Management Accounting: Information for Decision Making and Strategy Execution - Example

Running header: Management accounting Student’s name: Instructor’s name: Subject code: Date of submission: 4.31 1. Rates for each activity Activity rate = Estimated activity cost/Estimated total activity in the allocation base Activity Formula Rate Providing ATM services =cost/ no. of transactions $100,000/200,000 =$0.5cents/transaction Computer processing = cost/no of transactions $1,000,000/2,500,000 =$0.4/transaction Issuing statements =cost /no of statements $800,000/500,000 =$1.6/statement Customer inquiries =cost/telephone minutes $360,000/600,000 =$0.6/telephone minute 2. Cost of each product a) Checking accounts Number of activities per account = number of activities/number of accounts ATM transactions/account = 180,000/30,000 = 6 ATM transactions per account Computer transactions =2,000,000/30,000 = 66.667 computer transactions per account Number of statements =300,000/30,000 =10 statements per account Telephone minutes =350,000/30,000 = 11.667 telephone minutes per account Cost of a checking account Cost of a checking account = (number of activities per account /activity rate) = (6× $0.5) + (66.667 ×$0.4) + (10× $1.6) + (11.667 × $0.6) = $52.67/ checking account b) Personal loans Number of activities per personal loan = Number of accounts/ number of loans Computer transactions = 200,000/5,000 = 40 computer transactions per loan Number of statements =50,000/5,000 = 10 statements per loan Telephone minutes = 90,000/5,000 = 18 minutes per loan Cost of a loan = (Number of activities per loan /activity rate) = (40×$0.4) + (10×$1.6) + (18×$0.6) Cost of a loan = $42.8 per loan c) Gold VISA Number of activities per gold visa ATM Transactions = 20,000/10,000 = 2 transactions /gold VISA Computer transactions = 300,000/10,000 = 30 computer transactions per gold VISA Number of statements = 150,000/10,000 =15 statements /gold VISA Telephone minutes = 160,000/10,000 = 16 telephone minutes per gold VISA Cost of a gold VISA = (Number of activities per loan /activity rate) = (2×$0.6) + (30×$0.4) + (15×$1.6) + (16×$0.6) =$46.8 per gold VISA 3. Checking accounts analysis i) Accounts < $500 =0.5 ×30,000 = 15,000 accounts Average deposits = $400/ account Total deposits = $400× 15,000 = $6,000,000 Cost = (15,000× $52.67) = $790,050 Income = service charge + interest =12($5 ×15,000) + ($6,000,000×0.04) = $1,140,000 Net income = Income – cost = ($1,140,000-790,050) = $349,950 Average profitability = Net Income /number of accounts =$349,050/15000= $23.33 ii) Accounts between $ 500 and $1,000 = 0.1×30,000 = 3,000 accounts Average deposits = $750/account Total deposits = $750× 3000 = $2,250,000 Cost = Transaction cost + interest = (3,000×52.67) + ($ 750,000× 0.02) = $173,010 Income =Service charge +Interest = 12 ($5× 3000) + ($0.04 × 2,250,000) = $270,000 Net income =Income –Cost = ($270,000-173,010) = $96,990 Average profitability = 96,990/3000 = $32.33 iii) Accounts between $1,000 and $2,767 = 0.25 ×30,000 = 7,500 accounts Average deposits = $2,000/Account Total Deposits =$2,000× 7500 = $15,000,000 Cost = Transaction cost + Interest = ($52.67×7,500) + ($11,250,000× 0.02) = $620,025 Income = Interest = $15,000,000 × 0.04 = $600,000 Net Income = Income – cost = $600,000 – 620,025 = -$20,025 Average loss = 20,025/7,500 =- $2.65 Total costs iv) Accounts > 2,767 = 4,500 accounts Average deposits = $5,000 Total Deposits = $5,000× 4500 = $22, 500,000 Cost = Transaction cost + interest = (52.67× 4500) + (18,000,000 × 0.02) = $597,015 Income = Interest = $22,500,000× 0.04 = $900,000 Net Income = Income – Cost = $900,000- $597,015 = $302,985 Average profitability = $315,135/ 4,500 = $67.33 Total income for Checking accounts = $349,950 +$96,990+-$20,025+$302,985 = $769,950 Average profitability = $729,900/30,000 = $24.33 3. Profitability and recommendations As has been established above, the bank makes profits in all its categories of checking account with the exception of the category of 7500 accounts with an average balance of $2000. The category made a loss of $ 20,025 in the previous year. This was an average of $2.65 loss per account. This loss is attributed to the fact that although the level of deposits for this category of accounts is not high enough to cover for the interest expense paid to account holders in this category, the bank does not charge a standing charge for this category of accounts which implies that the little interest earned by the bank as part of the four percent interest is all used up in financing their costs and this is not even enough to cover the entire cost hence the loss. In a bid to ensure that this category of accounts do not result into losses, there is need for the bank to come up with a strategy that will ensure that the average deposits in this category of accounts is raised. Alternatively, the bank can consider the reintroduction of the $5 monthly standing charge for every account in this category. This will ensure that the accounts in this category generate enough income to cater for their cost as well as the interest given to customers while still ensuring that the bank makes some profits from this category of accounts. This way, the bank’s checking account will be more profitable. 6.41 Golding Manufacturing 1. Process costing Golding Manufacturing Process costing statement Unit cost Unit cost Direct materials $114,000.00 =114000/2800 $40.71 Direct labour $45,667.00 =45667/2740 $16.67 Total direct costs $159,667.00 57.38 Add manufacturing overheads (W2) $36,533.60 =36533.60/2740 13.33 Total production cost $196,200.60 70.71 Calculations Manufacturing overheads =$45,667 ×80% =$36,533.60 Equivalent units i) Manufacturing overheads = 2500 +300 units (100% complete) = 2800 units ii) Direct materials = 2500+ 300 units (80% complete) = 2740 units iii) Direct Labor = 2500+ 300(80%) (80% complete) = 2740 units 2. Golding Manufacturing Separate cost statement Econo Model Unit cost Unit cost Direct Materials $30,000.00 =30,000/1600 $18.75 Direct labour $26,333.53 =26,333.53/1580 $16.67 Total Direct costs $56,333.53 $35.42 Overheads $20,876.34 =36,533.40/2800 $13.33 Total production cost 77,209.87 $48.75 Computation of equivalent units Econo Model Direct materials = 1500+ 100 (100% complete) = 1600 units Direct labour = 1500+100(0.8) (80% complete =1580 units Overheads = 1500+100 (100% complete) =1600 units Deluxe model Unit cost Direct materials $84,000.00 =84,000/1200 $70.00 Direct labour $19,333.47 =19,333.50/1160 $16.67 Total direct costs $103,333.50 $86.67 Overheads $15,657.26 =15,657.26/1160 $13.33 Total cost 118,990.70 $100.00 Computation of equivalent units Direct materials = 1000+ 200 (100% complete) =1200 units Direct labour = 1000+ 200(80%) (80% complete) =1160 units Overheads =1000 +200 (100% complete) =1200 units 3. Comparison of product costs under the two methods Under a pure process costing method, each unit of any of the two models produced costs $ 70.71. This is despite the fact that the materials used to manufacture the deluxe model are much more expensive than those used in the manufacture of the Econo model. On the other hand, the cost of producing a unit of the Econo model changes to $48.75 while that of producing the deluxe model increases to $100 on using separate cost information to compute product cost. The difference in pricing of the two models when separate cost information is used arises from the fact that there are great differences in the cost of direct materials used in manufacturing the two different models. Based on this information, Karen’s argument that a pure process costing relationship is not appropriate is justified. This is because the relationship tends to ignore the differences that might occur in the processes used in manufacturing the different models as well as the amount and type of raw materials used in the manufacture of different models. If Karen had also used separate cost information in relation to labour, this would have resulted to even more accurate product costs. This would have ensured that the company does not overcharge customers and hence make low sales as is the case with the Econo model. Similarly, this would ensure that the company does not undercharge customers for its products and hence make losses despite high level of sales as is the case with the deluxe model. This being the case, I would recommend that a method that uses separate cost information or activity based costing method in determining the cost of producing different products for a company. 4. Based on the earlier pure process costing model, Aaron’s position of ignoring the request for additional advertising funds was justified. This is because each unit regardless of the model had a cost of $70.71 and hence Aaron could have been concerned that additional costs would have led to losses for the Econo model. However, on using the new system of separate cost information, Aaron could not have been justified in his position of not allowing for additional advertisement funds. This is because the Econo model was being wrongly costed at a cost of $70.71 when its actual cost was $48.75. As such the Econo model whose actual cost of production was $48.75 was wrongly deemed to be less profitable. As such, the request for additional advertisement funds was being viewed as having the effect of eating in to the already small profitability of the Econ model. However, using the separate cost information in computing the unit cost, it is clear that the Econo model is actually more profitable than it was thought to be due to its low cost of production. As such, granting more advertisement funds for the model would lead to more sales and hence more profits. Aaron should reconsider his position and give more funds. It is worth noting that with the new costing system, the company might consider lowering the price of the Econo model which will lead to more sales even without need for advertising. On the other hand, the company may review the price for the deluxe model upwards as it may have been sold at a loss previously. Probably Aaron might even find it necessary to allocate additional advertising costs for the deluxe model and not the Econo model if the new cost structure leads to an increase in the price of the deluxe model and lowering of the price of the Econo model. References: Kaplan, R2011, Management accounting: Information for decision making and strategy execution, Sydney, Prentice Hall. Mundy, J2011, contemporary issues in cost accounting, Management Accounting Research, vol. 21, no.2, pp.19-25. Warren, O2013, Management accounting, London, McGraw- Hill. Clinton, B2006, Management accounting- Approaches, Techniques and Management processes, New York, Thomas Reuters RIA Group. Ray, G2011, Managerial accounting, McGraw- Hill, Irwin. Peter, B2013, Introduction to managerial accounting, London, Rutledge. Shaikh, J2012, ABC, Cost management and target costing, International Journal of Managerial and Financial accounting, vol. 5, no.1, pp. 23-26. Middlecity.com2013, Process costing, Retrieved on 24th December 2013, from; http://www.middlecity.com/ch18.shtml Epstein, M2011, Advances in managerial accounting, New York, John Willey & Sons. Tibi, W2013, Business process optimization and ABC costing, Retrieved on 24th December 2013, from; http://www.waleedtibi.com/business-process-optimization-and-abc-costing/ Read More