Reference no: EM132687133

200108 Contemporary Management Accounting - University of Western Sydney

QUESTION 1

Decentralisation; transfer pricing; financial performance measures; reward system, behavioural issues.

Use a separate answer booklet and clearly show each of the requirement numbers (and any parts to them) against your answers.

There are 8 requirements to this question.

Coffey Ltd is a large and successful manufacturer of engines. The company consists of two divisions: the Automotive Division and the Motor Division. Coffey has recently acquired a new company which will become a third division. The new Componentry Division is a small manufacturer of components for motors. It has been owned and managed by the one person for 40 years. The prior owner treated all employees as part of his family. The company was noted for the lack of a ‘them and us' attitude between employees and management, and there was free and open communication between all staff.

Coffey is known for its modern management systems and would like all managers at Componentry to participate in the performance-related pay system that is used in the other two divisions. The profit-sharing plan applies to senior divisional managers only. It is based on placing 10 per cent of Coffey's profits before interest and income tax into a pool, which is then shared by the senior divisional managers in direct proportion to their base salaries. The senior managers in the two original divisions received bonuses of 11 per cent and 12 per cent of their salaries for the last two years before the acquisition of Componentry.

The profit results for the first financial year following the acquisition of the Componentry Division, are as follows:

	Motor	Automotive	Componentry
Sales revenue	32 000 000	41 800 000	9 700 000
Cost of goods sold	10 000 000	24 000 000	4 500 000
Gross margin	22 000 000	17 800 000	5 200 000
Administrative costs	11 800 000	7 500 000	3 600 000
Marketing and selling costs	7 320 000	6 120 000	1 212 000
Total costs	19 120 000	13 620 000	4 812 000
Profit before interest and taxes	2 880 000	4 180 000	388 000

Senior management salaries included in the above costs, and divisional assets at the end of that year, are as follows:

	Motor	Automotive	Componentry
Senior management salaries	4,400,000	3,200,000	1,710,000
Divisional assets	8,000,000	8,360,000	2,425,000

Prior to the acquisition by Coffey, all Componentry employees, including the senior managers, participated in a gainsharing program. Under this program, the financial impact of improvements in labour productivity and delivery performance were quantified each quarter, and 50 per cent of this amount was accumulated in a pool. At the end of each year, each employee received an equal share of the pool. The scheme was discontinued when Coffey purchased Componentry.

Componentry was acquired to ensure a steady supply of components were available to the Motor Division at a predetermined transfer price. The standard variable production cost of Componentry is $300 per unit. The Componentry Division could sell all of its components to outside buyers at $395 per unit. The absorption cost of a component from the Componentry Division is $350, which includes $50 of applied fixed overhead per unit. The transfer price has been set at $385, which is Componentry's absorption cost plus a ten per cent markup. The Motor Division has a special offer of $450 for it product. The Motor Division incurs variable costs of $100 in addition to the transfer price for the component from the Componentry Division. Both Divisions currently have spare capacity.

Required:

1. What is the major challenge Coffey will face as a decentralised organisation?

2. Determine which division has the best performance in the first year after the acquisition by calculating the ROI for each division?

3. What are the advantages and limitations of using ROI as a performance measure?

4. Determine the bonus pool available for the year. Show your calculations

5. Calculate the percentage bonus that each senior manager would receive. Show your workings.

6. Discuss the behavioural problems that may arise within the Componentry Division from the changes in the performance-related pay system.

7. Due to the transfer price being based on absorption cost plus a markup, the manager of the Motor Division has rejected the special offer. Is this decision in the best interests of Coffey Limited as a whole? Show calculations.

8. Using the general transfer pricing rule, determine the minimum transfer price required for the transfer to take place? What transfer price would you recommend and why?

QUESTION 2

JIT system; activity-based costing; supplier costs; supplier selection; supplier performance measure; electronic systems.

Use a separate answer booklet and clearly show each of the requirement numbers (and any parts to them) against your answers.
There are 6 requirements to this question.

Nevergrass Ltd manufactures ride-on lawn mowers and is located in Brisbane. More than 70 per cent of the cost of the company's ride-on lawn mowers consists of material and components, which are purchased from Australian suppliers. About three years ago, Nevergrass introduced a comprehensive supplier evaluation system to monitor the performance of its suppliers. Each supplier was given a three-year contract that guaranteed large orders as long as it performed according to Nevergrass's strict requirements. Each supplier's performance was measured by considering its adherence to delivery schedules (Nevergrass works on a just-in-time system), accuracy of orders delivered, number of components rejected on delivery, and its achievements in reducing its production costs (and, therefore, its material and component prices) over the contract period. Performance in all of these areas will determine whether Nevergrass renews the supplier's contract or offers the contract to another supplier. The suppliers are aware that there are many alternative component suppliers who would be eager to enter into a long- term contract with Nevergrass.

After holding discussions with the purchasing manager, as part of the review process, the financial controller has conducted a study to determine the full cost of dealing with suppliers. While the company uses a series of non-financial performance measures to measure most aspects of supplier performance, the financial controller believes that the calculation of the total cost of ownership will provide an additional perspective to viewing supplier performance. For the most recent year, the following supplier-related activities and costs have been identified:

Activity	Total Cost	Number of activities
Order components from Supplier	$1 800 000	6 000 orders
Receive order	9 000 000	10 000 deliveries
Return reject components to supplier	38 500	55 returns
Receive late deliveries	260 000	130 late deliveries
Production downtime due to late deliveries	2 400 000	800 hours
Production downtime due to defective material	3 600 000	3 000 hours
Process invoice and pay supplier	1 050 000	3 000 invoices
Dispute invoice amount	40 000	50 disputes
Quality audit of suppliers	500 000	10 audits

Nevergrass obtains its exhaust systems from two suppliers: Hot Exhausts and Chrome Manufacturers. Last year, Nevergrass purchased 3000 units from Hot Exhausts at $100 per unit, and 4000 units from Chrome Manufacturers at $90 per unit. Both suppliers provide an identical component.

The analysis revealed that last year the following activities related to the two suppliers:

Activity	Hot Exhausts	Chrome Manufacturers
Order components from Supplier	90 orders	130 orders
Receive order	90 deliveries	150 deliveries
Return reject components to supplier	15 returns	16 returns
Receive late deliveries	6 late deliveries	28 late deliveries
Production downtime due to late deliveries	45 hours	59 hours
Production downtime due to defective material	20 hours	29 hours
Process invoice and pay supplier	12 invoices	130 invoices
Dispute invoice amount	3 disputes	3 disputes
Quality audit of suppliers	1 audit	2 audits

Required:

1. What are the costs and benefits of the JIT system implemented by Nevergrass?

2. Calculate the supplier activity costs, the total cost of ownership per unit and the supplier performance index for the two suppliers. (6 marks)

3. Compare the performance of the two suppliers on the basis of cost, quality and efficiency.

4. Describe the changes that the purchasing manager and financial controller could implement to minimise supplier-related costs.

5. Consider the various criteria used by Nevergrass to determine whether or not supplier contracts should be renewed. Suggest two performance measures that Nevergrass might use to evaluate suppliers' performance.

6. Nevergrass is considering implementing electronic systems for transacting with suppliers. Outline some advantages that might accrue to both Nevergrass and its suppliers from such systems.

QUESTION 3

Absorption costing; activity-based costing; target costing: manufacturer; non-value-added activities; root cause cost drivers; ABM; BPR.
Use a separate answer booklet and clearly show each of the requirement numbers (and any parts to them) against your answers.
There are 7 requirements to this question.

Hans' Meat Pty Ltd manufactures smoked meat products in the Barossa Valley, using processes that have been handed down from one generation to the next. Recently, one of the company's major high-volume-selling products, mettwurst, has come under intense pressure from an Adelaide manufacturer that uses modern manufacturing processes.
Han's mettwurst sells for $7 per 500-gram stick, based on a cost-plus pricing system. (The company applies manufacturing overhead using a plantwide overhead rate based on the number of direct labour hours worked. Prices are based on absorption cost plus a 40 per cent markup.) The Adelaide competitor sells its mettwurst for $5.60 per 500-gram stick. The owner and manager, Hans, is not particularly worried about the problem, but his wife Frieda, the marketing manager, is concerned.

Heidi, their daughter, who attends university, developed an activity-based costing system and identified the bill of activities for the production of mettwurst on the following page.

Mettwurst: Bill of Activities Annual Volume: 5000 sticks Batch size: 250 sticks
Activity	Quantity of activity driver used	Cost per unit activity driver	Annual Cost
Inspect meat	20 inspections	$30 per inspection	$600
Dispose of substandard meat	500 kilograms	$1 per kilogram	500
Move to mincing room	60 barrow-loads	$8 per barrow	480
Load mincer*	40 loads	$27 per load	1 080
Operate mincer	3 000 kilograms	$0.50 per kilogram	1 500
Unload mincer*	40 loads	$21 per load	840
Move to mixing room	40 barrow-loads	$9 per barrow	360
Load mixer*	60 loads	$20 per load	1 200
Operate mixer	60 loads	$40 per load	2 400
Unload mixer*	60 loads	$16 per load	960
Move to packaging room	60 barrow-loads	$5 per barrow	300
Pack meat into skins	5 000 skins	$0.50 per skin	2 500
Move to smokehouse	100 trolley-loads	$4 per trolley	400
Move to truck	100 trolley-loads	$10 per trolley	1 000
Annual cost of all direct labour and manufacturing overhead activities			$14 120
Activity cost per unit			$2.824
Direct material cost per unit			2.160
Cost per unit			$4.984

* These activities have to be performed more than once per batch because of the limited capacity per machine.

Required:

1. Suggest some reasons why the Adelaide company may be able to sell its mettwurst at $5.60 over the longer term.

2. Calculate the cost per stick of mettwurst under the existing absorption costing system. Show workings.

3. Hans is convinced that Heidi's activity-based cost for the mettwurst is wrong. Identify the likely causes of the difference between the absorption cost and the activity-based cost per unit and explain to Hans why the absorption cost is likely to be wrong.

4. What target cost would Hans' Meat have to set for its mettwurst if it wished to match the Adelaide price and maintain its existing markup? Show workings.

5. Review the activities included in the bill of activities and identify three for elimination as non-value-added activities. For each non-value added activity, explain why you consider it to be non-value-added.

6. Suggest a possible root cause cost driver for each of the three non-value-added activities previously identified.

7. Consider business process re-engineering and activity-based management. Explain which approach does Hans' Meat need to adopt to eliminate its non-value-added activities?