TOPICS IN MANAGEMENT ACCOUNTING AMIS 4310 CASE QUESTIONS

Seligram, Inc.: Electr nic Te!ting O"erati n! 1. What caused the existing system at ETO to fail? 2. Calculate the reported cost of the five components listed in Exhibit a. The existing system. b. The system proposed by the accounting manager. c. The system proposed by the consultant. ". Which system is preferable? Why? #. Would you recommend any changes to the system you prefer? Why? $. Would you treat the ne% machine as a separate cost center or as a part of the main test room? #ri$get n In$%!trie!: A%t m ti&e C m" nent ' (a)ricati n Plant 1. The official overhead allocation rate used in the 1&'( model year strategy study at the )utomotive Component and *abrication +lant ,)C*- %as #"$. of direct labor cost. Calculate the overhead allocation rate using the 1&'( model year budget. Why do you get different numbers? 2. Calculate the overhead allocation rate for each of the model years 1&'' through 1&&/. )re the changes since 1&'( in overhead allocation rates significant? Why have these changes occurred? ". Consider t%o products in the same product line! Product 1 Expected 0elling +rice 0tandard 2aterial Cost 0tandard 3abor Cost 1 2 1 Product 2 1$# 2( " using!

Calculate the expected gross margins as a percentage of selling price on each product based on the 1&'' and 1&&/ model year budgets4 assuming selling price remains constant and material5labor costs do not change from standard. #. )re the product costs reported by the cost system appropriate for use in the strategic analysis? $. )ssume that the selling prices4 volumes4 and material costs for the 1&&1 model year %ill not change for fuel tan6s and doors produced by the )C* of 7ridgeton 8ndustries. )ssume also that if manifolds are produced4 their selling prices4 volume4 and material costs %ill not change either. a. +repare an estimated model year budget for the )C* in 1&&1 ,1- if no additional products are dropped. ,2- if the manifold product line is dropped. Explain any additional assumptions you ma6e in preparing your estimated model year budgets. b. What %ill be the overhead allocation rate under the t%o scenarios? . Would you outsource manifolds from the )C* in 1&&1? Why4 or %hy not? What more information %ould you %ant before reaching a final decision? *e!tin #ra!! Pr $%ct! C . 1. 9se the Overhead Cost )ctivity )nalysis in Exhibit $ and other data on manufacturing costs to estimate product costs for valves4 pumps4 and flo% controllers. 2. Compare the estimated costs you calculate to existing standard unit costs ,Exhibit "- and the revised unit costs ,Exhibit #-. What causes the different product costing methods to produce such different results? ". What are the strategic implications of your analysis? Could the production process for flo% controllers be changed in such a %ay to allo% :estin 7rass +roducts to reduce the unit cost of flo% controllers? ;o% %ould the change in the lot si<e for flo% controller production affect unit costs? ;as :estin 7rass +roducts adopted the most profitable distribution system in the flo% controller mar6et? What actions %ould you recommend to managers at :estin 7rass +roducts Company? #. )ssume that the interest in a ne% basis for cost accounting at :estin 7rass +roducts remains high. 8n the follo%ing month4 =uantities produced and sold4 activities4 and costs %ere all at standard. ;o% much higher or lo%er %ould the net income reported under the activity> transaction>based system be than the net income that %ill be reported under the present4 more traditional system? Why? 2

*a+ ta O,,ice Pr $%ct! 1. Why %as :a6ota?s existing pricing system inade=uate for its current operating environment? 2. :evelop an activity>based cost system for :a6ota Office +roducts ,:O+- based on @ear 2/// data. Calculate the activity cost>driver rate for each :O+ activity in 2///. ". 9sing your ans%er to Auestion 24 calculate the profitability of Customer ) and Customer 7. #. What explains any difference in profitability bet%een the t%o customers? $. What are the limitations4 if any4 to the estimates of the profitability of the t%o customers? . 8s there any additional information you %ould li6e to have to explain the relative profitability of the t%o customers? (. )ssume that :a6ota applies the analysis done in Auestion " to its entire customer base. ;o% could such information help the :a6ota managers increase company profits? '. 0uppose that a maBor customer s%itched from placing all its orders manually to placing all its orders over the internet site. ;o% should this affect the activity cost driver rates calculated in Auestion 2? ;o% %ould the s%itch affect :a6ota?s profitability?

Cari))ean Internet Ca,1. What managerial issues should :avid Crant consider before starting the Caribbean 8nternet CafD? 2. :efine the fixed4 variable and start>up costs in this case. ". What is the contribution margin per customer? # ;o% many customer visits %ill C8C need in order for the cafD to brea6>even in the first year? $. ;o% many customer visits %ill C8C need in order for the cafD to brea6>even in year t%o? . 0hould Crant proceed %ith the venture?

"

Salem Tele". ne C m"an/ 1. EFevenue hoursG represent the 6ey activity that drives costs at 0alem :ata 0ervices. Which expenses in Exhibit 2 are variable %ith respect to revenue hours? Which expenses are fixed %ith respect to revenue hours? 2. *or each expense that is variable %ith respect to revenue hours4 calculate the cost per revenue hour. ". Create a contribution margin income statement for 0alem :ata 0ervices. )ssume that inter> company usage is 2/$ hours. )ssume commercial usage is at the 2arch level. #. )ssuming the intracompany demand for service %ill average 2/$ hours per month4 %hat level of commercial revenue hours of computer use %ould be necessary to brea6 even each month. 0ince the intracompany demand is 6no%n to be 2/$ hours4 the contribution from these sales is assured to cover a portion of the fixed costs. Thus4 to determine the level of commercial revenue hours re=uired to brea6 even4 the contribution from commercial sales only needs to cover the fixed costs remaining after subtracting the fixed costs already covered by the contribution from intracompany sales. $. Estimate the effect on income of each of the options *lores has suggested if Wu estimates them as follo%s! 8ncreasing the price to commercial customers to 114/// per hour ,this %ould reduce external demand by "/.-. Feducing the price to commercial customers to 1 // per hour ,this %ould increase external demand by "/.-. 8ncreased promotion %ould increase revenue hours by up to "/.. Wu is unsure ho% much promotion this %ould ta6e. ,;o% much could be spent and still leave 0alem :ata 0ervices %ith no reported loss each month if commercial hours %ere increased "/.?-.

. 7ased on your analysis above4 is 0alem :ata 0ervices really a problem to 0alem Telephone Company? What should *lores do about 0alem :ata 0ervices? (. Can you suggest changes in the accounting system that %ould result in more useful information for *lores and Wu? S%"eri r Man%,act%ring C m"an/ 1. 7ased on the 2//# statement of profit and loss data ,Exhibits 1 and 2-4 do you agree %ith Waters? decision to 6eep product 1/"? 2. On Hanuary 14 2// 4 should the company reduce the price of product 1/1? To %hat price? ". What is 0uperior?s?s most profitable product? #

#. What appears to have caused the return to profitable operations in the first six months of 2//$? ;o% useful %as the data in Exhibit # for the purpose of this analysis? $. Why is it important that 0uperior has an effective cost system? What is your overall appraisal of the company?s cost system and its use in reports to management? 3ist the strengths and %ea6nesses of this system and its related reports for the purposes management uses the system?s output. What recommendations4 if any4 %ould you ma6e to Waters regarding the company?s cost accounting system and its related reports? Ca,e! M nte #ianc : #%il$ing a Pr ,it Plan 1. 9se a profit plan model to evaluate the attractiveness of s%itching all production to private brand coffee. Estimate 6ey accounting variables relating to profitability and cash flo% for this alternative. 2. 7ased on your analysis4 %hat recommendations %ould you ma6e to Ciacomo 0alvetti? ". What assumptions did you ma6e to complete your analysis? ;o% critical are these assumptions to your conclusions? #. +repare a list of additional assumptions that you %ould as6 for to improve the =uality of your analysis. $. )naly<e the profitability of a mixed strategy %here the company %ould sell Crade E)G coffee %ith an advertising level of (. and the rest of the production %ould be devoted to private brand coffee. C m"agnie $% (r i$, S. A. 1. ;o% %ould you explain the difference bet%een the 8talian region?s expected and actual profit? a- What %as the impact of the change in sales volume? b- What %as the impact of the change in the prices charged for ice>cream and specialties? c- What %as the impact of the changes in the cost of ra% materials4 labor4 and fixed costs? d- ;o% much of the changes in the cost of ra% material and labor are due to changes in the prices of the ra% materials and %ages of labor4 and ho% much are due to manufacturing efficiencies? 2. ;o% %ould you evaluate the performance of the manager of the 8talian Fegion?

". ;o% %ould you evaluate the performance of the *rench and 0panish managers? ;o% %ould you account for the ice>cream transfer from *rance to 0pain? #. What problems is Hac=ues Trumen facing? $. What %ould you recommend to him? P l/!ar 0imite$ 1. +repare a presentation for the +olysar 7oard of directors to revie% the performance of the I)0) Fubber :ivision. +ay particular attention to =uestions that may be raised concerning the accuracy and meaning of the volume variance. 2. What is the best sales and production strategy for EFOW :ivision? I)0) :ivision? Fubber Croup in total? ". What changes4 if any4 %ould you recommend be made in the management accounting performance system to improve the reporting and evaluation of the Fubber Croup performance? T.e S%"er Pr 1ect 1. What are the relevant cash flo%s for Ceneral *oods to use in evaluating the 0uper +roBect? 8n particular4 ho% should management deal %ith issues such asJ a- Test mar6eting expenses? b- Overhead expenses? c- Erosion of Hell>O contribution margin? d- )llocation of charges for the use of excess agglomerator capacity? 2. ;o% attractive is the investment as measured by various capital budgeting techni=ues ,i.e. accounting rate of return4 paybac6 period4 internal rate of return4 net present value-? ;o% useful are each of these measures of investment attractiveness? ,)ssume that Ceneral *oods uses 1/. as the discount rate to evaluate capital investments". ;o% attractive is the 0uper proBect in strategic and competitive terms? What potential ris6s and benefits does Ceneral *oods incur by either accepting or reBecting the proBect? #. 0hould Ceneral *oods proceed %ith the 0uper proBect? Why4 or %hy not?

#irc. Pa"er C m"an/ 1. Which bid should 2r. Kenton accept? Why? 2. Which bid is in the best interest of 7irch +aper Company? Why? ". 0hould the commercial vice>president intervene? 8f so4 ho%? 8n other %ords4 %hat potential alternatives might the vice>president consider? 2/a$erm P.armace%tical! 1. 9sing data from the case Exhibit '4 calculate the follo%ing items! a2/// EL) for the Iorth )merican :ermatology :ivision.

b- 2/// EL) bonus payout for a manager earning 12//4///4 assuming that the manager?s bonus is based 1//. on the :ivision?s EL)? c- 2//1 EL) and estimated bonus payout for the same manager4 assuming that Lyaderm profits fall bac6 to historical levels and the EL) improvement goal remains constant. 2. 7ased on your analysis4 %hat %ould you recommend to 2r. Ledrine?