BUACC5933 - Cost and Management Accounting Assignment Analysis

This assignment solution for BUACC5933, a cost and management accounting course, covers various aspects of cost accounting and corporate governance. Part 1 focuses on overhead allocation methods, including factory-wide and activity-based costing, along with determining appropriate cost drivers. Part 2 delves into product line profitability, evaluating the impact of discontinuing a product line, and calculating equivalent units using the FIFO method for process costing. Finally, Part 3 examines the significance of accounting information and financial reporting in enhancing corporate governance, emphasizing the role of financial reporting in providing transparency, mitigating information asymmetry, and facilitating effective decision-making by stakeholders. The solution highlights the importance of credible, timely, and relevant financial information for effective corporate governance and contract mechanisms.

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BUACC5933 – Cost and Management
Accounting
Semester 1 2018

Management accounting
PART 1
QUESTION1
(a)
Statement presenting allocation of total overhead costs(factory-wide approach)
VegieGrow FlowerFood
Overhead costs
[$960000 in 18:42]
$288000 $672000
Calculation of overhead rate
VegieGrow FlowerFood Total(Homegardens
Ltd.)
Overhead(A) $288000 $672000 $960000
Direct labour
Hours(B)
180000 420000 600000
Overhead rate(A/B) $1.6/direct labour
hour
$1.6/direct labour
hour
$1.6/direct labour
hour
(b)
Calculation of overhead rates(activity based costing system)
Processing= $640000/Total number of kilograms processed
=$640000/512000
=$1.25/kilogram processed
Packaging=$320000/Total number of units packaged
=$320000/200000
=$1.6/unit packaged
Allocation of Total Overhead Cost(activity based costing system)
VegieGrow FlowerFood
Kilograms processed(kgs)
(A)
192000 320000
Units Packaged(B) 90000 110000
Total Overhead($)
[(A*1.25)+(B*1.6)]
384000 576000
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Management accounting
(c) Determination of an appropriate cost driver is very important and usually the following
principles are adopted for such process:
 Service or use
 Survey method
 Ability to bear
A basis once adopted must be reviewed at periodic intervals to improve upon the accuracy of
apportionment.
QUESTION 2
(a)Statement presenting calculation of overhead rates
Scheduling and
travel
Setup time Supervision
Estimated
overhead($)(A)
85000 90000 60000
Cost drivers Hours of travel Number of setups Direct labour costs
Total of cost
drivers(B)
1250 600 400000
Overhead rate(A/B) $68/hour $150/setup $0.15/direct labour$
Assignment of overhead cost to each product line
Product line Details Overhead($)
Commercial [(750*68)+(350*150)+(100000*0.15)=] 118500
Residential [(500*68)+(250*150)+(300000*0.15)=] 116500
(b)Statement presenting operating income(using activity based overhead rates)
Commercial Residential
Revenues($) 300000 480000
Direct material
costs($)
30000 50000
Direct labour
costs($)
100000 300000
Overhead
costs($)
118500 248500 116500 466500
Operating
income/(loss)
($)
51500 13500
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Management accounting
(c)The controller should follow activity based product costing model[as shown in (b) above].
This method is much more rational as compared to the existing system of overhead
distribution as it involves distribution of the overhead based on the scheduling and travel
time, setup time and the supervision time.
PART 2
QUESTION1
(a)Net income of Ocenia Ltd.= Total of Income from all three models(viz. spotter, snooker
and stunner)
=30000+70000+(40000)
=$60000
(b)If the company discontinues the Stunner product line, then:
Statement presenting computation of net income of Ocenia Ltd.
Particulars SPOTTER SNOOKER TOTAL
Sales $300000 $500000 $800000
Less: Variable
expenses
150000 200000 350000
Contribution margin 150000 300000 450000
Less: Fixed
expenses(Note1)
142500 267500 410000
Net Income $7500 $32500 $40000
(c)Ocenia Ltd. should not eliminate product line stunner as eliminating stunner results in a
$20000 decrease in net income.
Working notes:
1)Calculation of fixed cost
Fixed Cost Spotter Snooker Total
Common
cost[$300000
allocated in sales
ratio,i.e,3:5](A)
$112500 $187500 $300000
Additional Fixed 30000 80000 110000
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Management accounting
expenses(B)
Total fixed
cost(A+B)
$142500 $267500 $410000
QUESTION 2
(a)
(1)Statement presenting calculation of equivalent number of units(using FIFO)
INPU
T
PARTICUL
ARS
OUTP
UT
MATERIAL CONVERSION COST
COMPLETI
ON %
EQUIVALE
NT UNITS
COMPLETI
ON %
EQUIVALE
NT
UNITS
1500 Completed
units
-out of
opening WIP
500 NIL NIL 40% 200
-out of units
introduced in
current year
400 100% 400 100% 400
Closing WIP 600 100% 600 40% 240
1500 1500 1000 840
(2)Statement presenting unit cost of production
Particulars Cost(A) Equivalent number
of units(B)
Cost/equivalent
unit(A/B)
Material $2400 1000 $2.4
Conversion cost $2820 840 $3.357
(3) Statement presenting cost of units transferred out and closing WIP
Particulars Details Cost
Units transferred out $[1350+(400*2.4)+(600*3.357)] $4324.2
Closing WIP $[(600*2.4)+(240*3.357)] $2245.68
Working Notes:
1) FIFO method has been used to value costs.
2) Due to absence of information relating to normal and abnormal loss, entire completed
units have been assumed to be transferred to finished goods stock.
(b)Production cost report of Tasman Ltd. for the month of July(for tennis rackets)
(only includes cost incurred in the manufacturing process in the current year)
5

Management accounting
Particulars Amount($)
Direct Material 2400
Direct Labour 1580
Prime Cost 3980
Manufacturing Overhead 1240
Add: Opening WIP 1350
Less: Closing WIP (2246)
Cost of Goods Sold/Cost of Sales 4324
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Management accounting
Part – 3
Introduction
Processes, institutions, systems, laws, mechanisms, policies, and relations through which
corporations are controlled and directed are known as Corporate Governance. It involves
balancing the main interests of the stakeholders of an organization. It also lays a definition of
the goals for which it is governed apart from managing the relationships among the
stakeholders. Earlier, the corporations used to emphasize mostly on rules and policies in
order to disperse power between agents and principals and also to govern management
activities. In the recent development, it is noticed that the core element of corporate
governance is financial reporting (Mariana & Maria, 2016). The shareholders of a corporate
are unable to evaluate the performance of the management so as to take considerate required
investment decisions without legitimate transparency, relevance and reliable information. A
certain untimely collapse of popular and giant like companies such as Parmalat1, Enron1 or
Worldcom1 along with remarkable financial reporting restatements at Ahold1, Xerox1,
Shell1, etc have not only broken faith in financial reporting but also shaken the confidence in
the financial system totally. This bought global pension systems under enormous pressure
and also made stock markets compensate for many years.
Significance of accounting information and financial reporting in enhancing corporate
governance
In order to have a corporation work under proper corporate governance principles, it is
required for the corporation to treat financial reporting as a central priority and not as a low-
priority bookkeeping. Earlier, the objective behind making financial statements was to
provide information about the financial situation and status of a corporation which might be
of great utility to a large number of users for making economic decisions and keeping a check
on the management’s performance. The main part of the various domestic accounting
systems in context to its financial reporting is its decision oriented objective. The financial
information with regards to the timing, amounts, and uncertainty of the company’s future
cash inflows and outflows is always desired by the investors as these are the factors on which
the decision related to investments are made. It is seen that information is generally required
for 2 major reasons.
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Management accounting
Firstly, financial reporting is one significant and dependable source of information from an
economic view which allows effective and efficient utilization and allocation of capital.
Fabricated statements that carry misleading and fraudulent information might result from
fund investments in ineffective corporations (Viney, 2010). When users who make business
and financial decisions are of the opinion that there is insufficient, biased or misleading
information in the financial statements there are chances for the capital markets to get
crashed. Information gap between the management (insiders) and the investors (outsiders) is
also reduced as a result of financial reporting. The capital market is badly impacted by
improper financial reporting. The financial reporting data is also influenced and affected by
the market performance of an organization.
Secondly, with appropriate, true and fair information in the financial statements, the interests
of the investors are more secured and protected legally. People indulged in manipulating and
fabricating the statements have to go through legal consequences. The information must be
made available to all in such a manner that it reaches the maximum for if fewer outsiders are
informed lesser will they be able to safeguard themselves by making legitimate financial
decisions. With this, it can be concluded as the effective corporate governance system is
dependent on effective information system which is further dependent on an effective
financial reporting system. So, corporate governance can rather be accounted useless in the
absence of an effective financial reporting.
Financial information system facilitates transparency in the financial statements by providing
a high quality of accounting information. In order to reduce and eradicate information gap
and asymmetry between market participants and managers, it is essential for the
organizations to opt for high-quality financial reporting. Incentive problems are one of the
examples of information asymmetry that arises due to the actions of the manager’s that are
unknown to the principal. Contracting and monitoring costs arise due to the occurrence of
such issues and the conflicts of interests between company’s shareholders and management.
Mitigation of agency costs is emphasized with the help of accounting information that plays
an important role in designing contracts. Information relevant to regulating managerial
behavior that is significant for effective contract mechanisms sets limitations for the financial
accounting information to perform its important role. Financial reporting plays an important
role in solving conflicts and issues related to corporate governance as per the evidence. The
incompleteness of the contracts that require being fused with more information is the aspect
on which financial reporting and accounting information in corporate governance is largely
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Management accounting
focused on. The efficiency of governance and contracting mechanisms by having increased
transparency and higher quality of financial reporting can eliminate agency issues and
disputes between shareholder and managers of the company (Goergen & Renneboog, 2011).
The performance evaluation and management rewarding become easy with the identification
of factors that are of no utility to the management. Credibility, timeliness, and relevance of
information in the financial reports are the substantial modes of communication with parties
like independent directors. The monitoring performance of the board of directors can be
enhanced with high-quality financial reports. The demand for public information and
corporate transparency is enormous and unaffected with the board of directors having access
to internal reports because of the various rules and policies and monitoring is done by
auditors for every public disclosure and financial information (Core et. al, 1999).
It is required for the majority of members of the boards to become independent directors due
to recent regulatory pressure so as to improve governance systems in corporations. This is
because of the perception that if the directors are independent and unaffected from corporate
insiders then there might be effective monitoring of management performance. Minimal or
less access to credible, relevant and reliable information is the major threat faced by outside
independent directors and outside shareholders. The quality of information received by the
board constructs the efficiency of a board’s decision-making. The capability of a board to
evaluate the performance of managers effectively is affected by the availability of limited
information. In order to monitor the performance of the board of directors, it is required and
important to have a transparency in the information environment. In order to enhance
governance mechanisms in corporations, the effect of regulations and legal systems is
required as it will not only facilitate but also enforce accounting standards as well.
What catches the attention of regulatory bodies, academics and practitioners are the increased
transparency, effective corporate governance and higher quality of financial reporting. The
efficiency of contracts, transparency in information and governance mechanisms are
interrelated and dependent and closely knitted with each other (Conchon, 2011). Such
transparency can be enhanced and can resolve information gap and asymmetry between
managers, directors and outside shareholders by means of higher quality of financial
reporting and informative accounting earnings that can improve contracting arrangements.
The incentives of management that withhold information and engage in accounting flexibility
like in the case of earnings management can also be reduced with the efficiency of corporate
governance. Agency issues are resolved with the help of such mechanisms as they substitute
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Management accounting
or complement one other (Cohen et. al, 2013). The incentives of managers and corporate
insiders are arranged in accordance with the interests of the shareholders so as to maximize
the value of the organization by considering important and legitimate monitoring
mechanisms. This further helps in investigating and evaluating the relationship between
financial accounting information and monitoring mechanisms (Uyar et. al, 2016). The
corporate governance can be strengthened and controlled with improvisations in financial
reporting. Better and improved the financial reporting better will be corporate governance.
Current financial reporting system provides information that recent years accounts scandals.
There has been the ample number of shortcomings in financial reporting such as the
measurement of assets and liabilities at nominal value and the ignorance of intangible assets
and non-financial aspects.
Conclusion
Corporate governance and financial reporting knead together the management and the users
of the information i.e. the outsiders as it is an information gathering system and mechanism.
A better understanding of financial reporting is required along with sufficient resources in
order to fill the expectation gap but it is sad that in maximum scenarios only opposite
happens. It serves a purpose for the users to evaluate decisions regarding making
investments in the company with the help of information derived from the financial
statements of the company.
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Management accounting
References
Cohen, D. A., Dey, A., and Z., L. T. (2013) Corporate governance reform and executive
incentives: Implications for investments and risk taking. Contemporary Accounting Research.
[online]. 30(4), p. 1296 – 1332. Doi: https://doi.org/10.1111/j.1911-3846.2012.01189.x
Conchon, A. (2011) Board-level employee representation rights in Europe: Facts and trends.
ETUI. European Trade Union Institute.
Core, J. E., Holthausen, R. W., and Larcker, D. F. (1999) Corporate governance, chief
executive officer compensation, and firm performance. Journal of Financial Economics.
[online]. 51, p. 371–406. Doi: https://doi.org/10.1016/S0304-405X(98)00058-0
Goergen, M. and Renneboog, L. (2011) Managerial compensation. Journal of Corporate
Finance. [online]. 17(4), p. 1068–1077. DOI: 10.1016/j.jcorpfin.2011.06.002
Mariana, M and Maria, C. (2016) Transparency of Accounting Information in Achieving
Good Corporate Governance. True View and Fair. Social Sciences and Education Research
Review. [online]. 3(1), p 41-62. Available from: http://sserr.ro/wp-content/uploads/2016/05/3-
1-41-62.pdf [Accessed 22 May 2018]
Uyar, A., Gungormus, A.H., and Kuzey, C. (2017) Impact of the Accounting Information
System on Corporate Governance: Evidence from Turkish Non-Listed Companies.
Australasian Accounting, Business and Finance Journal. [online].11(1),p. 9-27. Available
from: http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1751&context=aabfj [Accessed 22
May 2018]
Viney, C. (2010) McGrath’s Financial Institutions, Instruments and Markets. Sydney
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