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:

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

\begin{tabular}{|l|c|c|} \hline & \multicolumn{2}{|c|}{ Service Department Costs } \\ \hline & \begin{tabular}{c} Physical \\ Resources \end{tabular} & \begin{tabular}{c} Human \\ Resources \end{tabular} \\ \hline Variable Costs & $60,000 & $8,000 \\ \hline Fixed Costs & 140,000 & 78,000 \\ \hline & & \\ \hline Total service department costs & $200,000 & $86,000 \\ \hline \end{tabular} \begin{tabular}{|l|r|r|r|} \hline & \multicolumn{3}{|c|}{ Manufacturing Department } \\ \hline & \multicolumn{1}{|c|}{ Moulding } & \multicolumn{1}{|c|}{ Assembly } & \multicolumn{1}{|c|}{ Finishing } \\ \hline Departmental activity measures: & & & \\ \hline Direct labour hours & 10,000 & 40,000 & 30,000 \\ \hline Machine hours & 0 & 8,000 & 50,000 \\ \hline & & & \\ \hline Department costs: & $800,000 & $2,000,000 & $100,000 \\ \hline Raw materials & 150,000 & 600,000 & 450,000 \\ \hline Direct labour & 100,000 & 200,000 & 50,000 \\ \hline Variable overhead & 1,200,300 & 702,300 & 597,400 \\ \hline Fixed overhead & $2,250,300 & $3,502,300 & $1,197,400 \\ \hline Total department costs & & & \\ \hline \end{tabular} Assume that the Double Black ski board has the following annual requirements for machine time and direct labour time in the various departments Prepare the memo and related schedules for Ms. Spence. Normal case format should be followed