Management Accounting Case Study Solutions

Get solutions for management accounting case studies on Desklib. Learn about activity based cost report, customer profitability report, distribution channel cost report and more. Analyze the profits and costs associated with each department and make recommendations for future decisions.

MANAGEMENT ACCOUNTING

Scenario 1.
Solution 1.
ACTIVITY BASED COST REPORT
PARTICULARS
ARCHITECTURE FIRMS WINDOW TREATMENTS TOTAL TOTAL OF
BOTH THE
OPERATIONS
ADAMS BETZ TOTAL CHATHAM DEDHAM ELM
Direct Costs 147000 117200 264200 218400 115720 57040 391160 655360
Overhead Costs (WN1) 85100 136160 340400
Discount Cost (WN2) 23400 23400 3660 3660 27060
Total Cost 170400 117200 372700 218400 115720 60700 530980 1022820
CUSTOMER & TOTAL PROFITABILITY REPORT
PARTICULARS ARCHITECTURE FIRMS WINDOW TREATMENTS TOTAL TOTAL
ADAMS BETZ TOTAL CHATHAM DEDHAM ELM
Gross Revenues 234000 188800 422800 357380 147840 73200 578420 1001220
Direct Costs 147000 117200 264200 218400 115720 57040 391160 655360
LESS :
Overhead Costs 85100 136160 340400

Discount 23400 23400 3660 3660 27060
PROFIT 63600 71600 50100 138980 32120 12500 47440 -21600
DISTRIBUTION CHANNEL COST REPORT
PARTICULARS ARCHITECTURE FIRMS WINDOW TREATMENTS TOTAL
Direct Costs 264200 391160 655360
Overhead Costs 85100 136160 221260
Discounts Given 23400 3660 27060
Total Costs 372700 530980 903680
WORKING NOTES :
WN1 :
Overhead basis of Allocation
($)
OVERHEADS 340400
ARCH 25%

WIND 40%
GENERAL 35%
WN2 :
In case of activity based costing, the overheads have been allocated as per the percentage stated above. Also, discount is
a cost for the seller. Therefore, it is added to the cost of the two departments.
WN3 :
In case of distribution channel cost report, since there are two departments, the cost shown is associated with
the
at particular department. Therefore, overhead expenditure spent generally is not shown in that
report.

Solution 2:
Louise, popularly known for interior designing consulting and window treatment fabrication business is operated by Louise. Her business of
operation is through two different distribution channels where in first case, there are architecture firms and in second case, a commercial window
treatment business is there where construction of window treatments take place. There are two clients in case of first case and three clients in
case of second one (Atkinson, 2012).
The required case study required us to prepare an activity based cost report, distribution channel cost report and customer profitability report
where the overall total profitability has been assessed too (Berry, 2009). The activity cost report helps in understanding the costs associated with
each business and the total cost of both the departments.
The customer profitability report helps in understanding the contribution of each customer to the profits of the company. Such report also shows
us the total profits of the company. The distribution channel cost report helps in understanding the costs of each channel that the firm is bearing.
On the basis of various calculations, a lot of analysis are being made and recommendations are prepared on the basis of that.
ANALYSIS:
The company prefers using activity based costing where the fixed overhead cost is allocated on the basis of percentage. This percentage means
that part of the cost which is associated with the department. The company doesn't believe in traditional costing method which gives a better
picture of profit and cost (Boyd, 2013).
Coming to customer costing analysis, we see that there are more costs in case of windows department, that is, $530,980. However, when we see
the customer profitability report, we see more profits are generated from the architecture department. However, analyzing the gross revenues, we
see that the windows department generates more revenues than the first department. The reason of having higher profit in the first department is

because of the overheads costs which is high in case of windows department. Also, we see that for the sake of attracting Adams, the company
gave a discount of 10% which was equal to $23,400 which is unnecessary (Taillard, 2013). This is because such discount was provided to cut off
the competitor's sale. However, because of that, the company overall suffered a loss of $23,400 or an unnecessary cost of $23,400 (Girard,
2014).
However, the company's action of providing discount of 5% for advance cash payment is justified as cash payments leads to circulation of cash
in the operating cycle and the company would be at a good position if there is frequent cash circulation in the operating cycle.
From customer profitability report, we can also visualize the total profitability which is negative. Where the departments individually are making
profits, the overall company is suffering loss due to high overhead costing and due to firm practice of giving discount for attracting customers.
Had the company not provided 10% discount to Adams, the overall profit of the company would have been profitable or positive.
Coming to distribution channel cost report, we see that there are huge costs associated with window treatments department with high overhead
costs (Horngren, 2012).
RECOMMENDATION
It is recommended that the company's policy of applying activity based costing is totally correct as activity costing method :
 Helps in allocating the cost only to that extent which is associated with the particular activity. Thus, helps in assessing the true cost of an
activity.
 Helps in making better decisions as the management gets a true picture of all the costs and revenue associated with activities and thus, the
firm can decide whether to continue an operation or discontinue it or make such changes that would help in generating the maximum
possible profits.

 Helps in understanding the absorption capacity of each department individually and the contribution of each department in the company's
overall profits and costs.
The company's approach for costing is totally recommended to proceed in future with the same approach.
However, the company's smartness of providing a discount of 10% is not appreciated as that was solely for luring a customer from its
competitor. Such action could encourage other customers to adopt the same strategy for enjoying discounts from the customers. Also, because of
this the overall profitability of the company is $(21,600) which could have been a positive figure if such a strategy wasn't adopted. Also, the firm
could go for strategies like production at the own house, market substitutes etc.
Also, considering the fact that there are more revenue in first case, the company could consider shutting down one business and investing such
cost savings in the business giving better profits and absorbing minimum overhead costs or at least lesser than the other department.
CONCLUSION
The dynamic environment in the current world demands for most précis methods whether in case of accounting or costing or auditing or ethical
norms. It is important for the books or reports to deliver the transparency to all the intended users so that they can make the best possible
decisions such as investment decisions, raising loans decisions, comparison of costs with the industry rates or with their competitors or with the
market (Parrino, 2013).
The high dynamic environment is facing everyday changes where losing customer in a day is not a big deal and where customers are more
precious than profits because for a long term sustainability, long term profits are desired and for such goals, a fruitful and loyal relation is
required to be formed and maintained with the customers. An analysis is important for fulfillment of such long term objectives of the companies.
The analysis part through preparations of various reports could be complex but the current scenario demands a true and fair view of operations in
terms of both performance and money.

The above case is an analysis of various kinds of approaches to get the most transparent picture of all the costs and profits whether from their
individual customers or whether from the overall company or whether from a particular business or department. Such number of analysis only
helps an owner or the top management in making the decisions that could result in the best possible conclusions at the end.

Scenario 2.
Solution 1:
Particulars Super Chip Okay Chip
Sale Price per unit 80 26
Less :
Direct Materials per unit 5 2
Direct Manufacturing Labour p.u 60 20
Contribution per unit 15 4
Hours Required 3 1
Contribution/hour 5 4
So, our preference for manufacture would be Super chip as it produces $5 per hour. Considering the maximum units that can be produced in case
of Super chip, that is, 15000 and the maximum hours is the semiconductor division is 45000 hours, the number of Super chip and Oky chip that
should be produced.
Particulars Hours p.u. Maximum Units Total Hours
Maximum Available 45000
Super Chip 3 15000 45000
1 - -
Available Capacity -

Therefore, the company should produce 15000 units of Super chip.
Solution 2.
Case 1: when there is no transfer, profit calculation:
Particulars Super Chip Okay Chip Process Control Unit Total
Sale Price p.u. 80 26 132
Less :
Direct Materials p.u 5 2 70
Direct Manufacturing Labour p.u 60 20 45
Contribution p.u 15 4 17
Units Proposed to be Sold 15000 5000
Total Contribution 225000 85000 310000
Case 2: When there is a transfer of 5000 Super chips to the process control unit:
Particulars Super Chip Okay Chip Process Control Unit Total
Sale Price p.u. 80 26 145
Less :
Direct Materials p.u 5 2 -
Direct Manufacturing Labour p.u 60 20 45
Transfer Price 80

(5000 Super Chips are t/f to
Process Unit Cost @80/unit)
Contribution p.u 15 4 20
Units Proposed to be Sold 15000 5000
Total Contribution 225000 - 100000 325000
CONCLUSION: Comparing both the cases, we can see an increment in the profits by $15000 and therefore, it is advisable to go for transferring
option (Seal, 2012).
Working note:
The transfer price of the 5000 super chips would be $80/unit which would be deemed as sales for the first division and the cost of second
division.

Solution 3:
Particulars Super Chip Process Control
Unit Total
Profit when there is a transfer 2,25,000 1,00,000 3,25,000
Profit when there is no transfer 2,25,000 85,000 3,10,000
Difference 15,000
As we can see, whether there is a transfer or not, in case of Super Chip, there is no effect on the profits
earned
Through the sale or transfer. However, in case of Process Control Unit, there is an increment of $15,000
In profits. Thus, for the objective of goal congruence, we would be preferring transfer of 5,000 super chips
to the
Other department and not purchasing materials from the market at $70 p.u. Thus, the transfer pricing
would be
$80 p.u.

Solution 4:
Case 1: when there is no transfer, profit calculation:
Particulars Super Chip Okay Chip Process Control Unit Total
Sale Price p.u. 80 26 132
Less :
Direct Materials p.u 5 2 70
Direct Manufacturing Labour p.u 60 20 45
Contribution p.u 15 4 17
Hours Required 3 1 3
Contribution/hour 5 4 5.67
Units Proposed to be Sold 15000 15000 5000
Total Contribution 225000 60000 85000 370000
Case 2: When there is a transfer of 5000 Super chips to the process control unit:
Particulars Super Chip Okay Chip Process Control Unit Total
Sale Price p.u. 80 26 145
Less :
Direct Materials p.u 5 2 -
Direct Manufacturing Labour p.u 60 20 45
Transfer Price 80

(5000 Super Chips are t/f to
Process Unit Cost @80/unit)
Contribution p.u 15 4 20
Units Proposed to be Sold 15000 15000 5000
Total Contribution 225000 60000 100000 385000
Conclusion :
When there are 60000 hours, after production of 45,000 super chips, 15000 hours could be used to produce 15,000 okay
chips where
contribution per hours is $4/hour. We analyzed both the cases with transfer and without transfer. We concluded that there
Would be no effect in the profits when compared to answer in number 3. Thus, the profit increment would be same as
before,
that is, $15,000.

Bibliography
Atkinson, A. A. (2012). Management accounting. Upper Saddle River, N.J.: Paerson.
Berry, L. E. (2009). Management accounting demystified. New York: McGraw-Hill.
Boyd, W. K. (2013). Cost Accounting For Dummies. Hoboken: Wiley.
Girard, S. L. (2014). Business finance basics. Pompton Plains, NJ: Career Press.
Horngren, C. (2012). Cost accounting. Upper Saddle River, N.J.: Pearson/Prentice Hall.
Parrino, R. (2013). Fundamentals of Corporate Finance, 2nd Edition. Milton: John Wiley & Sons.
Seal, W. (2012). Management accounting. Maidenhead: McGraw-Hill Higher Education.
Taillard, M. (2013). Corporate finance for dummies. Hoboken, N.J.: Wiley.