Reference no: EM132218564

Management Accounting Assessment -

Learning Outcomes -

Identify and analyse ethical and organisational issues confronting contemporary management accountants.

Categorise and identify the nature of various types of costs, cost objects and cost behaviours and use cost estimation techniques to develop cost functions.

Apply cost accounting techniques to calculate the cost of a range of cost objects, as well as analyse costs.

Apply cost information to planning, control and decision-making.

Critically evaluate the relevance of both quantitative and qualitative costing information to management decision making.

Case Study - 'J&B Sports' and its Customer 'Sports-Strength'

Activity 1: Cost Behaviour and Cost Estimation at Sports-Strength

Required:

1) Identify each of the following costs incurred by Sports-Strength in terms of its cost behaviour - variable, fixed, mixed or step:

a. Monthly sales staff payroll of $5,000 plus 6% sales commission on jerseys

b. $200 monthly rental for credit card processing equipment

c. Cost of goods sold for $14.80 per jersey

d. The cost ($1) of price tags attached to each jersey

e. Inventory insurance that costs $2 per $1,000 of sales

f. Website hosting cost of $100 per month

2) Refer to the Sports-Strength's Contribution Format Income Statement for the year ended February 1, 2019 (Exhibit 2) and answer the following:

a. What is Sports-Strength's operating profit equation?

b. How many jerseys has Sports-Strength sold during the year? If it has sold 10% less than it had expected, how many jerseys had it planned to sell? Assuming a 30% tax rate, how much more income after tax would the extra 10% of sales have generated?

c. If Sports-Strength sells 55,000 jerseys what total expense will be reported on the income statement?

d. The Messenger, a local newspaper, has approached Martin Cole with a $20,000 annual ad campaign. If Martin accepts the ad campaign, what will change in Sports-Strength's operating profit equation?

e. Assume Martin Cole accepts The Messenger's ad campaign and as a result Sports- Strength sells 60,000 jerseys next year. Prepare a contribution format income statement for the year.

f. Discuss (max 500 words) the results shown in part e above. Should the ad campaign be accepted? Comment on the distribution of costs between fixed and variable for Sports Strength. How can the information on cost behavior and the contribution margin statement be used by management to make decisions and to plan? Give two specific examples of decisions and plans that could be made with this information.

Activity 2: CVP Analysis for Sports-Strength

Sports-Strength has just received notice from J&B Sports that the price of a soccer jersey will be increasing to $15.30 next year. In response to this increase, Sports-Strength is planning its sales and marketing campaign for the coming year. Managers have developed two possible plans and have asked you to evaluate them.

The first plan calls for passing on the entire $0.50 cost increase to customers through an increase in the sales price. Managers believe that $10,000 in additional advertising targeted directly to current customers will allow the sales force to reach the current year's sales volume of 51,975 jerseys.

The second plan relies on a new advertising campaign that focuses on the sales price remaining the same as last year. The campaign would include a new database that offers more potential customers than Sports-Strength has had access to in the past. The cost of the campaign is expected to be $5,000. Managers believe that the campaign will be more successful in generating new sales than the current incentive-based sales and marketing plan. As a result, they want to reduce the sales commission from 6% to 4% of sales and increase sales salaries by $22,000. The campaign is expected to generate an additional 10% in sales volume.

Required: Using the information in Exhibit 2 as a starting point, answer the following questions:

a. What is Sports-Strength's breakeven point in units and dollars before any of the above changes take place (ie. given the sale price and cost structure indicated in Exhibit 2)?

b. What was Sports-Strength's margin of safety in units and dollars in the year ending 1 February, 2019?

c. How much would operating income decrease if Sports-Strength did nothing to recover the increase in cost of goods sold, all other things being equal?

d. Determine the expected operating income under each proposed sales and marketing plan.

e. Why does the first plan result in the reduction in operating income that is greater than the $10,000 advertising?

f. Which plan do you recommend to management? Write a memo in the proper format which justifies your recommendation by providing relevant and appropriate supporting information. Include and explain any qualitative factors which may affect your recommendation.

Activity 3: Job Order Costing and Ethics in J&B Sports

J&B Sports custom makes soccer tops (jerseys), shorts, socks and jackets for individual clubs and players within the clubs. Players order their name and selected number on the back of each jersey. Clubs also have specific requirements regarding the sponsors' logos which need to be added to the clothing. The kits are manufactured in batches and product costs are accumulated for each batch or job. When the job is completed, the total costs accumulated for the job are divided by the number of units produced to determine the average cost per unit.

J&B Sports has determined the following unit costs for three of its four products:

	Shorts	Jerseys	Jackets
Direct materials	$4.47	$6.85	$44.72
Direct labour	2.40	1.92	14.40
Manufacturing overhead	3.00	2.40	18.00
Total unit cost	$9.87	$11.17	$77.12
Sales price per unit	$12.00	$14.80	$125.00

On May 31, J&B Sports Work in Process Inventory consisted of the following items:

Job	Units	Accumulated Cost
PA - 1247 Shorts	100	$717
JE - 1397 Jerseys	200	1,802
JA - 426 Jackets	50	3,046
		$5,565

During June, a total of $191,591 in direct materials and $74,208 in direct labour costs were incurred. Units finished and sold during June were as follows:

Product	Units Finished	Units Sold
Shorts	13,500	14,000
Jerseys	3,200	3,100
Jackets	2,500	2,500

Required

a. Given that J&B Sports uses direct labour dollars as its application base, what is the company's predetermined overhead rate?

b. Taking into consideration only these three products:

i.  Calculate the total manufacturing cost for June. ii. Calculate the Cost of Goods Manufactured for June.

iii. Calculate the Ending Work in Process Inventory for June.

iv. Calculate Gross Profit for June.

c. For each of the three products, state whether there are more, fewer, or the same number of finished units in Finished Goods Inventory on June 30 than there were on June 1.

d. J&B Sports board of directors has adopted a long-term strategy of maximising value of the shareholders' investment. To achieve this goal, the board established the following five-year financial objectives:

• Increase sales by 10% per year
• Increase income before taxes by 15% per year
• Increase dividends by 12% per year.

The managing director added a fourth financial objective last year: maintaining cost of goods sold at a maximum of 70% of sales. The company failed to achieve this goal in the year ending 1 February 2019, and it appears that it will again not be achieved in the current year. Because employee bonuses are tied to performance on all four objectives, the new internal accountant is concerned about company morale. She decides that if she overestimates the amount of ending work in process inventory and reclassifies the fabric inspection costs as administrative rather than manufacturing overhead costs, cost of goods sold for the year will fall below the 70% maximum level. She makes the adjustments and presents the managing director a set of financial statements that meet most of the financial objectives.

i. Explain why the adjustments the accountant made are unethical, referring to the Australian Accounting code of ethics.

ii. What additional costs, both monetary and nonmonetary might J&B Sports incur because of the accountant's actions?

Activity 4: Activity Based Costing at J&B Sports

The new internal accountant at J&B Sports is concerned about the current method of allocating overhead to production, using a volume-based allocation base (direct labour cost) and one plant-wide overhead rate. She decided to undertake an activity analysis across the manufacturing processes of the company and to identify the relevant cost drivers of these. She determined that J&B Sports had the following four activity pools and associated activity drivers:

Activity Pool	Activity Driver
Product design	Number of product lines
Warehousing/Packaging	Number of batches
Cutting	Number of cuts
Sewing	Direct labour hours

Once the activity pools were established, manufacturing overhead costs are assigned to these:

	Product Design	Warehousing/ Packaging	Cutting	Sewing
Indirect labour	$40,000	$40,000	$7,500	$15,000
Depreciation		7,396		34,696
Indirect materials	37,512	110,869	135,861	101,064
Rent
Utilities				41,330
Insurance
Other	6,377	12,297	3,747	14,730
Total	$83,889	$170,562	$147,108	$206,820

Data was also collected on the activity drivers for each activity pool:

Activity Pool	Total Activity
Product design	3 product lines (jerseys, shorts, jackets)
Warehousing/Packaging	9,170 batches
Cutting	56,580 cuts
Sewing	86,175 direct labour hours

Chris Desmond, J&B Sports' operations manager, recently received a sales brochure for a new electric cutting tool. Based on the tool's specifications, Chris believes that J&B Sports could increase the batch size on jersey production to 50 jerseys, up from the current 35 jerseys.

While the cutting tool would be used on shorts and jackets as well, other production factors prevent increasing the batch sizes for these products.

The new tool would increase annual operating costs by $14,082. Before deciding whether to purchase the cutting tool, Chris wants to know how the new tool will affect the cost of producing the company's three main products.

Required

a. Calculate the activity rates for each of the four activity pools before the new tool was purchased.

b. Classify each activity using the ABC cost hierarchy categories.

c. Calculate and present a schedule of the total annual cost included in the cutting activity cost pool assuming the cutting tool is purchased.

d. Calculate the cost per cut assuming the cutting tool is purchased.

e. Identify any other activity rates that will be affected by the purchase of the new cutting tool and explain how they will be affected.

f. Explain to Chris why unit costs for all three products will change after the purchase of the new cutting tool.

g. Do you recommend that Chris purchase the new cutting tool? Write a memo in the proper format which justifies your recommendation by providing relevant and appropriate supporting information. Include and explain any qualitative factors which may affect your recommendation.

Attachment:- Assignment File.rar