit costs that will help us to make better decisions and improve our ability to control costs in the future.’

Discuss whether or not you agree with this statement.

Short Answer Question 5:

What responsibilities would a management accountant of a medium sized manufacturing operation have with regard to data protection and security?

Short Answer Question 6:

Adelphi Ltd is a large multinational company with annual revenue of approximately $20 billion. During a particular period, a variance report revealed an unfavourable labour rate variance of $38,500. Should this variance be investigated? Give reasons for your answer.

Short Answer Question 7:

Identify reasons why a calculated variance, such as those listed below, might not be worthy of further investigation because of the likelihood that its cause is outside the control of management.

  • Materials price variance
  • Labour rate variance
  • Labour efficiency variance
  • Selling price variance

Short Answer Question 8:

Identify 3 useful non-financial performance measures for each of the following business activities:

  • a company selling household goods to consumers online
  • a hotel

Ensure that each of the measures provided are relevant to the specific business activity, rather than appropriate for any business activity.

Short Answer Question 9:

Birstall Ltd. makes high-tech electronic components. Customers place orders online or by phone, and then Birstall delivers the components to its customers. Birstall. has just carried out a customer account profitability analysis and has identified various customer groups that are less profitable than others. However, Birstall is reluctant to stop selling to the less profitable customer groups altogether and would prefer to increase their profitability.

How could Birstall increase the profitability of the less profitable customer groups?

Short Answer Question 10:

You are a senior management accountant working for a petrochemicals company. There has been a fire at a chemical plant. There were no injuries but there has been some damage to assets, and there have been unconfirmed reports of serious air and ground pollution. Your manager has asked you to prepare an estimate of the cost of the damage for the board, but has given you a hint that the board is expecting the cost to be small.

What are the individual, organisational and professional influences that might affect the way that you approach this work?

Case Study Information

Customer Profitability at Allegro Pty Ltd

Managers at Allegro Pty Ltd have been using various teams to collect activity-based data since 2010. Each team has consisted of one or more management accountants working closely with department managers. The teams typically work for 3-6 months on data collection and developing spreadsheets. To date the teams have mainly focused on product costing. Recently two teams have been set up to collect data to improve the company’s understanding of customer-related costs and profitability. One team has looked at distribution costs and the second at order related costs.  

Only 3 customers were included in the analysis. These 3 customers represent 10% of total sales. The company has approximately 250 customers in total. Finally the teams only considered labour related costs and direct costs for the cost pools.

The first objective for each team was to estimate the total annual overhead cost and annual volume for each cost driver. As the company only focused on three customers the data was quickly estimated.  The second objective was to estimate the percentage of each cost driver per customer.

Collecting Data

The management accept that a ‘cost sampling’ or snapshot’ approach is the best way to identify key activities and their costs.  This technique helps the department to develop estimates of how much time is devoted to different activities. Then by using an average hourly rate for all staff managers will be able to estimate the total annual cost of an activity. The decision to use an average hourly rate for all staff will save time.

Managers decided that between 4 to 8 activities should to be identified by each team.  The possibility of identifying 20-30 activities was considered but this was rejected because there was very little time to do the work. For the whole exercise it was felt that the information must not take too long to collect and interpret.

Most of the managers involved with the new teams have little experience of collecting data regarding activities and cost drivers. With some activities several cost drivers were discussed. This confused some managers who felt unclear why a cost driver was rejected or accepted. The management accountants believed these problems would not affect the accuracy of the data. 

Activity Based Costing Data

Team 1: Order related overheads

(Data based on 3 sample customers)

Activity cost poolCost driverAnnual overhead cost for the 3 customersAnnual volume for the 3 customers
Changes to ordersNumber of order amendments  $50,0003,000
Pre-sales supportNumber of hours of pre-sales support $100,0003,800
Post-sales supportNumber of hours of post-sales support $100,0002,200
Delayed paymentsNumber of delayed payments over 3 months$70,0001,250
Order processingNumber of orders$60,00020,000
InvoicingNumber of invoices$25,00022,500

Team 2: Distribution costs

(Data based on 3 sample customers)

Distribution related overhead costsCost driverAnnual overhead cost for the 3 customersAnnual volume for the 3 customers
Storage expensesAverage cartons in inventory$12,0005,000
Requisition handlingNumber of requisitions$8,50010,000
Standard deliveriesNumber of standard deliveries$5,0003,000
Special deliveriesNumber of special deliveries$12,800500

Customer sales and activity analysis

CustomerNorthSouthEast
Annual Sales$175,000$178,000$173,000


The following table summarises the percentage of each cost driver per customer. 

CustomerNorthSouthEastTotal

%%%%
Number of order amendments403030100
Number of hours of pre-sales support302050100
Number of hours of post-sales support303040100
Number of delayed payments203050100
Number of orders204040100
Number of invoices203050100
Average cartons in stock403030100
Number of requisitions303040100
Number of standard deliveries104050100
Number of special deliveries206020100


Case Study Questions:

Using the Allegro Client Briefing Report.

In preparation for an Activity Based Costing (ABC) project review meeting Harry Wren, the CFO of Allegro, has asked you to prepare a briefing paper on the ABC data collected by two Allegro teams. Specifically the CFO wants you to:

  1. Calculate the profit for each of the three sample customers analysed, based on the collected ABC data
  2. Provide recommendations the company should consider to improve the profitability of each of the three sample customers.
  3. The CFO is considering extending the ABC analysis to all customer-related revenues and costs and wants you to provide reasons, for consideration by the project review team, why such data is needed and how it can be used to help the company compete more profitable. 

Answer

Short Answer Question 1:

What are the recent changes in the management accounting environment that have, in part, made traditional management accounting systems inadequate for the modern business environment?

Answer:  The industrial environment has undergone substantial changes in recent past. The environment is more complex, has many factors affecting the operations and is highly instable. The modern manufacturing systems and processes use varied technologies and focus on customer needs which are most of the times customised to meet the requirements of different groups of customers. The traditional management accounting was devised in limited technology use, a comparatively stable environment and limited competition mostly from local business. The globalisation leading to increased competition and opened new markets to the business. The new markets has different factors affecting them like the exchange rates, import and export tariff rates, etc. Similarly new technologies has led to different factors like use of machinery, life of machinery, cost of technology used etc. affect the manufacturing process. All these factors has rendered the traditional management accounting obsolete in the modern industrial time. The modern management accounting system needs to incorporate methods to evaluate the requirement created by changing environments. 

Short Answer Question 2:

XYZ Pty Ltd manufactures a wide range of products and has adopted many aspects of Advanced Manufacturing Technology (AMT). A factory-wide direct labour hour rate has traditionally been used to absorb all production overheads into product costs.

Provide three reasons why a direct labour hour rate might not be appropriate for a company such as XYZ Pty Ltd.

Answer: XYZ Pty ltd manufactures a wide range of products and has adopted many aspects of Advanced Manufacturing technology. In this situation using the direct labor method of allocating the production overheads might not be appropriate for following reasons:
  1. Some products may be labour intensive while some products may need more work by machine. Since the cost per hour of labour and machine are different, direct labour may not be appropriate for all the products. 
  2. Some products may require skilled labour while others may require skilled labour. One rate for all the products to allocate the overheads may not be appropriate. 
  3. There could be other cost involved in production of the product like personal skill, technology and patent rights. These cost a not included in labour rates. So a factory wide rate might not be proper. 

Short Answer Question 3:

Suggest a suitable cost driver for each of the following overhead costs.

  • machine set-up costs
  • short-run variable overhead costs
  • materials receiving costs
  • materials handling costs
  • quality control costs
Answer: the suitable cost driver for the following overhead costs:
  • machine set-up costs- No of sets up required for each products to the total number of set ups done for the machine in the given time period
  • short-run variable overhead costs – the  units produced in the short run produced
  • materials receiving costs- No of units of materials received
  • materials handling costs- No of units of materials in stock
  • quality control costs- No. Quality inspections performed

Short Answer Question 4:

Your production director has stated: ‘Now that we are using ABC we have completely accurate product unit costs that will help us to make better decisions and improve our ability to control costs in the future.’

Discuss whether or not you agree with this statement.

Answer:
ABC- Activity based Costing system helps the management in allocating the overheads cost to the products more accurately. The system creates the cost pools for similar costs and allocate the cost to the products using the cost drivers. The product that use the cost drivers are allocated the corresponding overhead cost based on the activity used in their production. Thus the product cost is determined more accurately.
However the accuracy of the ABC system is dependent upon choosing the right cost pools, identifying the right cost driver and finding out the relation between the cost driver and the products. This is highly technical and important task. The ABC costing is a difficult system and needs lots of expertise to implement it. Any mistake can distort the data significantly and lead to wrong decisions. It needs to be reviewed and modified at regular intervals with the changing environment. 
Thus though ABC helps in accurate product costing, it is difficult to get completely accurate costing because of continuous changing environment and complexity involved in ABC costing. The process has to reviewed continuously. 

Short Answer Question 5:

What responsibilities would a management accountant of a medium sized manufacturing operation have with regard to data protection and security?

Answer:
Management Accountants have an important role to play in the organisation. The role extends beyond the traditional role of data analytics to data protection and security. The management accountants needs to assess the data and provide meaningful data to the management to help them in decision making.  The decisions are mostly of strategic nature business policies to meet the competition. 
The customer data used by management accountant for internal purposes also needs to be protected from misuse by other company staff and also ooutsiders.
Thus the management accountant is expected to protect the data from theft or unauthorised access.  

Short Answer Question 6:

Adelphi Ltd is a large multinational company with annual revenue of approximately $20 billion. During a particular period, a variance report revealed an unfavourable labour rate variance of $38,500. Should this variance be investigated? Give reasons for your answer.

Answer:
Yes, the unfavourable labour rate variance should be investigated. It is a small amount as compared to the annual revenue of the company but there could be various counter reasons which could have cancelled the effects of each other and lead to the variance.
For future budgeting and planning it is important to know the reason for variance. The labour rate variance could be because of:
  1. Change in labour rates
  2. Change in labour hours used for production
  3. Efficiency of labour hours, the idle time could be more or the overtime may be higher
  4. Some products may not require the anticipated skill of labour or may require more skill
Some products may not require the skilled labour hours, while some may need more labour hors than budgeted initially.  Thus it important to know the reason for the variance so that the future planning and budgeting can be done accordingly.

Short Answer Question 7:

Identify reasons why a calculated variance, such as those listed below, might not be worthy of further investigation because of the likelihood that its cause is outside the control of management.

  • Materials price variance
  • Labour rate variance
  • Labour efficiency variance
  • Selling price variance
Answer: The variance can be outside the control of management for following reasons:

  • Materials price variance- The market price of the materials have changed, or the product is no more available in the market
  • Labour rate variance – there is rise in minimum wages rate 
  • Labour efficiency variance – the job is highly skilled and not many people are equipped to perform it. 
  • Selling price variance – the market price of the product is down and the  competition products are available at low costs.

Short Answer Question 8:

Identify 3 useful non-financial performance measures for each of the following business activities:

  • a company selling household goods to consumers online
  • a hotel

Ensure that each of the measures provided are relevant to the specific business activity, rather than appropriate for any business activity.

Answer:
Non- financial performance measures for the following business activities:
  1. a company selling household goods to consumers online:
  2. repeated customers buying similar products or other products from the  website
  3. Reviews given by customers for the products and experience
  4. Number of complaints raised by customers 
  5. a hotel:
  6. Dinners visiting the place again and again for dining
  7. The results of food inspections, hygiene inspections carried out by  the authorities
  8. Customer Ratings to  the food, ambience, staff given to the hotel 

Short Answer Question 9:

Birstall Ltd. makes high-tech electronic components. Customers place orders online or by phone, and then Birstall delivers the components to its customers. Birstall. has just carried out a customer account profitability analysis and has identified various customer groups that are less profitable than others. However, Birstall is reluctant to stop selling to the less profitable customer groups altogether and would prefer to increase their profitability.

How could Birstall increase the profitability of the less profitable customer groups?

Answer:
The profitability of the less profitable customer groups  can be increased in following ways:
  1. Providing the combo products to the customers at discounts including the high profitability products. This will motivate customers to  buy more products
  2. Making the minimum amount of sales necessary to complete the order.
  3. Charging delivery fees for products where the cost of products ordered is less.
These steps will help in increasing the profitability without losing the customers completely.

Short Answer Question 10:

You are a senior management accountant working for a petrochemicals company. There has been a fire at a chemical plant. There were no injuries but there has been some damage to assets, and there have been unconfirmed reports of serious air and ground pollution. Your manager has asked you to prepare an estimate of the cost of the damage for the board, but has given you a hint that the board is expecting the cost to be small.

What are the individual, organisational and professional influences that might affect the way that you approach this work?

Answer:
Work Ethics are very important for sustainable and profitable business.  The management accounting person is also bound by professional ethics to provide the users with correct and fair information. Also as an individual and management employee the organisation has social and environment responsibilities which require that the business should take care of the society they are serving and preserve the environment losses.
Thus the management accountant should assess the damage with integrity and report the damage fairly to the board.

Case Study Information

Customer Profitability at Allegro Pty Ltd

Managers at Allegro Pty Ltd have been using various teams to collect activity-based data since 2010. Each team has consisted of one or more management accountants working closely with department managers. The teams typically work for 3-6 months on data collection and developing spreadsheets. To date the teams have mainly focused on product costing. Recently two teams have been set up to collect data to improve the company’s understanding of customer-related costs and profitability. One team has looked at distribution costs and the second at order related costs.  

Only 3 customers were included in the analysis. These 3 customers represent 10% of total sales. The company has approximately 250 customers in total. Finally the teams only considered labour related costs and direct costs for the cost pools.

The first objective for each team was to estimate the total annual overhead cost and annual volume for each cost driver. As the company only focused on three customers the data was quickly estimated.  The second objective was to estimate the percentage of each cost driver per customer.

Collecting Data

The management accept that a ‘cost sampling’ or snapshot’ approach is the best way to identify key activities and their costs.  This technique helps the department to develop estimates of how much time is devoted to different activities. Then by using an average hourly rate for all staff managers will be able to estimate the total annual cost of an activity. The decision to use an average hourly rate for all staff will save time.

Managers decided that between 4 to 8 activities should to be identified by each team.  The possibility of identifying 20-30 activities was considered but this was rejected because there was very little time to do the work. For the whole exercise it was felt that the information must not take too long to collect and interpret.

Most of the managers involved with the new teams have little experience of collecting data regarding activities and cost drivers. With some activities several cost drivers were discussed. This confused some managers who felt unclear why a cost driver was rejected or accepted. The management accountants believed these problems would not affect the accuracy of the data. 

Activity Based Costing Data

Team 1: Order related overheads

(Data based on 3 sample customers)

Activity cost poolCost driverAnnual overhead cost for the 3 customersAnnual volume for the 3 customers
Changes to ordersNumber of order amendments  $50,0003,000
Pre-sales supportNumber of hours of pre-sales support $100,0003,800
Post-sales supportNumber of hours of post-sales support $100,0002,200
Delayed paymentsNumber of delayed payments over 3 months$70,0001,250
Order processingNumber of orders$60,00020,000
InvoicingNumber of invoices$25,00022,500

Team 2: Distribution costs

(Data based on 3 sample customers)

Distribution related overhead costsCost driverAnnual overhead cost for the 3 customersAnnual volume for the 3 customers
Storage expensesAverage cartons in inventory$12,0005,000
Requisition handlingNumber of requisitions$8,50010,000
Standard deliveriesNumber of standard deliveries$5,0003,000
Special deliveriesNumber of special deliveries$12,800500


Customer sales and activity analysis

CustomerNorthSouthEast
Annual Sales$175,000$178,000$173,000

The following table summarises the percentage of each cost driver per customer. 

CustomerNorthSouthEastTotal

%%%%
Number of order amendments403030100
Number of hours of pre-sales support302050100
Number of hours of post-sales support303040100
Number of delayed payments203050100
Number of orders204040100
Number of invoices203050100
Average cartons in stock403030100
Number of requisitions303040100
Number of standard deliveries104050100
Number of special deliveries206020100

Case Study Questions:

Using the Allegro Client Briefing Report.

In preparation for an Activity Based Costing (ABC) project review meeting Harry Wren, the CFO of Allegro, has asked you to prepare a briefing paper on the ABC data collected by two Allegro teams. Specifically the CFO wants you to:

  1. Calculate the profit for each of the three sample customers analysed, based on the collected ABC data
  2. Provide recommendations the company should consider to improve the profitability of each of the three sample customers.
  3. The CFO is considering extending the ABC analysis to all customer-related revenues and costs and wants you to provide reasons, for consideration by the project review team, why such data is needed and how it can be used to help the company compete more profitably
  1. Overhead cost allocated to each customer, annual sales and profitability areas follows:

  • North 
Annual sales – $175,000Annual Overheads allocated- $121,410Profit= $53,590
  • South 
Annual sales – $178,000Annual Overheads allocated-$133,330           Profit= $44,670
  • East 
Annual sales – $173,000Annual Overheads allocated-$188,560Profit= Loss $15,560

  1. The above calculation shows that North and south are profitable while East is in loss. The company needs to increase the price of products delivered to East. 
  2. The use of ABC for  determining the cost for all the customers is important because it is observed that among the three customers of the company used for analysis one is in loss because of the overhead cost used  for providing the products to this customer (East) is more. The pricing of the company is same for all the customers. This is not the correct way of pricing because of the difference in the cost of products provided to each customer.
The management can use the ABC costing to find out the cost of  each customer and add a fixed percentage of profit to the cost to derive the selling price. This will to consistent method of pricing, profit from each customer and higher profitability to the company. 


 Rate of Absorption of Cost $/per unit of activity North  South  East  Total NorthSouthEastTotal
   Activity Driver  Over head cost Allocated 
Number of order amendments$16.67         1,200            900              900           3,000         20,000                15,000                15,000          50,000 
Number of hours of pre-sales support$26.32         1,140            760           1,900           3,800         30,000                20,000                50,000        100,000 
Number of hours of post-sales support$45.45            660            660              880           2,200         30,000                30,000                40,000        100,000 
Number of delayed payments$56.00            250            375              625           1,250         14,000                21,000                35,000          70,000 
Number of orders$3.00         4,000         8,000           8,000         20,000         12,000                24,000                24,000          60,000 
Number of invoices$1.11         4,500         6,750         11,250         22,500           5,000                  7,500                12,500          25,000 
Average cartons in stock$2.40         2,000         1,500           1,500           5,000           4,800                  3,600                  3,600          12,000 
Number of requisitions$0.85         3,000         3,000           4,000         10,000           2,550                  2,550                  3,400            8,500 
Number of standard deliveries$1.67            300         1,200           1,500           3,000              500                  2,000                  2,500            5,000 
Number of special deliveries$25.60            100            300              100              500           2,560                  7,680                  2,560          12,800 
Total               121,410                    133,330                     188,560             443,300 


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