PACC6001 Management Accounting

Published : 22-Sep,2021 | Views : 10

Question:

Paxer Inc uses a process costing system. A unit of product passes through three departments Moulding, Assembly and Finishing—before it is completed. The following production took place in the Finishing Department during August:

Work in process inventory, 1 August 1 400
Units transferred in from Assembly Department 14 000
Units transferred out to finished goods inventory 11 900

Raw material is added at the beginning of processing in the Finishing Department. The work in process inventory was 70 per cent complete as to conversion on 1 August, and 40 per cent complete as to conversion on 31 August.Paxer Inc uses the weighted average method of process costing. The equivalent units and costs per equivalent unit of production for each cost element for the Finishing Department are shown as follows:
Equivalent units Cost per equivalent unit
Transferred-in costs 15 400 $5.00
Raw material 15 400 1.00
Conversion cost 13 300 3.00
Total $9.00

Required:
1. Calculate the following amounts:
(a) Cost of units transferred to finished goods inventory during August.
(b) Cost of the Finishing Department's work in process inventory on 31 August.

2. The total costs of prior departments included in the work in process inventory of the Finishing Department on 1 August amounted to $6750. Prepare the journal entry to record the transfer of the goods from the Assembly Department to the Finishing Department during August.

WealthWise Insurance has recently set up an internal information system to improve social and environmental practices within the company. The company has its head office in Brisbane and offices in all capital cities and every regional city with a population of more than 50 000 people. One of the underlying principles of the company is to be socially and environmentally responsible. This principle has been in place for many years, dating back to the firm's founder,Jeannette Dai, who felt that she would like to contribute to society rather than simply maximising profits.

The company is a major contributor to charities, particularly those that focus on the homeless and the poor. It actively promotes environmental management in all of the company operations.It sponsors a program that provides scholarships to disadvantaged students to allow them to attend university, and it is proud to offer employment in the company to long-term unemployed and the poor. Each year it publishes a sustainability report that summarises its achievements across each area of performance.

Over time these activities have become a marketing strength of WealthWise. The social and environmental stance taken by the company has attracted many customers to the company. Listed on the Australian Securities Exchange in 2001, the company has also become a preferred investment of ethical and green investment funds.
The mission statement of WealthWise states that it will aim to:
• Support employees in achieving their personal and career goals.
• Act in a socially responsible way when dealing with insurance clients and the general community.
• Promote a better social and physical environment for the world.

However, the current chief executive officer, Sylvia Trott, thinks that the firm has become complacent and is resting on its past achievements. She is concerned that the firm has built up a reputation for good social and environmental practices but is not ‘walking the talk’. There is some level of discontent among employees about the way that management treats staff, and this is impacting on employee satisfaction. There have also been negative reports in the media of its treatment of businesses in Phuket and Langkawi that were damaged in the December 2004 tsunami. The reports claim that the company has tried to minimise the amounts paid to these businesses by strictly applying clauses in the insurance contracts that cover earthquake damage but not flood damage.

In 2004, the company's profit rose by 15 per cent to $173 million on an asset base of $1235 million. This is the third consecutive year of increased profits. Earnings per share were 62 cents, and the market value was $5.40 per share. The board is concerned that WealthWise makes a loss on its insurance business, while its investments yield a strong return and are the main reason for the increase in profitability. Its investment portfolio includes shares in BHP Billiton, Qantas, Telstra and James Hardie Industries. The board adopts a sustainability approach to viewing its performance and uses the following key performance indicators to assess company performance:

Required:
1. Explain what is meant by sustainability reporting and why a publicly listed insurance company like WealthWise may adopt this approach.
2. Consider the list of key performance indicators used by WealthWise. Explain how these measures could be used to help achieve the mission.
3. Suggest alternative performance measures that could be included in the performance measurement system to assist WealthWise to achieve its mission.
4. Write a report to the chief executive officer explaining what steps she can take to encourage staff to behave in a way that supports sustainability. Specifically, explain to her how the performance measurement system could be used in a balanced way to support the achievement of the company's goals.

Answer:

1A. Cost of units transferred to finished goods inventory during August:

	Transferred in cost	Raw material	Conversion cost
Work in process inventory,1 August	1400	1400	1400
Cost per Equivalent unit	5	1	3
% of completion	100%	100%	70%
Total cost	$ 7,000	$ 1,400	$ 2,940
units transferred and fully completed	10500	10500	10500
Cost per Equivalent unit	5	1	3
% of completion	100%	100%	100%
Total Cost	$ 52,500	$ 10,500	$ 31,500
Work in process, 31 August	3500	3500	3500
Cost per Equivalent unit	5	1	3
% of completion	100%	100%	40%
Total Cost	$17,500	$3,500	$4,200

Total cost = 11340 + 94500 +25200

= $ 1,31,040

1B. Cost of the Finishing Department Work in process inventory on 31 August is:

The total cost is $25,200

2 The journal entry to record the transfer of the goods from the assembly department to the Finishing department during August is:

Sustainability reporting is a report, which is published by the company regarding its various economic and social impacts in the society. Today it is a method that is adopted by many companies worldwide unlike earlier where only a few environmentally approached companies used to employ it. It is also a method in which the firm tries to maximize the sustainability of the organization so that both the internal and external stakeholders are demonstrated. It tries to establish a link between the company’s strategy and its fulfillment of such strategies towards a sustainable economy. It helps the company to maintain its reputation and long-term relation with its customers, as the customers believe that the company is working keeping in mind their welfare.

A public company like Wealthwise will definitely adopt this approach to improve its profitability, image and long-term reputation in the society. For an insurance company it is very much important to develop a trust with its customers. By adopting sustainability reporting the reputation of the company improves and the customers build a loyalty with the company. By adopting such method decision-making becomes more efficient and also they have less employee turnover and internal problems.

The mission of the WealthWise insurance company are as follow

Support employees in achieving their personal and career goals
Act in a socially responsibly way when dealing with insurance clients
Promote a better physical and social environment for the world.

Firstly, lets take a look on the financial indicators. For any company profit is the main aim to survive the competition. Unless sufficient profit is earned, no company can survive in the long run. Also, for any sustainable activity money is required and it will only be possible is the company is doing well financially. For an insurance company, to earn profits their main source of income is the insurance premium they receive and the return on investment that they earn. So, it is very important to keep a check on these two factors and two continuously improve them so that the firm earns profit and achieve its mission.

Secondly, when we come to economic indicators, the policies practices and spending on suppliers are important to consider. The policies will directly affect the employees, customers and other stakeholders of the company. The procedure for hiring local staff is also very important for better employment growth and the betterment of the society. The development of project for public benefit is very important to deal with the clients in socially responsible way.

When we see the social indicators, employee satisfaction ratings are considered. It is important to have less employee turnover for better functioning of the company. Also, the employees get a better platform for their career if they get the opportunity to grow in a firm. The customer ethical ranking of sales staff is also very important. The customers come in direct contact with the sales staff and it is very important to maintain a good relation with them, because indirectly the doing it with the company.

There are environmental indicators also which are assessed to achieve the mission like tonnes of paper recycled in a year, reduction in electricity usage, and litres of fuel per dollar of sales. If a company works gets it paper recycled, keeps a check to reduce the use of electricity it is definitely successful in achieving its mission of providing better environment for the world.

The alternative performance measures that could be included in the performance measure to assist WealthWise achieve its mission are as follows:

Environmental indicators:

Do betterment for the human development index
Mitigation services during natural disasters

Social Indicators:

The number of complaints they have received and how they are addresses
To check on customer satisfaction via surveys.
The amount of donation and charities done.
Any news published in the newspaper and to check if it is in favor or not.
Seminars to be conducted for employee training and motivation

It has always been the aim of Wealthwise insurance company to act in a socially and ethically responsible way. It has always adopted the method of sustainability reporting, as it believes that it is essential to act towards the society and also for its own reputation. Even the mission of the company states the same. The management can take more steps to encourage the staff to behave in a way that supports sustainability.

The policy and practices adopted by the firm should be made more clear to the employees and incentives be given to one who performs in the best possible way that supports sustainability. When preparing public projects employees should be involved and made them realize how much the company focuses on the benefit of the public. Seminars should be conducted on sustainability reporting, which will give them a broader idea of the benefits of this policy. The internal policies should be made very clear regarding indiscrimination, racism and other issues and actions be taken if any violated. Activities should be organized for a particular cause like cleanliness drives, marathon etc. promoting particular issues.

The cost data for scatter diagram is

MONTH	UNITS LOADED OR UNLOADED(KG)	SHIPPING COSTS
January	3600	$23,400.00
February	3200	$22,600.00
March	2600	$22,500.00
April	2000	$20,400.00
May	4400	$22,200.00
June	4800	$25,100.00
July	4000	$24,000.00
August	3600	$22,800.00
September	5200	$24,240.00
October	2200	$22,100.00
November	2400	$22,700.00
December	2800	$22,700.00

Using the table above in high low method of cost behavior it takes the two extreme figures of the costs to split the mixed costs into fixed and variable costs.

The equation used to calculate this is Y₂–y₁

Where

y2 is the total cost at the highest level of activity

y1 is the total cost at the lowest level of activity

x2 is the number of units at the highest level of activity

x1 is the number of units at the lowest level of activity

Total Fixed cost = y₂-bx₂ = y₁ – bx₁

= 24240 – (1.2)*5200 = 20400 – (1.2)* 2000

= $ 18,000

This can be applied to the cost equation of Y = a+bx

Y= 18000 + (1.2)*x

The shipping department cost for the month when the loads were 4500 kg is

Y=18000+(1.2)*4500

=$ 23,400

The equation for regression analysis is

Y=a+bx, where b is the slope of regression line

A = n

MONTH	KG(x)	COSTS(y)	x squared	xy
January	3,600.00	23,400.00	1,29,60,000.00	8,42,40,000.00
February	3,200.00	22,600.00	1,02,40,000.00	7,23,20,000.00
March	2,600.00	22,500.00	67,60,000.00	5,85,00,000.00
April	2,000.00	20,400.00	40,00,000.00	4,08,00,000.00
May	4,400.00	22,200.00	1,93,60,000.00	9,76,80,000.00
June	4,800.00	25,100.00	2,30,40,000.00	12,04,80,000.00
July	4,000.00	24,000.00	1,60,00,000.00	9,60,00,000.00
August	3,600.00	22,800.00	1,29,60,000.00	8,20,80,000.00
September	5,200.00	24,240.00	2,70,40,000.00	12,60,48,000.00
October	2,200.00	22,100.00	48,40,000.00	4,86,20,000.00
November	2,400.00	22,700.00	57,60,000.00	5,44,80,000.00
December	2,800.00	22,700.00	78,40,000.00	6,35,60,000.00
Total	40,800.00	2,74,740.00	15,08,00,000.00	94,48,08,000.00

N	12.00
Sum of xy	94,48,08,000.00
Sum of x	40,800.00
Sum of y	2,74,740.00
Sum of x square	15,08,00,000.00

Putting in the equation

b= 12(94,48,08,000) – (40,800)(2,74,740)

= 0.89

a = 2,74,740 – (0.89)(40800)

The variable component is 0.89 and the fixed component is $19,869

The regression equation for the Shipping department is

Y=a+bx

Y= 19869+0.89x

The department cost when the loads totaling is 4500 kg is

Y = 19869 + (0.89)(4500)

= $23,874

The cost predictions estimated using the high-low method and regression analysis differ mainly because of the values taken to calculate the costs. In high-low method only the highest and lowest units of costs are considered, where as in regression method all the costs of various units produced are undertaken. Least square regression method is more recommended as compared to the high-low is more accurate and optimize the costs in a much better way. They take into consideration all the costs.

The break even point is that point of a company when the revenue equals the expenses and the company does not incur any losses. The company’s break even point is calculated using the following formula:

Total revenue – Total Variable cost – Total Fixed cost = 0

Unit S.P *Quantity – Unit Variable cost * Quantity – Fixed cost = 0

500Q - 275Q – 247500 = 0

225 Q = 247500

Q=1100 tonnes

Hence at 1100 tonnes the company will reach its break even point.

If the sales is 2100 tonnes in the next year and the prices and costs remain the same, the net profit will be calculated as:
The company gets an offer from international customer to produce 1500 tonnes at $450 per tonnes. Now the production capacity is 3000 tonnes. So the local customer orders have to be restricted to 1500 tonnes. We calculate the net profit from this order.

PARTICULARS	AMOUNT
Total Sales (1500*450)	$6,75,000.00
Variable cost (1500*275)	$4,12,500.00
Total Sales (1500 * 500)	$7,50,000.00
Variable costs (1500*275)	$4,12,500.00
Total fixed cost for both the order	$2,47,500.00
Net Profit	$3,52,500.00

Here in this problem the current net profit that need to be maintained is $1,57,500. The variable cost has increased to $300 and the fixed cost has increased to $3,09,000.

The quantity required to maintain the same profit is calculated as below:

500Q – 3,09,000-300Q = 1,57,500

200Q = 4,66,500

Q = 2333 tonnes

The break even volume when the variable cost has reduced by $25 to $250 and the fixed cost has increased from $2,47,500 to $ 3,06,000 is calculated as below:

500Q – 250Q – 3,06,000 = 0

250Q = 3,06,000

Q = 1224 tonnes

New contribution margin per unit = $250

Contribution margin ratio = (250/500) * 100 = 50%

Break even point in sales dollar = $3,06,000/50%

= $6,12,000

New Selling price = $450

New Variable cost = $315

Fixed cost = $ 2,47,500

To maintain the profit of $ 94,500 the quantiyi required is calculated as:

450Q – 315Q-2,47,500 = 94,500

135Q = 3,42,000

Q = 2533 tonnes

We see the profitability of each product

PARTICULARS	P	Q	R
Selling price	213	254.25	200
Units sold	8000	15000	4000
Sales	1704000	3813750	800000
Per unit cost	191	169.5	95.5
Total cost	1528000	2542500	382000
Profit	176000	1271250	418000
profit %	10%	33%	52%

Yes, it is true that product P is the company least profitable product. It is only earning a profit of only 10%, which is very less for a firm to continue that product. The per unit cost of product P is very high.

Yes product R is a profitable product for Opsonin Ltd. It is earning a profit of 52%, which is a remarkable profit percentage. The cost of this product is very low and also the competitors are not interested in expanding in this product, which give an edge to Opsonin Ltd.

The competitors of Opsonin Ltd are not interested in the market for product Q. So Opsonin Ltd is free to further increase the price in this category as they have a monopoly and no danger for competitors. They can increase the sales of this product by more advertisement and selling techniques. For product P Opsonin faces a danger from its competitors. The profit it is earning is very low of 10%. Also the cost of this is very high. So it will be very difficult for them to lower the price further. They will need to use different techniques to make this product profitable. For product Q also the firm currently is not so much in danger. The profit % earned is reasonable and also the quantity of sales is good enough.

According to Activity based costing the financial comptroller determined the costs in this way.

Particulars	P	Q	R	Total
Total units sold	8000	15000	4000
Raw Material cost	$35.00	$52.50	$17.50	$105.00
Total Material cost	$2,80,000.00	$7,87,500.00	$70,000.00	$11,37,500.00

Now the percentage of material is calculated as

P =( 2,80,000/1137500)*100 = 25%

Q =(7,87,500/11,37,500)*100 = 69%

R =(70,000/ 11,37,500)*100 = 6%

The product cost of these products according to activity based costing are as follow:

We see here that earlier the costs were over estimated for product P and product Q and under estimated for product R. As now the costs of product P and product Q have reduced so their selling price from before. And for product R the budgeted selling prices have increased as also the estimated cost for product R.

Obrien Sally recently attended a conference at which activity based costing system was discussed about. After discussing with the top management we planned to prepare the costs according to activity based costing system. For this the entire overhead budget was placed in its own activity pool and cost drivers were recognized for them. A data was compiled and the percentage that each driver contributed to the costs of different products. The scenario which we found was completely opposite of what we are considering today.

After applying activity based costing system we found that the cost of product P is much less which in comparison to earlier cost. This gives us an advantage over the competitors by further reducing the price and more profits from this product. We can eliminate the competitors for this product if we follow the activity based costing system. For product Q also the new cost is much less as compared to earlier cost. Here, also we can reduce the price to give a competitive edge. But our main concern is product R, which is actually consuming a lot of cost according to the activity cost drivers. This is making our product non profitable. As of now we are a monopoly in the market so we can try and reduce the cost and also increase the price further to make this product also profitable.

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