Management Accounting Assignment: Kanthal, Impairment and Financials

This document presents a comprehensive solution to a management accounting assignment. The assignment begins with an analysis of the Kanthal Company's cost system, identifying issues related to customer profitability measurement and indirect cost allocation. It explores the characteristics of high-profit and low-profit customers, and the implementation of a new accounting system, 'Kanthal 90,' to address the shortcomings of the previous system. The solution further examines the reasons behind unprofitable customers and suggests strategies for improving their profitability. The second part of the assignment delves into asset impairment, calculating the value of a network facility asset and determining if impairment exists. It also explores financial instruments, performance reporting, and the application of fair value accounting, including a discussion of the article by Horton & Macve (2008). The solution provides detailed journal entries for the impairment and reversal of impairment losses for Mace Ltd, including working notes and calculations for asset carrying amounts, depreciation, and the allocation of impairment losses. The document addresses different scenarios for the reversal of impairment, including excess recoverable amounts and changes in recoverable amounts for specific assets, providing relevant journal entries for each scenario.

Running head: MANAGEMENT ACCOUNTING
Management Accounting

MANAGEMENT ACCOUNTING
Table of Contents
Assignment 1: Kanthal (A).....................................................................................................3
Task One.............................................................................................................................3
Task Two.............................................................................................................................3
Task Three...........................................................................................................................4
Task Four............................................................................................................................4
Task Five.............................................................................................................................5
Assignment 2...........................................................................................................................6
Task One: Asset Impairment...............................................................................................6
Task Two: Financial Instruments and Performance Reporting..........................................6
Task Three: Cash-generating Unit, Reversal of Impairment loss.......................................7
Task Four: Prepare and Reconcile Variable Costing Statements.....................................13
Bibliography..........................................................................................................................14
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Assignment 1: Kanthal (A)
Task One
The previous cost system used by Kanthal Company included the expenses incurred on
administrative, sales and marketing. This implied that the selling price of the products
exceeds the cost price, which eventually created profits for the company. On the other
hand, when cost price including manufacturing costs and other expenses exceeded the
selling price, the company faced losses. However, the company possess distinct sorts of
customers with varied demands affecting its sales order, cost system and profitability as
well. The main concern of this system was the barrier regarding appropriate measurement
of profitability. It did not measured customers’ profitability on an individual basis. There
might be a possibility to ensure hidden profits /costs, which eventually necessitates a
system that can generate accurate information regarding such costs. The new cost system of
the company should not take into concern production overhead, administrative and selling
costs as fixed. Therefore, there is an urgent need for better provision of information about
each and every order as well as product to determine the profitability level. Moreover, the
costs that incurred by the company were mostly indirect in nature hence, through its
previous cost system, it could not allocate such costs in an appropriate way.
Task Two
Based on the given case information, the two main types of the customers of Kanthal
included high-profit and low-profit. One of the characteristics of high-profit customers is
that they buy standard/high-quality products. They place large scale of orders for their
preferred products and do not demand any type of service neither commercial nor technical.
Rather, they forecast product demands annually in a precise manner. On the other hand,
low-profit customers demand particularly for commercial/technical services at a higher
rate. They place low scale orders for low-margin products. They frequently order such
products that are non-standard in nature.
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MANAGEMENT ACCOUNTING
Task Three
After identifying the issues in the previous cost system, the company i.e. Kanthal opted a
new system of account management known as ‘Kanthal 90.’ The intention of this new
system is to overcome the barriers of the previous one. Therefore, the main feature of the
new system is to analyze various costs such as administrative, sales and production
precisely, which the previous system failed to perform. It is expected that the new system
will be able to report the true costs of the company as well as the profits being generated
from the products, the type of customers and the respective market positions. Therefore,
with the use of this particular system, the company is likely to equally distribute its
resources amongst distinct sorts of the customers and thereby attain predetermined targets
within a specific timeframe.
Task Four
According to the case, it was observed after certain investigation and interviews that the top
unprofitable customers were those who had been ordering largest orders. This implied that
their sales volume was high, but they were unprofitable for the organization, which its
previous cost system failed to trace. The reason for such unprofitability was that these
customers had opted for just-in-time delivery process to supply the products. Moreover, the
company did not recognize that one of these customers had pushed back the orders due to
the implementation of this new JIT system. It was also found that another customer was
using the company for only backing up the orders when its main suppliers could not place
their orders on time. As per the case, the variation being observed in the ordering patterns
of the customers was the sole reason to have hidden profits and losses. Hence, the ordering
pattern must be such that the order size should be minimum and thereby making all its
customers to be profitable. This can be done by changing the prices of the products
according to the demands of the customers along with the usage of information technology.
Therefore, in an overall basis, it should implement continuous changes intending to
enhance quality of the products and develop ways to increase customer orders1.
1 Cooper, R & Kaplan, Robert S 2017, Profit priorities from activity-based costing, Harvard Business School
Publishing, viewed 14 September 2017, < https://hbr.org/1991/05/profit-priorities-from-activity-based-
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MANAGEMENT ACCOUNTING
Task Five
Observing the figures of Exhibit 8, which revealed the ranking of the customers from the
most profitable one to the least, it can be stated that most of the customers were profitable.
However, the customers who were unprofitable should be worked upon in order to turn
them into profitable ones. The most essential improvement should be made to increase
customer satisfaction, which will in turn enhance their loyalty towards the company. This
will certainly increase their loyalty and thereby generate maximum profits2. Referring to
Exhibit 9, the cumulative percentage of the customers and profits has been shown wherein
cumulative profit decreased and the percentage of customers increased. Thus, based on this
notion, it can be stated that even though the customers of the company have been growing
extensively, their profit seems to diminish, which must be monitored constantly to retain
them for a longer time and raise their loyalty at large. In terms of recommendations, the
management team of the company can implement ABC analysis and based on the impacts
imposed on the profitability level, the company can strategize future plans to retain them
either by granting discounts or delivering additional services as per the requirement.
costing>
2 Hallowell, R 1996, ‘The relationships of customer satisfaction, customer loyalty, and profitability: an
empirical study’, International Journal of Service Industry Management, vol. 7, no. 4, pp. 27-42.
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MANAGEMENT ACCOUNTING
Assignment 2
Task One: Asset Impairment
As per the current market value of the facility given, the value of the network facility asset
would be the summation of the determined value and residual value. Therefore, the total
value of the asset would be ($300,000+$50,000) = $350,000. This implies that the asset is
impaired because its market value is less than value listed. The decision of writing down
the network facility asset to $300,000 depends on the company because it might create loss
and fail to generate sufficient level of cash flow. Therefore, network facility asset has been
acting as a part of the company’s assets hence, should not be written down.
Task Two: Financial Instruments and Performance Reporting
According to Horton & Macve (2008), IASC was pursuing various proposals for the
purpose of financial instrument accounting. The objective of the given article of Horton &
Macve (2008) was to enhance fair value concept to solve the problems relating to
measurement. Therefore, theory-based approach has been used for the purpose of value
accounting. It was also observed that in the conceptual basis, fair value was inappropriate
specifically because of the measurement issues. There were also other problems regarding
recognitions and financial assets/liabilities. In a greater level, this concept was inadequate
to recognize and measure the entire financial performance. For instance, it did not yield the
desired results while standardized accounting was used regarding life insurance. Thus, it
can be affirmed that international standard of accounting was itself in crisis wherein
appropriate structure is essential to be considered. There were also various controversies
that have been highlighted in the article regarding the flaws in the accounting model, which
created unfavorable conditions for International Accounting Standards Committee (IASC).
Difficulties were also observed in value determination of assets because of the current
system’s conceptual and practicality problems. Fair value was considered in order to
facilitate exchange of assets within a market. Thus, understanding all the aspects,
conclusion was drawn that there were problems regarding the preparation of income
statement as well as balance sheet, according to which appropriate recommendations were
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MANAGEMENT ACCOUNTING
made such as adopting special rules as per the requirements. Improvements can also be
done as per ‘Relative Current Value Accounting’ to have a better progress and mitigate all
the issues.
Task Three: Cash-generating Unit, Reversal of Impairment loss
A.
Working Notes:
1. There is a need to calculate the impairment loss initially in order to prepare journal
entries for impairment of assets. Thus, the impairment loss of the assets of Mace Ltd as on
30 June, 2015 is calculated hereunder.
CARRYING AMOUNT OF ASSETS AMOUNT($)
Factory 192,000
Goodwill 12,000
Equipments 144,000
Inventory 64,000
Account Receivable 28,000
Cash 16,000
Total Amount 456,000
Amount Recoverable 428,000
Amount of Impairment Loss 28,000
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MANAGEMENT ACCOUNTING
2. After the calculation of impairment loss, goodwill is subtracted to find the written off
value of relevant assets, which must be included in the journal entry. The total written off
value is $(28,000-12,000) = $16,000. Thus, net carrying amount is further calculated as:
ASSETS CARRYING
AMOUNT ($)
LOSS
ALLOCATION
($)
NET
CARRYING
AMOUNT ($)
Factory
(192,000/336,000)
192,000 9,143 182,857
Equipment
(144,000/336,000)
144,000 6,857 137,143
Total 336,000 16,000 320,000
Therefore, the required journal entry for Mace Ltd regarding the impairment of the assets is
provided hereunder.
PARTICULARS AMOUNT
($)
AMOUNT
($)
Impairment loss Dr. 28,000
Goodwill Cr. 12,000
(Loss Allocation) Impairment losses -Factory Cr. 9,143
-Equipment Cr. 6,857
B. (i)
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Working Notes:
1. In order to prepare the journal entries for Mace Ltd at 30 June 2016 for reversal of the
prior impairment loss, the carrying amount of the assets is calculated below.
For factory:
Factory $336,000
Less: accumulated impairment loss and depreciation
(144,000 + 52,000 + 9,143)
$205,143
Total $130,857
For equipment:
Equipment $176,000
Less: accumulated impairment loss and depreciation
(32,000 + 40,000 + 6,857)
$78,857
Total $97,143
2. After the calculation of actual carrying amount for both the assets, the next step would
be to calculate the same without impairment loss.
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MANAGEMENT ACCOUNTING
Factory $336,000 Equipment $176,000
Less: accumulated
depreciation (144,000 +
48,000)
$192,000 Less: accumulated
depreciation (32,000 +
36,000)
$68,000
Total $144,000 Total $108,000
3. The next step would be to calculate the difference between the actual carrying amount
and when there is no impairment cost incurred, which is as follows:
Factory $ (144,000 – 130,857) = $13,143
Equipment $ (108,000 – 97,143) = $10,857
Therefore, total carrying cost is $ (13,143 + 10,857) = $24,000
Thus, the required final journal entry is prepared as:
PARTICULARS AMOUNT
($)
AMOUNT
($)
Accumulated depreciation and impairment loss (factory) Dr. 13,143
Accumulated depreciation and impairment loss(equipment) Dr. 10,857
Income (reversal of impairment loss) Cr. 24,000
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B. (ii)
The excess recoverable amount is observed to be $16,000 therefore; the reversal would
vary according to the allocation of excess amount on carrying amount at the reversal. This
can be explained in details below:
ASSETS CARRYING
AMOUNT ($)
ALLOCATION
OF EXCESS ($)
NET
CARRYING
AMOUNT ($)
Factory
(130,857/228,000)
130,857 9,143 140,040
Equipment
(97,143/228,000)
97,143 6,857 103,960
Total 228,000 16,000 244,000
Therefore, the required journal entry would be:
PARTICULARS AMOUNT
($)
AMOUNT
($)
Accumulated depreciation and impairment loss (factory) Dr. 9,183
Accumulated depreciation and impairment loss(equipment) Dr. 6,817
Income (reversal of impairment loss) Cr. 16,000
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B. (iii)
Assuming recoverable amount of the factory to be $140,000, then the changes that will
occur in the above calculations have been illustrated as follows:
For factory, the reversal of impairment would be $ (140,000 - 130,857) = $9,143
For equipment, reversal of impairment is $ (9,183 - 9,143) = $40
Therefore, the respective journal entry would be:
PARTICULARS AMOUNT
($)
AMOUNT
($)
Accumulated depreciation and impairment loss (factory) Dr. 9,143
Accumulated depreciation and impairment loss(equipment) Dr. 6,857
Income (reversal of impairment loss) Cr. 16,000
After preparing these journal entries, it can be observed that the allocation of equipment has
not exceeded the carrying cost when the impairment is not made. Therefore, in this case,
the calculation of equipment will have certain changes, as depicted below.
Equipment $176,000
Less: accumulated impairment loss and depreciation
(32,000 + 40,000 + 6,857 - 6,857)
$72,000
Total $104,000
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