Reference no: EM132702746

XYZ Company produces products in a mass production environment with 3 departments: Cutting, Assembly and Packaging. The product moves through each of the 3 departments in sequential order. That is, the WIP of the 1 department becomes one of the inputs of the 2 department (i.e department 2's transferred-in cost); the WIP of the 2 department becomes one of the inputs of the 3 department. The product passes through all 3 departments before it is complete.

The accountant for XYZ wants to put in place a control system that evaluates the performance of each department by producing department -based Profit and Loss statements. The manager of each department will be held responsible for their department's profit or loss. In order to minimise the cost of setting up this system the accountant has decided to produce the Profit and Loss statements using the absorption cost figures that have been generated from the financial accounting system.

Required:

Evaluate the accountant's proposed control system. In your answer address the following points:

Question a) Critically evaluate the strengths and weaknesses of using Profit and Loss statements based on absorption costing to evaluate departmental performance.

Question b) State whether you agree with the accountant's proposed control system.

Question c) Regardless of whether you agree or disagree with the accountant's proposed system, explain how you might improve the system and critically evaluate the strengths and weaknesses of your recommended improvement.