Advanced Diploma of Accounting Assessment 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:|
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:|
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.
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?
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.
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:
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:|
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.
Non- financial performance measures for the following business activities:
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?
The profitability of the less profitable customer groups can be increased in following ways:
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?
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.
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 pool||Cost driver||Annual overhead cost for the 3 customers||Annual volume for the 3 customers|
|Changes to orders||Number of order amendments||$50,000||3,000|
|Pre-sales support||Number of hours of pre-sales support||$100,000||3,800|
|Post-sales support||Number of hours of post-sales support||$100,000||2,200|
|Delayed payments||Number of delayed payments over 3 months||$70,000||1,250|
|Order processing||Number of orders||$60,000||20,000|
|Invoicing||Number of invoices||$25,000||22,500|
Team 2: Distribution costs
(Data based on 3 sample customers)
|Distribution related overhead costs||Cost driver||Annual overhead cost for the 3 customers||Annual volume for the 3 customers|
|Storage expenses||Average cartons in inventory||$12,000||5,000|
|Requisition handling||Number of requisitions||$8,500||10,000|
|Standard deliveries||Number of standard deliveries||$5,000||3,000|
|Special deliveries||Number of special deliveries||$12,800||500|
Customer sales and activity analysis
The following table summarises the percentage of each cost driver per customer.
|Number of order amendments||40||30||30||100|
|Number of hours of pre-sales support||30||20||50||100|
|Number of hours of post-sales support||30||30||40||100|
|Number of delayed payments||20||30||50||100|
|Number of orders||20||40||40||100|
|Number of invoices||20||30||50||100|
|Average cartons in stock||40||30||30||100|
|Number of requisitions||30||30||40||100|
|Number of standard deliveries||10||40||50||100|
|Number of special deliveries||20||60||20||100|
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:
- Calculate the profit for each of the three sample customers analysed, based on the collected ABC data
- Provide recommendations the company should consider to improve the profitability of each of the three sample customers.
- 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
|Rate of Absorption of Cost $/per unit of activity||North||South||East||Total||North||South||East||Total|
|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|