Requirements in the case study: For more clarity, you are required to allocate the costs to porducts and calculate the profit by products and follow the case study format (It should include Address to Controller, Introduction, Root Issues, Analysys and recemmendation supported by all calculations).

CASE 24 King Coal The provincial government's electrical utility has a coal mine in the King region that produces thermal and metallurgical coal using an integrated pit mine and cleaning plant. Separate reporting is not done for the extraction and cleaning plant or for the thermal coal and metallurgical coal. The assumption is that if the total cost is competi- tive. then each part must be cfficicnt. Although this may have been a reasonable approximation in the past, new mines have been openied that are more efficient. Now the utility's senior management wants to manage the cost of each part individually. The controller has assigned you to calculate the profitability of the operations, The reason for your assignment is to figure out, as accurately as possible. the exact costs of each coal (thermal and metallurgical) and each operation (extraction and cleaning) at the King Mine. Then you are to compare the costs with other operations of the utility and with industry averages. These costs will be the starting points for specifying annual improvements in productivity and cost effectiveness. A component of this study will be to devise a transfer price between the extraction and cleaning plant, if that would motivate cost effectiveness. When he assigned the project, the controller conveyed the transfer price idea of a board member, but admitted he does not under- stand why it would be beneficial. The controller asks that you explain transfer pricing and its possible benefits in your report. The production process includes the extraction and hauling of raw coal to the cleaning plant. The clcaning plant preparcs both types of coal for shipment by rail, the thermal to a thermal plant and the metallurgical to a private steel mill. The financial performances of the extraction and cleaning operations and experises of the ancillary support and administrative activities combine into a single operating statement. The statement is shown in Exhibit 1. You realize that to accomplish your project you will need to allocate these custs to the two types of cals and two onera- tions. Subscqucntly, you arrange appointments with managers and other employees who are knowledgeable concerning the content and drivers for each expense line item. Employees are transported by company bus from two towns where they live to the mine site. The last 27 kilometres into the mine is a company maintained road. You find that the annual contract for thermal coal is 450,000 tonnes, and 150.000 tonnes for metallurgical coal. For each contract, the King mine is the prime supplier, and the customers make up any shortage by alternative and more expensive secondary suppliers. The mine ships the full amount of each contract for each year, 99 100 SECTION IS: MANAGEMENT ACCOUNTING CASES Exhibit 1 KING MINE DIVISION Operating Statement For the Year Ending December 31 in thousands of dollars) $ 11,700 REVENUE Thermal cel Metallurgical coal EXPENSES Extraction wages and benefits Plant wages and benefits Diesel fuel, gasoline Amortization, pit trucks, equipment Amortization, busts Amortization, plant equipment Amortization, depletion costs Management salaries and benefits Administration Facilities, utilities and taxes Marketing department Ner inconte lere incxyme taxus $10.500 9,500 3,800 3,000 900 2,800 800 2,300 2,600 800 29.700 $128.000) * Amortization is based on the physical exhaustion of the asset. The metallurgical coal generates revenue at the rate of $78 per tonne. The thermal coal does not generate revenue, because it is shipped to a thermal plant owned by the provincial government. To estimate a transfer price, you asked the general manager of the thermal plant what would be the landed cost of thermal coal on a long-term con- tract. She estimated the cost to be $71 per donne delivered) for comparable coal. The traffic officer (responsible for arranging for and monitoring transportation) explained that King ships clear coal at the cost of $6 a tonne. The mine is a series of interlinked pit mincs that produce 652,000 tonnes per year. Excavation equipment and trucks remove the ovcrburden. The pits differ by coal type, and for efficiency purposes the miners extract thermal coal for three weeks, and then metallurgical coal in the fourth Pit mining wages and henefits, amortization for pit trucks and equipment, and depletion onists are entirely attributable to the extraction of the coal. These costs are the same per tonnc for both thermal and metallurgical coal. Shrinkage in the cleaning plant through the elimination of impurities reduces the weight by eight percent. The expenses for the cleaning plant include plant wages and benefits and amortization for plant and equipment. The metallurgical process has addi- tional stages and, thus, a higher cost per tonne than thermal coal. You estimate that 70 percent of all cleaning costs are attributable to thermal coal, and 30 percent to metallurgical coal. As for diesel fuel and gasoline expenses, you estimate that S3,500,000 was for extraction, $150,000 was for the loaders in the plant and $150,000 was for the buses. CASE 24: KING COAL 101 There are nine buses scheduled to drive back and forth between the two towns and the mine site where all employees report for work: 500.000 kilometres were driven last year. Employees take the bus about 98 percent of the time. The following table shows the brcakdown of employees by department: Extraction 416 Plant 26 Management 13 Administration 15 S Marketing When analyzed according to where they work or how they devote their average work day, the management, administration, and marketing personnel had the following to say in aggregate: Extraction Plant Neither Management Administration Marketing 45 45 35 40 20 15 100 Total 100% 100% 1015, About $600,000 of the administration expense item is attributable to buses. Square feet occupied is the cost driver for facilities, utilities, and municipal taxes. You calcu- late the allocation to be 45 percent for extraction, 35 percent for plant, 10 percent for administration, 5 percent for management, and 5 percent for marketing. Required Complete your assignment using the case approach. CASE 24 King Coal The provincial government's electrical utility has a coal mine in the King region that produces thermal and metallurgical coal using an integrated pit mine and cleaning plant. Separate reporting is not done for the extraction and cleaning plant or for the thermal coal and metallurgical coal. The assumption is that if the total cost is competi- tive. then each part must be cfficicnt. Although this may have been a reasonable approximation in the past, new mines have been openied that are more efficient. Now the utility's senior management wants to manage the cost of each part individually. The controller has assigned you to calculate the profitability of the operations, The reason for your assignment is to figure out, as accurately as possible. the exact costs of each coal (thermal and metallurgical) and each operation (extraction and cleaning) at the King Mine. Then you are to compare the costs with other operations of the utility and with industry averages. These costs will be the starting points for specifying annual improvements in productivity and cost effectiveness. A component of this study will be to devise a transfer price between the extraction and cleaning plant, if that would motivate cost effectiveness. When he assigned the project, the controller conveyed the transfer price idea of a board member, but admitted he does not under- stand why it would be beneficial. The controller asks that you explain transfer pricing and its possible benefits in your report. The production process includes the extraction and hauling of raw coal to the cleaning plant. The clcaning plant preparcs both types of coal for shipment by rail, the thermal to a thermal plant and the metallurgical to a private steel mill. The financial performances of the extraction and cleaning operations and experises of the ancillary support and administrative activities combine into a single operating statement. The statement is shown in Exhibit 1. You realize that to accomplish your project you will need to allocate these custs to the two types of cals and two onera- tions. Subscqucntly, you arrange appointments with managers and other employees who are knowledgeable concerning the content and drivers for each expense line item. Employees are transported by company bus from two towns where they live to the mine site. The last 27 kilometres into the mine is a company maintained road. You find that the annual contract for thermal coal is 450,000 tonnes, and 150.000 tonnes for metallurgical coal. For each contract, the King mine is the prime supplier, and the customers make up any shortage by alternative and more expensive secondary suppliers. The mine ships the full amount of each contract for each year, 99 100 SECTION IS: MANAGEMENT ACCOUNTING CASES Exhibit 1 KING MINE DIVISION Operating Statement For the Year Ending December 31 in thousands of dollars) $ 11,700 REVENUE Thermal cel Metallurgical coal EXPENSES Extraction wages and benefits Plant wages and benefits Diesel fuel, gasoline Amortization, pit trucks, equipment Amortization, busts Amortization, plant equipment Amortization, depletion costs Management salaries and benefits Administration Facilities, utilities and taxes Marketing department Ner inconte lere incxyme taxus $10.500 9,500 3,800 3,000 900 2,800 800 2,300 2,600 800 29.700 $128.000) * Amortization is based on the physical exhaustion of the asset. The metallurgical coal generates revenue at the rate of $78 per tonne. The thermal coal does not generate revenue, because it is shipped to a thermal plant owned by the provincial government. To estimate a transfer price, you asked the general manager of the thermal plant what would be the landed cost of thermal coal on a long-term con- tract. She estimated the cost to be $71 per donne delivered) for comparable coal. The traffic officer (responsible for arranging for and monitoring transportation) explained that King ships clear coal at the cost of $6 a tonne. The mine is a series of interlinked pit mincs that produce 652,000 tonnes per year. Excavation equipment and trucks remove the ovcrburden. The pits differ by coal type, and for efficiency purposes the miners extract thermal coal for three weeks, and then metallurgical coal in the fourth Pit mining wages and henefits, amortization for pit trucks and equipment, and depletion onists are entirely attributable to the extraction of the coal. These costs are the same per tonnc for both thermal and metallurgical coal. Shrinkage in the cleaning plant through the elimination of impurities reduces the weight by eight percent. The expenses for the cleaning plant include plant wages and benefits and amortization for plant and equipment. The metallurgical process has addi- tional stages and, thus, a higher cost per tonne than thermal coal. You estimate that 70 percent of all cleaning costs are attributable to thermal coal, and 30 percent to metallurgical coal. As for diesel fuel and gasoline expenses, you estimate that S3,500,000 was for extraction, $150,000 was for the loaders in the plant and $150,000 was for the buses. CASE 24: KING COAL 101 There are nine buses scheduled to drive back and forth between the two towns and the mine site where all employees report for work: 500.000 kilometres were driven last year. Employees take the bus about 98 percent of the time. The following table shows the brcakdown of employees by department: Extraction 416 Plant 26 Management 13 Administration 15 S Marketing When analyzed according to where they work or how they devote their average work day, the management, administration, and marketing personnel had the following to say in aggregate: Extraction Plant Neither Management Administration Marketing 45 45 35 40 20 15 100 Total 100% 100% 1015, About $600,000 of the administration expense item is attributable to buses. Square feet occupied is the cost driver for facilities, utilities, and municipal taxes. You calcu- late the allocation to be 45 percent for extraction, 35 percent for plant, 10 percent for administration, 5 percent for management, and 5 percent for marketing. Required Complete your assignment using the case approach