ACCT3070 accounting management

CMAII Case Study Analysis - Winter 2021 25 MARKS 5% - ALLOW 3 PER GROUP The president of MacDonald Inc, has asked the Controller, Laura Spence, to review the way the company is costing its products. The company uses manufacturing cost as a basis for setting prices and has determined that overall, the selling prices of its products seem to be out of line with the prices of competitors. For example, the very popular Black Diamond model is priced much lower than competitors whereas all other models are priced well above the products of competi- tors. As a result, prots are declining along with sales for some models. The president has a gut feeling that this all has something to do with how the ski boards are costed (in comparison with competitors). The company currently uses a single plant-wide rate to charge overhead to the various company products. This method no longer seems to be providing the precision needed in determining costs and setting prices. Ms. Spence has therefore called together your group, the Special Analysis Group (part of the Accounting Department), to look into other possibilities for charging overhead to the products. In particular, she wants your group to explore another altema tive---the direct method of allocating service department costs to specic operating departments and to allocate varia- ble and xed costs separately. She wants your analysis to fo- cus on one product line in particular, the Double Black Model. She asks you to complete the analysis in the form of a long memo and submit it to her. It should include the fol- lowing items: 1. A schedule showing the calculation for the current sin- gle plant wide overhead rate and the related overhead cost for the Black Diamond model. 2. A schedule showing the calculations using a separate overhead rate for each department assuming the direct method is used and assuming separate allocations for variable and xed costs. Assume the xed overhead is allocated based on the percentage of peak-period re- quirements. In computing the rates, use a machine- hours basis in the Finishing Department and a direct la- bour hours basis in the other two departments. 3. Determine the overhead cost in total for the Black Dia- mond Model in each department and in total for all de- partments . 4. Compare this with the answer in part one and explain in detail why there is a difference in the total product cost between the two methods. Explain how this might also account for the apparent over costing and overpricing of the company's other products. Give your opinion on which method is recommended and why. 5. Ms. Spence also wants you to suggest any other altema tive methods or approaches to costing (that you have studied in CMAl or CMAZ) that might lead to more precise product costs and explain why these other choices might be superior to simply adopting the direct method of service department allocations. Briey de- scribe why any other alternatives might be superior. Case: MacDonald Inc. manufactures and markets a complete line of ski boards. MacDonald has three manufacturing depart- ments-Moulding, Assembly, and Finishing- and two service departments Physical Resources and Human Resources. The basic berglass boards are fabricated in the Moulding Department. Fittings are attached to the boards in the Assem- bly Department. The boards are painted, surfaces are sanded and polished, and the completed boards are packed in the Finishing Department. Varying amounts of materials, time and effort are required for each of the various ski boards pro- duced by the company. The Physical Resources and Human Resources provide services to the manufacturing departments MacDonald has always used a plantwide overhead rate. Di- rect labour hours are used to assign the overhead to products. The overhead rate is computed by dividing the company's to- tal estimated overhead cost by the total estimated direct la- bour hours to be worked in the three manufacturing depart- ments. Sarah Lane, the manager of cost accounting has recom- Estimated physical resources hours 4,000 3,000 1,000 Percentage of peak-period requirements 50% 35% 15% mended that the company use department overhead rates ra- Human Resources ther than a single, plantwide rate. Planned operating costs Estimated human resources hours 200 500 800 Percentage of peak-period requirements 15% 40% 45% and expected levels of activity for the coming year have been developed by Sarah and are presented below: Assume that the Double Black ski board has the following Service Department Costs Physical Human annual requirements for machine time and direct labour time Resources Resources Variable Costs $ 60,000 $ 8,000 in the various departments Fixed Costs 40,000 78,000 Total service department costs $200,000 $86,000 Machine Direct Hours Labour Hours Manufacturing Department Moulding Department 0 500 Moulding Assembly Finishing Assembly Department 200 1.000 Departmental activity measures: Finishing Department 1,500 800 Direct labour hours 10,000 40,000 30,000 Total hours 1,700 2,300 Machine hours 0 8.000 50,000 Department costs: Raw materials $ 800,000 $2.000.000 $ 100,000 Direct labour 150,000 600.000 450.000 Variable overhead 100,000 200,000 50,000 Prepare the memo and related schedules for Ms. Spence. Fixed overhead 1,200,300 702,300 597,400 Total department costs $2,250,300 $3,502,300 $1,197,400 Normal case format should be followed. Manufacturing Department Moulding Assembly Finishing Use of service departments Physical ResourcesTypical Case Format CMAII Case Studies The typical format for a Case Study in CMAH consists of a memo 3 to 6 pages including schedules that is generally pre- pared by an Accounting Analysis Group within the control- ler's ofce, or by an external group of accounting consult- ants, either for the controller or for the top management team. While the details and approach to every case are different, the basis format is as follows: 1. An introduction which describes the major problem or challenges facing the business which you are being asked to help solve. It also generally includes a re- view of the specic issues you were asked to deal with and an overview of how you plan to proceed. This last aspect is to refresh the memory of the person who as- signed the project to you and can be done as a list of the contents of your memo. 2. A list of alternatives that may be considered to help solve the problem facing the business (as outlined in part 1.) and an analysis of each alternative (both quali- tative and quantitative aspects). Be sure and include any assumptions and you are making and any necessary calculations so it is clear to the reader how you arrived at your numerical results. 3. A recommendation that is based on one of the alterna- tives or a combination of alternatives and an explana- tion as to why this alternative was chosen (if not al- ready obvious). 4. A brief conclusion. Any supporting schedules may either be included right in the body of the case memo or put in an Appendix. Be sure to make reference to any schedule in an appendix in the main body of the memo. End of document