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 competitors. As a result, profits 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 alternative-----the direct method of allocating service department costs to specific operating departments and to allocate variable and fixed costs separately. She wants your analysis to focus 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 following items: 1. A schedule showing the calculation for the current single 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 fixed costs. Assume the fixed overhead is allocated based on the percentage of peak-period requirements. In computing the rates, use a machine-hours basis in the Finishing Department and a direct labour hours basis in the other two departments. 3. Determine the overhead cost in total for the Black Diamond Model in each department and in total for all departments . 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 companys other products. Give your opinion on which method is recommended and why. 5. Ms. Spence also wants you to suggest any other alternative methods or approaches to costing (that you have studied in CMA1 or CMA2) 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. Briefly describe why any other alternatives might be superior. Case: MacDonald Inc. manufactures and markets a complete line of ski boards. MacDonald has three manufacturing departments-Moulding, Assembly, and Finishing- and two service departments Physical Resources and Human Resources. The basic fiberglass boards are fabricated in the Moulding Department. Fittings are attached to the boards in the Assembly 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 produced by the company. The Physical Resources and Human Resources provide services to the manufacturing departments MacDonald has always used a plantwide overhead rate. Direct labour hours are used to assign the overhead to products. The overhead rate is computed by dividing the companys total estimated overhead cost by the total estimated direct labour hours to be worked in the three manufacturing departments. Sarah Lane, the manager of cost accounting has recommended that the company use department overhead rates rather than a single, plantwide rate. Planned operating costs and expected levels of activity for the coming year have been developed by Sarah and are presented below: Service Department Costs Physical Resources Human Resources Variable Costs $ 60,000 $ 8,000 Fixed Costs 140,000 78,000 Total service department costs $200,000 $86,000 Manufacturing Department Moulding Assembly Finishing Departmental activity measures: Direct labour hours 10,000 40,000 30,000 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 Fixed overhead 1,200,300 702,300 597,400 Total department costs $2,250,300 $3,502,300 $1,197,400 Manufacturing Department Moulding Assembly Finishing Use of service departments Physical Resources Estimated physical resources hours 4,000 3,000 1,000 Percentage of peak-period requirements 50% 35% 15% Human Resources Estimated human resources hours 200 600 800 Percentage of peak-period requirements 15% 40% 45% Assume that the Double Black ski board has the following annual requirements for machine time and direct labour time in the various departments Machine Hours Direct Labour Hours Moulding Department 0 500 Assembly Department 200 1,000 Finishing Department 1,500 800 Total hours 1,700 2,300 Prepare the memo and related schedules for Ms. Spence. Normal case format should be followed. Typical Case Format CMAII Case Studies The typical format for a Case Study in CMAII consists of a memo 3 to 6 pages including schedules that is generally prepared by an Accounting Analysis Group within the controllers office, or by an external group of accounting consultants, 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 review of the specific 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 assigned 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 qualitative 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 alternatives or a combination of alternatives and an explanation as to why this alternative was chosen (if not already 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.