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traditional, contemporary and advanced theoretical and technical management accounting knowledge

1. integrate traditional, contemporary and advanced theoretical and technical management accounting knowledge for planning, control and evaluation, as well as decisions making;
2. critically apply traditional, contemporary and advanced theoretical and technical accounting knowledge and skills to solve emerging and/or advanced management accounting problems that require planning, control and evaluation, as well as decision making from a strategic perspective; and
3. demonstrate information literacy and numeracy skills required by accountants to access relevant data from research and business literature sources and use contemporary and advanced analytical techniques.
Background information
You are the management accountant working for a privately owned leisure goods company, a smallto medium-sized enterprise. The company has two manufacturing plants located in Brisbane and Melbourne, Australia. The company also imports a range of finished products. The industry is highly competitive and the company relies on a regular launch of new products to the market, which is critical to its success. The company’s accounting system has not been updated for 10 years, and the staff has had limited training and development over the last five years. The owner of the firm, Bob Spikes, is concerned about profitability trends and has asked you to investigate the following issues: • Sales have increased over the past three years; however, profitability has declined.
• The company’s product range has continued to increase and overhead costs have also risen significantly.
• The pricing policy used has been based on contribution margin. Your investigation has concentrated on three products and has uncovered the following information.
Product profitability on current costing approach

PRODUCT 1 PRODUCT 2 PRODUCT 3 TOTAL
unit volume 150000 2000000 180000
mechine hours 3000 3000 4000 10000
revenue $ 2200000 3000000 2100000 7300000
direct materiAL 500000 900000 500000 1900000
DIRECT LABOUR 600000 700000 300000 1600000

TOTAL MANUFACTURING OVERHEADS 471900 471900 629200 1573000

PRODUCT PROFITABILITY 628100 928100 670800 2227000

Currently the products from this division have overhead costs allocated on the basis of machine hours
. You are concerned that these costs do not reflect what is actually occurring with cost structures. You have been able to establish further information on these three products that can be used in an activity-based costing (ABC) analysis
. Activities, cost drivers, cost driver volume usage and manufacturing overhead costs Activity Cost drive
r
ACTIVITY COST DRIVER PRODUCT 1 PRODUCT 2 PRODUCT 3 TOTAL MANUFACTURING OVERHEADS
CLEANING MECHINE CLEANING MECHINE HOURS 1930 1000 1000 3930 628800
QUALITY TEST Quality inspection
and testing hours 3000 3762 1000 7762 419200
PROCUREMENT Number of purchase orders 600 1400 1150 3150 315000
administration Estimated
administration
hours 500 900 1600 3000 210000
Your investigation also revealed that the administration activity cost pool includes an allocation of $30,000 for the factory manager’s salary. There is no relevant allocation basis for this cost, and the estimated administration hours do not include any estimate of the factory manager’s time.
Required
: One of the traditional responsibilities of the management accountant is to provide cost information. Activity-based costing (ABC) is the process of allocating costs incurred in supplying the product or service based on the amount of activity required to produce it
. a) Calculate the profitability of the three products (including a total of all three) using an activity-based costing approach. Show all workings
. b) Analyse and explain the differences between the current costing approach and the ABC approach for each product. (max 500 words)
c) Based on relevant research (max 1500 words)
i. Identify and explain key practical issues that need to be discussed and considered prior to any implementation of an ABC approach applicable to this company.
ii. Summarise how the ABC information may be used to improve managerial decisionmaking (activity-based management (ABM)). Source: Adapted from CA Program, Management Accounting & Applied Finance (1) 2015

 

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