ACG24 Management Accounting: Karmichael Holdings Pilot Study Report

This report discusses the cost management issues faced by the Barossa Valley Development Association Inc. (BVDA) and presents a pilot study conducted at Karmichael Holdings, a family-owned business with vinery, dining, and bakery sectors. Various cost accounting methods are analyzed to determine the most suitable approach for each sector, with activity-based costing identified as the most effective method. The report covers cost classifications, estimation, cost-volume-profit analysis, job and process costing, and activity-based costing, ultimately concluding with recommendations for improved cost management practices within Karmichael Holdings. Desklib offers similar assignments and resources to support student learning.

TEAM 21 REPORT
Karmichael Holdings
- Pilot Study
Commissioned by the
Barossa Valley Development Association (BVDA)
ACG24 - Management Accounting
(Semester 1 - 2018)

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Executive Summary
The discussion deals with the issues that the Barossa Valley Development
Association Inc. (BVDA) is facing. It is related to the cost management issue
and a pilot study has been conducted in order to resolve the issue and find a
a solution. The Karmichael holding which is a part of the BVDA, is a family
owned business dealing with three different business including vinery, dining
and bakery. the various cost accounting method has been implemented in
the holding to find out a valid solution to the problem an analyze their
implementation to find out the most suitable process for each of the sectors.
According to the report, it has been found that the Activity Based Costing
can be taken as the most suitable method of cost management.

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Table of Contents
Introduction.....................................................................................................3
Discussion........................................................................................................4
Cost classifications and use of information in decision-making....................4
Cost estimation.............................................................................................5
Cost-volume-profit analysis..........................................................................6
Job and process costing................................................................................7
Activity-based costing..................................................................................7
Conclusion.......................................................................................................8
References.....................................................................................................10

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Introduction
In the Barossa Valley the development association has been formed
named the Barossa Valley Development Association Inc. (BVDA). The main
purpose of this association is to provide knowledge of the locality that would
enhance the development. The Barrosa valley which is known for its wine
and scenic beauty attracts many tourist and is planning to conduct a case
study to explore the management and the accounting issue. For the
research, the Barrossa valley has appointed a family named Karmichael. The
main purpose of the research is to point out the various issues in the
accounting like underutilization of the resources and accounting processes
(Cooper 2017 p 27, para 12). The Karmichael is one of the family businesses
that work under the BVDA. It has three businesses located outside of
Tanunda. Since the middle of 1800s, the property was converted to
vineyards and in the mid-1960s into a boutique winery. The three businesses
are run by different family members and each of them deals with different
products and services. The ‘crooked creek’ vines that was established by
Paul and Mary Karmichael is now taken over by their son and his wife, Grace
and Alby deals with the red wines and have recently planted new varieties
which are about to give the first harvest. The second one is ‘Vine Dining’ that
is run by Sophie that deals with food products and dining, that produces and
promotes a farm-to-table concept with varying menu depending on season
and harvest. Samuel who is the brother of Sophie has opened a bakery

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named ‘Rolling in Dough’ that includes a including a range of gluten free
baked products.
Discussion
The main purpose of the discussion is to identify the various cost
associated with the Karmichael holding and the accounting management
issues of the same. The Barossa Valley Development Association Inc. needs
to identify the process and policies of the Karmichael holding so point out the
issues in the accounting (Henri Boiral and Roy 2016). It has been suspected
that the management accounting is underutilized and the main reason
behind the same is due to the misunderstanding of the business owners. In
the Karmichael holding, although, there are three kinds of business that
deals with three different kinds of commodities the management processes
and policies are same (Klychova et al.2015 pp 3, para 6).
Cost classifications and use of information in decision-making: The
cost classification is the process in which the Karmichael holding classifies its
various costs into different categories. The categories of costing include fixed
cost, variable costs, production cost and opportunity costs. The costs are
classified according to their function, traceability, timing of charge against
revenue, behavior and relevance to the decision making. In the given
organization pilot study it has been found that the cost are classified into
manufacturing cost and the other is the non-manufacturing costs. As per

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their name, the manufacturing costs refer to the goods that are converted
from the raw materials and are manufactured for sale (Sechilariu Wang and
Locment 2014 p 9, para 16). In Karmichael holding the ‘crooked creek’, Vine
Dining’, ‘Rolling in Dough’ have different kinds of products manufactured and
require different kinds of raw materials. Similarly, non-manufacturing costs
differ in the three different sections. It includes the selling expenses and the
administrative expenses. The Karmichael being a tourist spot does not
require any advertisement and costs of promotion (Lanen 2016, p 56 para
102).
When it comes to decision making of the Karmichael there are three
types of decisions. One is the strategic decisions; the second is the
operational decision and the third is the managerial decisions (Homburget al.
2016 p 35, para 98). The strategic is the are non-repetitive in nature and are
not related to the operations of the business. The operational decision deals
with the regular functioning of the business. Then comes the managerial
decisions that are needed for development, research and innovation.
However, there are issues that are pointed out in the decision-making
process in the Karmichael holding. At times, it is difficult for them to come
into a conclusion, as there is an existence of multiple owners and all are co-
related. This can be a major issue while taking a decision. Moreover, there
are multiple kinds of business in the Karmichael which may lead to conflicts
and confusion as the family members are only the owners and the managers
as well (Ingram et al.2015 p 123, para 345).

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Cost estimation: The cost estimation refers to the total cost of the project
program and operation. In the given case the estimated cost of the
Karmichael holding the tendering or Cost Estimation is a part of project
management subjects other than planning, monitoring, risk analysis, and
budgeting.
The Karmichael holding, dedicate a departmental organization to carry out
coat estimation. It takes place for all three of the business undertakings
within the holding and estimates the cost all together.
The cost estimate of Karmichael holding has three main parts:
1. Direct cost analysis: The direct cost is the cost of regular working of
the Karmichael holding, it includes the labor cost, cost of purchase of
plants and machineries, various materials and many more. The
Karmichael holding deals with three business the ‘crooked creek’ that
deals with the vinery estimates the cost of the machines that help in
the extraction of wines and various raw materials for production and its
innovation. Vine Dining’ estimates the cost various cost related to food
products and dining. The ‘Rolling in Dough’ also estimates the various
associated costs within including cost of the raw materials and other
direct expenses (Boardman et al. 2017 p 86 para: 54 ).
2. Indirect cost analysis: The indirect cost is the somewhat same for all
the three businesses that includes the staff salaries, accommodation,

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office expenses. All three businesses estimate the indirect cost
similarly as the three of them are located in the same location.
3. Mark up: the mark is the investment decisions that are taken by the
owners of the company who are the businesses top management
(Konijeti et al. 2014. para-10).
The Karmichael holding estimates the costs by using the excel sheet,
moreover, there are many software programs that are used which makes the
process much easier. The business uses the Candy CCS for accurate and fair
estimation.
Cost-volume-profit analysis: Karmichael holding uses the CVP analysis
technique for determining the costs and volume changes that affect the
company's operating net income. In performing the CVP analysis, there are
several assumptions, as per their procedure they take sales price per unit,
variable costs per unit, total fixed costs to be constant. They also assume
that everything that is produced is sold and the costs are only affected
because of changes in business activities. The company uses the net income
equation of cost volume profit analysis. The problem encountered by
Karmichael holding when cost-volume-profit analysis stands as a basis for
decision-making is managerial inefficiency and this includes ignorance of this
concept that is inability of the management to employ it in their decision
making and also not knowing the importance of cost volume- profit analysis.

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Karmichael holding are not relevant in their decision-making process
(Palanski, Avey and Jiraporn 2014 p257, para 5).
Job and process costing: Job costing is the method of recording
the manufacturing job, rather than process. With the help of this, the
accountant can keep track of the cost of each job, maintain data which is
often more relevant to the operations of the business. Job costing is the
accounting methodology that the used to track the expense of
manufacturing costs. Due to the fact that certain operations that takes place
in the Karmichael require different operations, the manager use this
methodology to trace the expenses of each job in order to use this
information for tax and accounting analysis. The forms of Job Costing have
includes the various direct costs like labor, materials, and overhead (Said
2016 p 14 para 6).
The various Cost in the Karmichael incurred stays in the work-in-
process account throughout the job and when the job completed, they are
transferred to the finished goods account. The job costing enables the
accountants to can make sense of complicated jobs, which are moving
towards the process of completion. The Karmichael uses the technique of job
costing, as it is the most efficient process. They also use job-costing software
that increases the efficiency and effectiveness. The Bookkeepers can run the
system quite smoothly in this process. Although while surveying on the
accounting issues in the Karmichael holding, it can be said the process of

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Job costing is comparatively more expensive as more clerical work is
involved in identifying each element of cost with specific departments and
jobs this increases the chances of errors (Garvey, Book and Covert 2016, p
225, para 295).
Activity-based costing: The activity-based costing is a costing
methodology that is used by the Karmichael holding where they assign each
of the cost of activity with resources to all products and services. It has three
sectors out of which the ‘Vine Dining’ follows this type of costing as it activity
based assigns the cost of each activity with resources to all products and
services. it is beneficial for them as Vine Dining deals with various products
like food, theme-based dining and hospitality. This model allocates the
overhead costs into direct cost compared to conventional costing. It is the
most trending and effective process of cost management. It Identifies and
eliminates those products and services that are unprofitable and enables
modification. It focuses on allocation of costs in operational management
and segregates, the costs into fixed cost, variable cost and overhead costs.
The fixed cost deals with the unavoidable costs that is not dependent on the
production and sales (Eldenburg et al. 2016, p 556, para 897). The variable
cost changes with the amount of production and varies. The overhead costs
are the indirect costs that are related to the production and operations. This
split of cost helps to identify the cost drivers if achieved. In the process, the
direct labor and materials is easy to trace directly to products, but it is more
difficult to directly allocate indirect costs to products (Cascio 2018 p 129,

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para 45). However in order to identify the issues in the cost management
process it can be said, applicability of ABC is bound to cost of required data
capture that drives the prevalence to slow processes in administrations and
services, where staff time consumed per task defines a dominant portion of
cost. Hence the reported application for production tasks do not appear as
favorable.
Conclusion
The process Cost management refers to the planning and controlling
the policies of a business according to their operations. It is a form of
management that enables a business to predict the expenditures and help in
reducing the chance of going over the anticipated budget. Implementing a
cost management structure for projects can help a business keep their over-
all budget under control. In the given scenario, the Karmichael holds three
kinds of business one deals with vine products, one deals with fine dining
and the other deals with bakery. It can be said after analyzing the different
kind of cost processes in the three different sectors namely ‘crooked creek’,
Vine Dining’, ‘Rolling in Dough’ have different functions and therefore, the
process of accounting is different for different sector. For crooked creek and
rolling in dough, the job costing can be effectively used and in case of Vine
Dining, the Activity Based costing is the most suitable one. An efficient
process of analyzing the process of costing will enable to resolve the issue of

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underutilization of resources and manage the misunderstanding between the
owners.