Reference no: EM133553613

Management Accounting

Question 1 - Cost Behaviour

Sarah Supplies Ltd is a wholesaler of a large variety of plumbing supplies. The company's accountant, Maverick, has recently completed a cost study of the firm's Shipping Department in which he used the kilograms of supplies loaded or unloaded at the company's loading dock to quantify the department's activity. Sarah Supplies compiled the following data.

Required:

A. Draw a scatter diagram of the cost data for the Shipping Department.
B. Estimate the Shipping Department's cost behaviour using the high-low method. Use an equation to express the results of this estimation method.
C. Using the equations estimated in Part B predict the Shipping Department's costs for a month when loads totalling 5200 kilograms are moved.
D. Prepare least squares regression analysis to estimate the variable and fixed components for the Shipping Department costs.
E. Based on your spreadsheet write the least squares regression equation for the Department's costs.
F. Using the equation from Part E, predict the firm's Shipping Department's costs for a month when loads totalling 5200 kilograms are moved.
G. Why do these cost predictions estimated using the high-low and regression methods differ? Which method do you recommend? Explain your answer.

Question 2 - Performance Management Systems

Waverly Water Heaters (WWH) opened for business 25 years ago with fewer than 10 employees and just $500 000 of sales in the first year. Today, WWH has more than 1000 employees and annual revenues of $400 million. The company's growth has caused management to begin considering how best to compensate employees. Historically, WWH has used a strictly cash-based compensation system. Company CEO Wanda Harrell and CFO Claire Audrey now believe that such a system is no longer feasible, primarily because they worry that it does not adequately motivate employees to think of the company's long-term interests. Wanda and Claire recently met with a compensation consultant to discuss new ways of compensating employees that may better link compensation and performance.
Required:

A. Excluding cash compensation, what are the possible types of compensation that WWH may use?
B. What are the advantages and disadvantages of each type of compensation identified by you in question requirement A?
C. Make a recommendation as to the types of compensation that would be most appropriate for WWH. Justify your recommendation. Are there any weaknesses inherent in your choice recommended?

Question 3 - Accounting for Sustainability

Read the following excerpt from an article regarding low-cost (sweatshop) labour production occurring in Bangladesh:
Impoverished Bangladeshi workers claim they have been physically abused and threatened while working in sweatshops used by some of Australia's best-known retailers.

In one case, they were beaten and their representatives were told they would be killed if they protested against working conditions.
The ABC's Four Corners program has travelled to the country's capital Dhaka, where a number of workers revealed big Australian brands including Rivers, Coles, Target, and Kmart ordered clothes from factories in Bangladesh that did not meet international standards. The revelations come just months after international outcry over the tragic building collapse in Rana Plaza, which killed more than 1000 people and highlighted the plight of the nation's garment workers.
Required:

Explain how a sustainability value chain might cause a large manufacturer to revisit the way in which they use overseas low-cost clothing manufacturing. In discussing the value chain, consider opportunities and concerns raised by a sustainability value chain analysis.

Question 4 - Accounting for Sustainability

The world has witnessed the damaging effects of a novel coronavirus (also referred to as COVID-19) since early 2020, leading to the shutting down of many aspects of economic and social life worldwide (Bapuji et al., 2020; Brammer et al., 2020). Although the world has experienced several pandemics from the late twentieth century through to the early twenty-first century, caused by infectious diseases such as Zika fever, Ebola, severe acute respiratory syndrome (SARS), avian flu, swine flu, and Middle East respiratory syndrome (MERS), the COVID-19 pandemic is more lethal with an extensive global spread aided by today's service- oriented economy, in comparison to previous pandemics (Baker et al., 2020a; Baker et al., 2020b; World Bank, 2020; World Economic Forum [WEF], 2020). For example, the World Bank (2020) predicts that the global economy will shrink by 5.2% in 2020 due to the COVID- 19 pandemic and that it will also experience the deepest recession since the Second World War. In this continuing economic turmoil, COVID-19 has hugely affected the equity market and most stock indices worldwide have fallen (World Economic Forum [WEF], 2020). For example, Baker et al. (2020a) show that while the Spanish Flu of 1918-1920 triggered daily stock market movements of not more than 2.5%, COVID-19 has triggered these movements 24-fold. Conversely, several financial experts argue that firms with a strong focus on sustainability practices and fair management of stakeholders appear to have outperformed their counterparts that lack this focus (e.g., BlackRock, 2020; Schroders, 2020).

Prior studies argue that businesses with a higher level of sustainability performance can alleviate certain aspects of regulatory, legislative, or fiscal actions (Berman et al., 1999; Cheng et al., 2013; Hillman and Keim, 2001) and attract socially conscious consumers (Hillman and Keim, 2001; Rashid et al., 2020) and socially responsible investors (Cheng et al., 2013; Kapstein, 2001). Moreover, firms that are more engaged with their stakeholders through maintaining superior sustainability performance are more visible. The COVID-19 pandemic provides the opportunity to evaluate how firms manage their stakeholders during this crisis as well as how stakeholders behave during this time. For example, Edelman (2020), in a recent survey of 12,000 people in 12 countries, reports that approximately 65% of respondents indicated that their future purchasing decisions would be influenced by the firm's response during the COVID-19 pandemic. Edelman (2020) also finds that 82% of Chinese respondents stated that they moved to a new company as it proved to be innovative and compassionate in its response during the pandemic. Meanwhile, one-third of respondents managed to convince other people to leave a brand that acted inappropriately during the pandemic. Similarly, Just Capital (2020) has developed a tracking system to monitor how the USA's largest employers are treating stakeholders amid the COVID-19 crisis. These examples demonstrate the importance from the firm's perspective of managing stakeholders during this crisis, with investors closely monitoring these developments (Business for Social Responsibility, 2020).

Required:
Explain how management accountants can play a significant role in protecting stakeholders' interests in the COVID-19 pandemic.

Question 5 - Process Costing Systems

Recently, Gold Coast Pty Ltd expanded its market by becoming an original equipment supplier to Robert Pty Ltd. Gold Coast Pty produces factory upgraded speakers specifically for Robert Pty Ltd. The speaker cabinets and associated components are outsourced with assembly remaining in-house. Gold Coast assembles the product by placing the speakers and other components in cabinets that define an audio package upgrade. Speaker cabinets and associated components are added at the beginning of the assembly process. The following are cost and production data for the assembly process for August.

Required:

A. Assume that Gold Coast Pty Ltd uses the FIFO method to cost out the audio package.

i. Prepare a physical flow analysis for the assembly department for the month of September.
ii. Calculate equivalent units of production for the assembly department for the month of September.
iii. Calculate unit cost for the assembly department for the month of September.

iv. Calculate the cost of units transferred out and the cost of ending WIP inventory.

v. Prepare a cost reconciliation for the assembly department for the month of September.

B. If Gold Coast Pty uses the weighted average method of process costing, how would your answers to requirements A(i) - A(v) change?

Question 6 - Activity-Based Costing and Management

Sigma Inc. manufactures three products for the pharmaceutical industry:

• Product P : Annual sales, 9000 units.
• Product Q : Annual sales, 16 000 units.
• Product R : Annual sales, 5000 units.

The company uses a traditional, volume-based product costing system with manufacturing overhead applied on the basis of direct labour dollars. The product costs have been calculated as follows:

*Manufacturing overhead budget:

Sigma Inc's pricing method has been to set a budgeted setting price equal to 140 per cent of full product cost. However, only the Product Q have been selling at their budgeted price. The budgeted and actual current prices for all three products are the following:

Sigma Inc has been forced to lower the price of product P in order to get orders. In contrast, Sigma Inc has raised the price of product R several times, but there has been no apparent loss of sales. Sigma Inc has been under increasing pressure to reduce the price even further on gismos. In contrast, Sigma Inc's competitors do not seem to be interested in the market for Product R. Sigma Inc apparently has this market to itself.

Required:

A. Is product P the company's least profitable product? Explain your answer.

B. Is product R a profitable product for Sigma Ltd? Explain your answer.

C. Comment on the reactions of Sigma Inc's competitors to the firm's pricing strategy. What dangers does Sigma Inc face?

D. Sigma Inc's financial controller, Obrien Sally, recently attended a conference at which activity-based costing systems were discussed. She became convinced that such a system would help Sigma Inc's management to understand its product costs better. She obtained top management's approval to design an activity-based costing system, and an ABC project team was formed. In Stage 1 of the ABC project, each of the overhead items listed in the overhead budget was placed into its own activity cost pool. Then an activity driver was identified for each activity cost pool. Finally, the ABC project team compiled data showing the percentage of each activity driver that was consumed by each of Sigma Inc's product lines. These data are summarised as follows:

Show how the financial controller determined the percentages given above for raw material costs. (Round to the nearest whole per cent.)

E. Develop product costs for the three products based on a simple activity-based product costing system. (Round to the nearest cent.)

F. Calculate a budgeted price for each product, using Sigma Inc's pricing formula. Compare the new budgeted prices with the current actual selling prices and previously reported product costs.

G. Refer to the new budgeted prices for Sigma Inc's three products, based on the new activity- based costing system. Write a memo to the company managing director commenting on the situation Sigma Inc has been facing regarding the market for its products and the actions of its competitors. Discuss the strategic options available to management. What do you recommend, and why?

H. Refer to the product costs developed in requirement E. Prepare a table showing how Sigma Inc's traditional, volume-based product costing system distorts the product costs of product P, Q and R.