USQ ACC5502 Accounting and Financial Management

ACC5502 Accounting and Financial Management  
Assignment 2
University of Southern Queensland    

This assignment is designed to give you an opportunity:

  • apply management accounting concepts and finance frameworks…to increase the effectiveness of management decision making
  • apply management accounting concepts …to help assess the impact on organisational systems
  • apply and use management accounting concepts and finance frameworks…to provide solutions to real world problems

Assignment Part One

Over the past 15 years, activity-based costing has enabled managers to see that not all revenue is good revenue and not all customers are profitable customers. Unfortunately, the difficulties of implementing and maintaining traditional ABC systems have prevented them from being adopted on any significant scale. Time-driven ABC has overcome these difficulties, offering a transparent, scalable methodology that is easy to implement and update. It draws on existing databases to incorporate specific features for particular orders, processes, suppliers, and customers. Activity-based costing is no longer a complex, expensive financial-systems implementation; the time-driven ABC innovation provides managers with meaningful cost and profitability information, quickly and inexpensively.

Source: Adapted from Robert S. Kaplan and Steven R. Anderson, “Time-Driven Activity-Based Costing”, Harvard Business Review (November 2004).

Required:

1. Critically evaluate the above quote in regards to contemporary costing practice and answer the following questions. You should include current business and academic literature relevant to the following questions:

  1. This quote claims that activity based costing (ABC) enables managers to differentiate between profitable and non-profitable customers. Do you agree or disagree that ABC provides better information for this purpose than traditional costing methods? Provide support for your answer.
  2. What are the difficulties associated with implementing ABC? Consider these in regards to different sized organisations and different types of organisations. You may like to research real life examples to illustrate your argument.
  3. Provide an overview of time-driven activity based costing and discuss whether you believe that it addresses some of the problems associated with ABC.
  4. Assume you are the financial controller for USQ – you have been asked to provide a one page executive summary on the possible introduction of ABC to the university. Prepare this for senior management to consider. Make sure you provide a recommendation as to whether ABC is suitable for this organisation.

2. Consider the following hypothetical organisation whereby senior management receive no financial benefits for favourable budget outcomes. The budgets are set by the board with limited input from senior management or other personnel. The organisation uses a zero based budgeting system.

Using your knowledge of budgeting processes and organisational performance measurement, address the following:

  1. Evaluate the budgeting process in relation to motivating management and improving organisational processes.
  2. Suggest refinements to the budgeting system and state how these could improve outcomes for the company.

Assignment Part Two

Answer the following questions:

(1) Footy fever purchases football jerseys for $55 and sells them for $65. Sales of football jerseys (in units) for the first quarter of 2018 are expected to be as follows: Jan 5,000; Feb 5,500; Mar 6,000 and 7,000 for April 2018.

The business expects inventory of 1,250 units on hand at 1st January 2018 and has a target finished inventory of 25% of the following month’s sales units.

Actual sales for November and December 2017 were 9,000 and 7,500 jerseys respectively.

Sales are 80% cash, and 20% credit. Credit customers pay 40% in the month following the sale and 60% two months following.

Payment for purchases is made in the month following the purchase.

The budgeted cash balance on 1 January 2018 is $1,000.

Required:

  1. Prepare a sales budget for the quarter January – March 2018
  2. Prepare a purchases budget for the quarter January – March 2018
  3. Prepare a schedule of receipts from accounts receivable for quarter January – March
  4. Prepare a cash budget for the quarter January – March 2018
  5. Comment on the cash position of Footy Fever for each month

(2) NRG Ltd has a current breakeven point of 43,000 units. Which of the following would result in a decrease to the breakeven point?

  1. a decrease in the variable costs per unit
  2. an increase in the contribution margin per unit
  3. a decrease in the selling price per unit
  4. an increase in the fixed costs

(3) Zen Ltd has 13,000 units in inventory that cost $2.75 per unit to produce. Due to changing technology, the sales department is having difficulty selling this product. It will cost $4,300 to scrap the units and Zen Ltd needs to clear the warehouse to make room for new stock. A customer has approached Zen Ltd and is willing to take all 13,000 units. However, as this is old technology, they are not willing to pay for this item. Should Zen Ltd simply give these units away? If not, what is the minimum price for which Zen Ltd should sell these units?

(4) Kendo Ltd has fixed costs of $149,000 and variable costs are 75% of the selling price. To realise profits of $741,000 from sales of 35,600 units, what must the selling price be per unit?

(5) Dragon’s Lair makes small gadgets. The manufacturing costs per unit to produce a gadget are as follows:

Direct Materials $65
Direct Labour $25
Variable Manufacturing Overhead $15
Fixed Manufacturing Overhead $95
Total Manufacturing Costs $200

Variable selling costs to obtain and fill orders normally average $5 per unit when Dragon’s Lair sells gadgets locally. Dragon’s Lair has recently paid $48,000 to advertise in an international magazine. Dragon’s Lair has just received an order from a German Company for 400 gadgets for a total offering price of $45,000. The German Company will pay all shipping charges except the initial packaging costs which are expected to be $2.75 per gadget. Dragon’s Lair has excess capacity.

  1. Should Dragon’s Lair accept this one time only special order? Support your answer with calculations.
  2. Why is knowing that Dragon’s Lair has excess capacity important?

(6) Lolly Water Company makes lemonade. Lolly Water Company normally sells 34,000 bottles of lemonade for $4 per bottle. The cost to manufacture the lemonade is $1.50 per bottle. Management of Lolly Water Company have undertaken some research and have determined that further processing of the lemonade could convert the product into raspberry-lemonade flavour. Lolly Water Company could sell the raspberry-lemonade for $5.50 per bottle and would incur variable processing costs to convert the lemonade to raspberry-lemonade of $1.50 per bottle. Variable selling costs for lemonade are $1.00 per bottle, but for the raspberry-lemonade would be $0.80 per bottle.

Based on this information, assuming Lolly Water Company can sell 34,000 bottles of raspberry/lemonade:

  1. Should Lolly Water Company process the lemonade further into raspberry-lemonade? Support your answer with calculations.
  2. If the selling price of the raspberry-lemonade dropped to $5.00 per bottle, should Lolly Water Company process the lemonade further into raspberry-lemonade? Support your answer with calculations.
  3. Describe relevant revenues and relevant costs. Provide management of Lolly Water Company with a list of relevant revenues and relevant expenses for this decision. Identify any revenues and/or expenses that would not be relevant for this decision.

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