ACC202 - Group Assignment: Customer Profitability and Cost Analysis

This assignment solution addresses a Management Accounting project (ACC202) focusing on customer profitability analysis and cost allocation methods. The project involves two scenarios: the first analyzes the profitability of an interior design and window treatment business, using activity-based costing to assess costs associated with different distribution channels and customer segments. It includes detailed reports on direct and overhead costs, customer profitability, and distribution channel costs, along with recommendations on cost allocation strategies and the impact of discounts. The second scenario explores the optimal production strategy for a company manufacturing two types of chips (Super Chip and Okay Chip) under resource constraints, including the evaluation of transfer pricing between departments and its effect on overall profitability. The solution provides calculations, comparisons of different scenarios, and recommendations to maximize profit.

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 TOTA
L
Direct Costs 264200 391160 655360
Overhead Costs 85100 136160 221260
Discounts Given 23400 3660 27060
Total Costs 372700 530980 903680
WN1 :
Overhead basis of Allocation
($)
OVERHEADS 340400
ARCH 25%
WIND 40%
GENERAL 35%

WN 2: The overheads are allocated on the basis of percentage that is stated above as per activity based costing. Discount is considered to be the
cost for the sellers. Therefore, such discount has been added to both the departments.
WN 3: As per the distribution channel cost report, there are two departments and the cost is allocated to the two departments accordingly.
However, the total overhead expense does not appear in the reports.

Solution 2:
Louise is famous for the consultation of interior designing and also for window treatment fabrication. There are two different distribution
channels in his business. The first one is the architecture firms and the second one is the commercial window treatments business. Louise has
one client for architecture firms and three clients for commercial window treatments.
The required case study has been provided to us in order to prepare the activity based report, cost report of the different channels and customer
profitability also which will help us in assessing the overall profitability that they are able to earn. The cost incurred in the overall business as
well as in different departments can be understood with the help of activity cost report.
The customer profitability report is prepared as it helps to understand each customer’s contribution in the profits earned by the company. This
report also provides us the information of the total profits of the company. However, the distribution channel report helps us to obtain
information about the costs that is incurred in different channel.
On the basis of the calculations made in this assignment, a proper analysis has been carried out and recommendations have been given.
ANALYSIS:
The company has adopted activity based costing as the cost allocation method in which the cost is allocated on the basis of cost that should be
allocated to that department. The company does not use traditional costing system but it gives a clearer picture.
On analysis the customer analysis, it is observed that the cost incurred in the windows department is amounting to $ 530980. But when we look
upon the customer profitability report, we observe that the profits that are generated from the architecture department are higher. The analysis
shows that more revenues are generated from the windows department when compared with the other department. The company has adopted a
strategy in order to attract customers; it gave the customers a discount of 10% which amounted to $23,400. This strategy was adopted by the

company to slower down the sales of the competitors. There was also a negative impact because of this which is that the company has to suffer
loss or incur extra costs of $23,400.
The company also decided to provide 5% discount to the customers who would make advance payments in cash. This strategy was justified
because the cash payments helped the company to shorten the operating cycle. As we know, a shorter operating cycle is considered to be
favourable as it beings the company to a good position.
The total profitability of the company is in negative which can be observed in the customer profitability report of the company. Although we can
see that the departments of the company are generating profits individually but when it comes to the overall profitability the company is
suffering because of the huge overhead costs and the heavy discounts that it is providing to the customers. If the company would not have
provided 10% discount to Adams then the profitability of the company would have been positive. It is observed that there are huge overhead
costs that are involved in the distribution channel cost report of the company (Atkinson, 2012).
RECOMMENDATION
Activity Based Costing is preferred by the company and the reasons for it are as follows:
 Activity based costing helps to allocate costs to the product on the basis of the actual resources that is consumed. Therefore, it helps in
allocating the costs correctly.
 It improves the decision making process as the information obtained because of this costing method is true. It helps the firm in deciding
whether it should continue producing a particular product or not keeping in mind the profitability.
 The absorption capacity of the individual departments and the department’s contribution helps to know about the cash flows and profits.
Therefore, the company is recommended to use activity based costing in future also.

The company has also provided discount to the customers in order to complete with the competitors which is not appreciable as it has affected
the profits. The company incurred losses of $21600 because of this offer but this figure could have been the profit figure if the company would
not have adopted such strategy. There were alternative strategies that were available, they were production of market substitutes and own house
etc.
The company has a better option which was to shut down the current production of one business, save costs and then invest such money at a
place where the cost of production is low and the company is able to generate higher profit.
CONCLUSION
As we know, market is dynamic in nature and therefore, there is a requirement of certain precise methods in all the fields whether accounting,
auditing or costing. The reports that are prepared by the company are used by various users in order to take numerous decisions such as
comparison of costs between different competitors and that of the industry rates, investment decisions or raising loan decisions. Therefore, the
reports prepared should fulfil the qualitative characteristics of transparency.
In this dynamic environment, the companies loose customers very easily which is highly unfavourable. In the current situation, the companies
give more importance to customers than the profits. Customers help the companies to survive in the long run and therefore, customer satisfaction
is the main objective of the company. If the primary aim of any company is to earn profits only then it might not survive in the long run. The
objectives of the companies should be analysed properly and steps should be taken accordingly. However, preparation and analysis of report is a
difficult job but this helps in providing true and fair view about the company which is demanded in the current scenario (Seal, 2012).
This assignment comprises of information about the different approaches that are adopted by the company, its costs and profits from individual
customers, department or the entire business. This information is considered to be very important because the management uses this information
to take important decisions regarding the business activities.

Scenario 2:
Solution 1:
Particulars Super Chip Okay Chip
Sale Price p.u. 80 26
Less :
Direct Materials p.u 5 2
Direct Manufacturing Labour p.u 60 20
Contribution p.u 15 4
Hours Required 3 1
Contribution/hour 5 4
The company should prefer manufacturing Super Chip as it produces $5 per hour. The maximum number of Super Chips and Oky chips that
could be produced taking into consideration the maximum units are shown below.
Particulars Hours p.u. Maximum Units Total Hours
Maximum Available 45000
Super Chip 3 15000 45000
1 - -
Available Capacity -

Therefore, the company should manufacture 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
(5000 Super Chips are t/f to
Process Unit Cost @80/unit)
80

Contribution p.u 15 4 20
Units Proposed to be Sold 15000 5000
Total Contribution 225000 - 100000 325000
Conclusion: On comparing both the cases, it is found that the profits increased by $15000 and therefore, the company can go for the transferring
option.
The transfer price for 5000 Super chips would be $80 per unit which would be considered as sales for the first division and cost for the 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
There is no impact on the profits whether the company has adopted transfer or sale in case of the super chips. But in the case of Process control
unit we can see that the profits has increased by $15000. It is advisable that the company should consider transferring 5000 super chips to the
other department and purchase the material at $ 70 per unit. However, the transfer price would be $ 80 per unit.