Management Accounting Case Study: Earl's Gyms, Galactia & MJA Eng

This document presents solutions to several management accounting case studies. It includes a rectified income statement for Earl's Gyms Ltd, demonstrating a profit contrary to initial reports, and analyzes mistakes in the original statement. It also provides schedules for cost of goods manufactured, prime cost, and conversion cost for Galactia Ltd. Furthermore, the document estimates a tender bid for MJA Engineers, highlighting the importance of direct cost tracking. Finally, it addresses cash receipts for a retailer, calculating collections for October and the December quarter. Desklib offers more solved assignments and past papers for students.

Management Accounting
1

Case Study-A
Chapter 2 Case 2.42 (Earl’s Gyms Limited)
Requirement-1
Losses to the tune of $161,400 have been reported in the income statement initially
prepared by Bob Earl reports. This implies that the company is not performing well and thus, the
bank might consider cancelling the overdraft facility given to the company. However, the income
statement prepared by Bob Earl is full of mistakes and it does not portray true picture of
profitability of the company. The rectified income statement of the company has been prepared
as below:
Income statement: Earl's Gyms Ltd
Amount
($)
Sales
540,000.
00
Less: Operating expenses
Raw material consumed (240000-
24000)
216,000.
00
Change in WIP
(48,000.
00)
Change in Finished goods
(1,800.
00)
Purchase of factory supplies
12,000.
00
Wages-factory employees direct
90,000.
00
Wages-factory employees others
12,000.
00
Manager's salary
48,000.
00
Office staff salaries
12,000.
00
Sales staff salaries
26,400.
00
Advertising
6,000.
00
Administrative expenses
9,600.
00
Cleaning cost
6,000.
00
Rent-factory (80%)
24,000.
00
Rent- sales area (15%) 4,500.
2

00
Rent-administration area (80%)
1,500.
00
Electricity
5,400.
00
Depreciation- Factory equipment
33,600.
00
Depreciation- Office equipment
2,400.
00
Depreciation- Sales vehicles
36,000.
00
Total
495,600.
00
Net profit
44,400.
00
The rectified income statement shows that the company is earning profit of $44,400. This
shows that the bank might be satisfied with the performance of the company and it may not
cancel the overdraft facility. However, the statement of profit does not provide analysis about the
cash and liquidity position of the company. Hence, it is desirable that the bank conducts a further
analysis into the liquidity position of the company to decide on the cancellation of the overdraft
facility.
Requirement-2
There were various serious mistakes in the income statement prepared by Bob Earl.
Firstly, the income statement included purchase amount of materials and supplies which is
wrong. Only the amount of material and supplies consumed is included in the statement of profit
and loss. Further, the closing inventory of WIP and finished goods was totally ignored which
reduced the profitability of the company. The factory rent was not properly bifurcated resulting
into wrong presentation of the rent expense in the income statement. Apart from these mistakes,
the purchase of non-current assets such as equipment, sales vehicle, and office equipment was
charged in the statement of profit and loss which is wrong. Only depreciation expense on the
non-current is charged to the statement of profit and loss account (Boyd, 2018).
Case Study-B
P 4.36: Galactia Ltd
3

Requirement-1
Schedule of cost of goods manufactured:
June
Particulars Amount
Cost of goods sold
690,000.0
0
Less: Opening stock of
finished goods
204,000.0
0
Add: Closing stock of
finished goods
210,000.0
0
Cost of goods manufactured
696,000.0
0
Requirement-2
Schedule of prime cost: June
Particulars Amount
Cost of goods manufactured
696,000.
00
Add: Closing WIP
72,000.
00
Less: Opening WIP
80,000.
00
Factory cost
688,000.
00
Less: Factory overhead (688000-
208000/1.5)*.50
160,000.0
0
Prime cost
528,000.0
0
Requirement-3
Schedule of conversion cost: June
Particulars Amount
Direct labor (688000-
4

208000/1.5)
320,000.0
0
Manufacturing overhead
160,000.0
0
Total
480,000.0
0
Case Study-C
P 6.39 MJA Engineers – Consulting Engineering Firm
Requirement-1
The estimation of tender bid for the project is given as below:
Tender bid
Costs
Civil engineering 21,000.00
Environmental scientists 15,000.00
Support labor 9,000.00
Travel 750.00
computer time 3,000.00
photocopying, phone etc. 375.00
Total 49,125.00
Mark up on cost
Mark up on Civil engineering @75% 15,750.00
Mark up on Environmental scientists
@75% 11,250.00
Mark up on other costs @ 50% 6,562.50
Total 33,562.50
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Total bid price 82,687.50
The bid price of tender is $82687.50.
Requirement-2
The total cost of the project amounts to $49,125 with mark up of 75% on civil
engineering cost and environmental scientist cost and a further mark up of 50% on other costs.
The total mark up is worked out to be $33,562.50. Adding the mark up to the cost of the project,
the tender price is worked out to be $82,687.50.
Requirement-3
MJA is looking to use the costing system that will track the direct costs involved in the
project. This costing system would be highly useful for the managers. The manager can get the
required information from the costing system to get prepare bid. The information about direct
costs to be incurred on the project is crucial in determining the bid price. The direct costs are the
costs which are incurred solely for the purpose of the project under consideration. Thus, the
costing system that tracks direct cost would be highly useful for the manager in estimating the
bid price. Apart from this, the manager could also use this information system in controlling the
cost while the project is under process (Alex, 2011).
Requirement-4
The proposed costing system comprises a tracking system in which all the directly
associated costs of the project are to be tracked. Thus, this costing system is an improvement
over the existing costing system. The existing costing system provides for recording of all costs
without segregating them into direct and indirect. This increases the manual work for the
managers. However, in the proposed costing system, the segregation of costs into direct and
indirect takes place automatically, which eases out the process of cost determination of quoting
price in tender bids (Alex, 2011).
Case Study-D
E 9.22 CASH RECEIPTS - RETAILER
Month Sales ($)
Collection
pattern
June
122,500.0
Month of sales 70%
6

0
July
150,000.0
0
1st month after
sales 15%
Aug
175,000.0
0
2nd month after
sales 10%
Sep
200,000.0
0
3rd month after
sales 4%
Oct
225,000.0
0 Uncollectible 1%
Nov
250,000.0
0
Dec
212,500.0
0
Requirement-1 Requirement-2
Cash receipts: October Cash receipts: December quarter
Month of sales
157,500.0
0 Oct Nov Dec
Collection of July
(4%) 6,000.00 Month of sales
157,500.0
0
175,000.0
0
148,750.0
0
Collection of Aug
(10%) 17,500.00 Collection of July 6,000.00
Collection of Sep
(15%) 30,000.00 Collection of Aug 17,500.00 7,000.00
Total
211,000.0
0 Collection of Sep 30,000.00 20,000.00 8,000.00
Collection of Oct 33,750.00 22,500.00
Collection of Nov 37,500.00
Total
211,000.0
0
235,750.0
0
216,750.0
0
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Requirement-3
8

Month Sales ($)
Collection
pattern
June
175,000.0
0 Month of sales 70%
July
212,500.0
0
1st month after
sales 15%
Aug
175,000.0
0
2nd month after
sales 10%
Sep
200,000.0
0
3rd month after
sales 4%
Oct
225,000.0
0 Uncollectible 1%
Nov
250,000.0
0
Dec
212,500.0
0
Requirement-1 Requirement-2
Cash receipts: October Cash receipts: December quarter
Month of sales
157,500.0
0 Oct Nov Dec
Collection of July
(4%) 8,500.00 Month of sales
157,500.0
0
175,000.0
0
148,750.0
0
Collection of Aug
(10%) 17,500.00 Collection of July 8,500.00
Collection of Sep
(15%) 30,000.00 Collection of Aug 17,500.00 7,000.00
Total
213,500.0
0 Collection of Sep 30,000.00 20,000.00 8,000.00
Collection of Oct 33,750.00 22,500.00
Collection of Nov 37,500.00
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Total
213,500.0
0
235,750.0
0
216,750.0
0
Due to change in sales figures of June and July, the collections of October will be affected only.
The changes have been highlighted in yellow.
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References
Alex, K. 2011. Cost Accounting. Pearson Education India.
Boyd, K.W. 2018. Accounting All-in-One For Dummies. John Wiley & Sons.
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