ACCT604 Managerial Accounting paper
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Pristine Limited (PL) manufactures and sells fireproof safes and document containers of various shapes and sizes for home use, including safes made to Australian/New Zealand Industry standard AS/NZS 3809. The division now makes 50 different products but these fit into the two main product groups of 35 metal safes and 15 more recently developed plastic safes.
Table 1 shows last quarter’s income statement by product group.
Table 1—Quarter 1 income statement by product group
Metal safes Plastic safes
Total
$$$
$
$
$
Sales revenues
296900
246800
543700
Direct materials
2150020680
42180
Process and support costs
231770170280402050
Total costs
253270
190960
444230
Net income
43630
55840
99470
Profit margin
14.7%
22.6%
18.3%
The managing director, Christine Smith, is concerned because the net margin on metal safes has fallen below the company’s target of 20 per cent and because company profits have been falling despite overall sales growth and increased capacity utilisation. Metal safes is the high volume product group but sales fell by 5 per cent last quarter. Plastic safes sell at much lower volumes, but the sales of plastic safes increased by 15 per cent last quarter, despite recent price increases and their apparently high margins. The marketing director, Colin Drake, tries to explain the trends as follows:
The margins on metal safes are being squeezed because of ridiculously low prices set by the competition. However, the increased sales of high margin plastic safes should compensate for this. I therefore propose to concentrate marketing resources on plastic safes.
However, Christine highlights that despite selling more plastic safes overall profitability is falling. She questions the reliability of the present costing system, which has remained very traditional despite PL having become a much more complex business in recent years. PL’s process and support costs are currently absorbed on the basis of total process hours using a single overhead absorption rate of $23.65 per process hour. Christine argues that although raw materials are cheaper, overall production of plastic safes is quite complex and she questions whether the simplistic costing system is missing something. She requests an investigation into improved costing procedures using an activity-based costing model.
It is established that there are five main activities undertaken by PL. Table 2 shows details of these activities, their cost drivers and their estimated costs per quarter.
Table 2—D
Activity
ata on key activities
Cost driver
Estimated costs
Insulation process
Insulation process hours
$ 180700
Assembly process
Assembly process hours
69600
Quality control
Number of inspections
80080
Materials management
Number of requisitions
47800
Selling and administration
Number of sales orders
23870
Total process and support costs
402050
Table 3 shows last quarter’s actual activity rates.
Table 3—Act
Activity
ivity rates for the
Metal safes
last quarter
Plastic safes
Total
activity
Insulation process hours
7000
6000
13000
Assembly hours
2800
1200
4000
Total process hours
9800
7200
17000
Number of inspections
40
100
140
Number of requisitions
300
700
1000
Number of sales orders
30
47
77
The assembly process for plastic safes is quite complex and there has recently been a high level of rejects. This has resulted in the need for increased quality control activities. Plastic safes generally comprise more components than metal safes, causing more material movements. The plastic safe product group is still new and PL’s customer base is characterised by a large number of customers each ordering small volumes.
REQUIRED:
1) Explain TWO general problems associated with Pristine Limited’s traditional costing system.
(4 marks)
2) Highlight FOUR indicators that the current costing system is outdated and flawed. (8 marks)
3) Calculate the activity cost rates to be used in the desired activity-based costing system.
(5 marks)
4) Prepare a revised income statement by product group tracing process and support costs to product groups using activity-based costing methodology. (15 marks)
5) Briefly explain the differences in product costs and net profit margins between the two
alternative costing systems. (6 marks)
6) State the benefits, costs and issues of adopting the activity- based costing system to Pristine Limited. (8 marks)
[Solved] ACCT604 Managerial Accounting paper
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- Submitted On 08 Sep, 2018 09:38:53
- Academia
- Rating : 60
- Grade : A+
- Questions : 0
- Solutions : 4595
- Blog : 1
- Earned : $25563.50