Mercury Inc. Management Accounting: Case Studies and Solutions

This assignment is a management accounting report for Mercury Inc., addressing various case studies within the company. It covers manufacturing cost flows, international issues in management accounting (specifically concerning Australian dairy products in China), comprehensive budgeting, cost concepts, and strategic management accounting. The report includes an ethics case study and provides advice and recommended actions. Numerical analysis such as cost of goods manufactured and sold schedules, income statements, and NPV calculations are presented. The report assesses the advantages and disadvantages of projects and recommends whether to accept them based on NPV and other factors. Desklib offers similar solved assignments and past papers for students.

MANAGEMENT ACCOUNTING
Management accounting
Name of the student
Name of the university
Student ID
Author note

1MANAGEMENT ACCOUNTING
Table of Contents
Question 1..................................................................................................................................2
Manufacturing cost flows.......................................................................................................2
Question 2..................................................................................................................................3
International issues in management account..........................................................................3
(i) Advantage of Australian dairy product in China............................................................3
(ii) Difference in western and Chinese approaches of management accounting..............4
(iii) Concepts of Guanxi and power distance.....................................................................4
Question 3..................................................................................................................................5
Comprehensive manufacturing budget..................................................................................5
(a) Five year budget..........................................................................................................5
(b) Increased production constraint...................................................................................7
(c) Report to CEO.............................................................................................................7
Question 4..................................................................................................................................8
(i) Distinguish between variable cost and fixed cost and product cost and period cost......8
(ii) Relevant range...........................................................................................................10
Question 5................................................................................................................................10
Strategic Management Accounting case study....................................................................10
(i) Before and after budget comparison.............................................................................10
(ii) Drop in sales for the competitor Death Star manufacturing......................................11
(iii) Report........................................................................................................................12

2MANAGEMENT ACCOUNTING
Question 5................................................................................................................................12
Ethics case study..................................................................................................................12
(i) Advice to Burdon..........................................................................................................12
(ii) Recommended actions for Burdon............................................................................13
Reference..................................................................................................................................14

3MANAGEMENT ACCOUNTING
Question 1
Manufacturing cost flows
Cost of goods manufactured schedule
Opening work in progress $ 6,20,000.00
Direct material
Opening raw material inventory $ 4,86,000.00
Add: Raw material purchases $ 86,51,500.00
Add: Freight inward $ 1,00,500.00
Raw material available for use $ 92,38,000.00
Less: Closing raw material inventory $ 7,86,500.00
Direct material used $ 84,51,500.00
Direct labour cost $ 43,28,500.00
Manufacturing overhead
Indirect labour $ 12,50,000.00
Direct manufacturing overhead $ 22,55,500.00
Other manufacturing overhead $ 8,47,000.00
Factory rent $ 2,50,000.00
Factory heat, light and power $ 15,67,500.00
Total manufacturing overhead $ 61,70,000.00
Less: Closing work in progress $ 11,87,500.00
Cost of goods manufactured $ 183,82,500.00
Cost of goods sold schedule
Cost of goods manufactured $ 183,82,500.00
Add: Opening finished goods inventory $ 2,75,500.00
Cost of goods available for sale $ 186,58,000.00
Less: Closing finished goods inventory $ 7,52,000.00
Cost of goods sold $ 179,06,000.00
Income statement for Snoozy Trading Co Ltd
Particulars Amount Amount
Sales revenue $ 357,26,840.00
Less: Cost of goods sold $ 179,06,000.00
Gross profit $ 178,20,840.00
Less: Selling and administration expenses
Sales Rep Salary and Commission Costs $ 33,24,500.00
Administration Salaries and Costs $ 8,75,500.00

4MANAGEMENT ACCOUNTING
Accounting and audit costs $ 1,50,000.00
Sales & marketing expenses $ 8,71,500.00
Total expenses $ 52,21,500.00
Net profit before interest and tax $ 125,99,340.00
Less: Financing costs $ 5,47,500.00
Net profit before tax $ 120,51,840.00
Less: Tax @ 30% $ 36,15,552.00
Net profit after tax $ 84,36,288.00
Question 2
International issues in management account
(i) Advantage of Australian dairy product in China
Demands for globally traded dairy products are now dominated by China and
Australia is benefitted from this. The free trade deal with the country slashed tariff on the
dairy exports can lead Australia to become the land of milk and Australia is set up for taking
advantages from the addiction of china on western powdered milk. Infant formula is the
preferred foods in china for the infants (Fuller & Beghin, 2015). However, as the mainlanders
from Chinese mainlanders were busy in holidaying in the western countries and were taking
home the milk powder for family and friends. Chinese tariffs on the Australian dairy products
will be cut over the period of 4-11 years and 15% tariff for infant formula milk will be
eliminated in 4 years. On the other hand, it will further increase the competitiveness of China,
their ability to get healthy, safe, reliable sources for quality protein and the dairy products.
Reduction in tariff will reduce the export cost of the company, which in turn will
reduce the overall manufacturing cost of the product. Therefore, the company can
manufacture more products for the purpose of exports. On the other hand, reduction of tariff
will increase the competition in export. Therefore, the company may have to improve the
quality of the goods to face the competition (Douphrate et al., 2013).

5MANAGEMENT ACCOUNTING
(ii) Difference in western and Chinese approaches of management accounting
The accounting profession for China is headed by Law of People’s Republic of China
on the Certified Public Accounts. China does not follow the international accounting
guidelines and policies. However, they are moving to the direction with the accession to
World Trade Organization that will be fully complied within few years. As the Chinese
government implemented the reform and opened up various policies during 1978, various
western concepts of management accounting and techniques are introduced in China. The
main issues with implementation of the western methods are not the political sensitivity
issues, but the issues are technical constraints. While essential data for MIS is developed in
Chinese companies for usage of the western techniques like Activity Based costing, it is not
possible to collect the data easily under the present situation (Hu, Chand & Evans, 2013).
Moreover, the changes in the management accounting can be experienced in few areas like
promotion of the products, profitability and usage of responsibility accounting as major
criteria for choosing investment projects. Further, the Chinese are generally comfortable with
grey areas and not with the black and white areas of the business. Learning these navigations
requires patients and observance. Taking time for understanding Chinese way is rewarding in
professional as well as personal ways (Hilton & Platt, 2013).
(iii) Concepts of Guanxi and power distance
Guanxi is based on the concepts of loyalty, reciprocity, trust and dedication that helps
in developing the non-familial and interpersonal relations and mirroring concepts of filial
piety that is used for ground level familial relations. Eventually the relationships established
by guanxi are not transferrable and personal (Kaynak, Wong & Leung, 2013).
On the other hand, power distance is the way in which the power is unequally
allocated. In simple words, people from some cultures accept the higher degree of the power
that is unequally distributed as compared to the people from other cultures (Sriramesh, 2013).

6MANAGEMENT ACCOUNTING
It is observed that the Chinese people have comparatively high power distance
whereas the Australian people have low index value for power distance. Therefore, the
management practices in China states that the Chinese superiors will expect to lead, take
decisions paternalistically and autocratically (Luo, 2013). On the other hand, the subordinates
are unwilling and afraid to disagree with the decisions of superiors. Therefore, Deirdre shall
keep in mind these facts while interacting with the managers of China South Dairy Company.
Question 3
Comprehensive manufacturing budget
(a) Five year budget
(i) Sales, production and purchase budget
Sales budget
Particulars 2018 2019 2020 2021 2022
Units 57,035,550 62,739,105 69,013,016 75,914,317 83,505,749
Wholesale
price $ 2.35 $ 2.45 $ 2.55 $ 2.66 $ 2.77
Sales revenue
$133,784,011.9
7
$
153,416,815.7
3
$
175,930,733.4
3
$201,748,568.5
6
$231,355,171.0
0
Production budget
2018 2019 2020 2021 2022
Raw material
$
0.62
$
0.64
$
0.67
$
0.69
$
0.71
Direct labour
$
0.08
$
0.08
$
0.09
$
0.09
$
0.09
Manufacturi
ng overhead
$
1.50
$
1.55
$
3.83
$
6.10
$
8.37
Total
production
cost
$
2.21
$
2.28
$
2.36
$
2.43
$
2.51

7MANAGEMENT ACCOUNTING
Scheduled
production
(units) 57,147,388 62,848,789 65,000,000 65,000,000 65,000,000
Production
cost
$
126,371,803.
83
$
143,444,913.
72
$
153,176,329.
47
$
158,154,560.
18
$
163,294,583.
38
Purchase budget
2018 2019 2020 2021 2022
Budgeted
production in units 57,147,388 62,848,789 65,000,000 65,000,000 65,000,000
Direct material
required per unit 57,147,388 62,848,789 65,000,000 65,000,000 65,000,000
Add: Budgeted
closing material
2,197,976.4
4
2,417,261.1
1 2,500,000 2,500,000 2,500,000
Less: Opening
material 2000000
2,197,976.4
4
2,417,261.1
1 2,500,000 2,500,000
Purchase units
57,345,363.
94
63,068,073.
41
65,082,738.
89 65,000,000 65,000,000
Cost per unit
$
0.62
$
0.64
$
0.67
$
0.69
$
0.71
Budgeted material
purchase
$
35,821,498.
40
$
40,676,638.
87
$
43,340,246.
48
$
44,691,915.
88
$
46,144,403.
14
(ii) Budgeted cost of goods manufactured schedule
2018 2019 2020 2021 2022
Production
cost
$
126,371,803.
83
$
143,444,913.
72
$
153,176,329.
47
$
158,154,560.
18
$
163,294,583.38
Factory
manager's
salary
$
153,375.00
$
156,825.94
$
160,354.52
$
163,962.50
$
167,651.65
Depreciation:
Factory plant
and equipment
$
765,000.00
$
765,000.00
$
765,000.00
$
765,000.00
$
765,000.00
Cost of goods
manufactured
$
127,290,178.
83
$
144,366,739.
66
$
154,101,683.
99
$
159,083,522.
67
$
164,227,235.03

8MANAGEMENT ACCOUNTING
(iii) Budgeted cost of goods sold schedule
2018 2019 2020 2021 2022
Cost of
goods
manufacture
d
$
127,290,178.
83
$
144,366,739.
66
$
154,101,683.
99
$
159,083,522.
67
$
164,227,235.
03
Add:
Opening
stock of
finished
goods
$
985,000.00
$
1,096,837.50
$
1,206,521.25
$
1,327,173.38
$
1,459,890.71
Less:
Closing
stock of
finished
goods
$
1,096,837.50
$
1,206,521.25
$
1,327,173.38
$
1,459,890.71
$
1,605,879.78
Cost of
goods sold
$
127,178,341.
33
$
144,257,055.
91
$
153,981,031.
86
$
158,950,805.
34
$
164,081,245.
96
Gross profit schedule
2018 2019 2020 2021 2022
Sales revenue
$
133,784,011.
97
$
153,416,815.
73
$
175,930,733.
43
$
201,748,568.
56
$
231,355,171.0
0
Less: Cost of
goods sold
$
127,178,341.
33
$
144,257,055.
91
$
153,981,031.
86
$
158,950,805.
34
$
164,081,245.9
6
Gross profit
$
6,605,670.63
$
9,159,759.82
$
21,949,701.5
7
$
42,797,763.2
3
$
67,273,925.04
(b) Increased production constraint
Computation of NPV
Year 2019 2019 2020 2021 2022
Cash outflow
$
(5,000,000.00)
Cash inflow
$
4,146,181.87
$
6,280,279.19
$
8,877,442.64 $ 16,249,545.43
Cash $ $ $ $ $ 16,249,545.43

9MANAGEMENT ACCOUNTING
inflow/(outflow
) (5,000,000.00) 4,146,181.87 6,280,279.19 8,877,442.64
Discounting
factor @ 12% 1 0.8929 0.7972 0.7118 0.6355
Discounted cash
flow
$
(5,000,000.00)
$
3,702,125.79
$
5,006,638.57
$
6,318,963.67 $ 10,326,586.12
Net present value $ 20,354,314.16
(c) Report to CEO
Generally, the project is accepted if the net present value of the project taking into
consideration the discounting factor of cost is positive. It has been found from the calculation
that the net present value of the project is $ 20,354,314.16. Therefore, as the NPV of the
project is positive, the project is acceptable (Žižlavský, 2014). However, before accepting the
project various other factors like risks and opportunities must be taken into consideration.
Various risks that may b effaced are that though the production capacity of the plant is
increased, the workers may not be willing to work for more productions. If new employees
are engaged they may charge higher wages that may eat up the additional profit. Further,
there may be financial obstacles for investing in the new project. On the other hand, the
opportunity that may be achieved by the company is competitive advantages over the
competitors, capturing the market segments which in turn will increase the profitability
(Leyman & Vanhoucke, 2016). Therefore, after taking into consideration the risk and
opportunities the project may be accepted if the net present value of the project is positive.
Question 4
Cost concepts
(i) Distinguish between variable cost and fixed cost and product cost and period
cost
Variable cost and fixed cost –

10MANAGEMENT ACCOUNTING
Fixed cost is the cost that remains same irrespective of production volume whereas
the variable costs change when there is a change in the output. Fixed cost includes building,
machinery and rent. On the other hand, variable cost includes wages, utilities, material cost
for production (Drury, 2013). The main differences among 2 types of costs are as follows –
Basis of difference Fixed cost Variable cost
Nature This costs are time related These costs are volume
related
Unit cost It changes with the units as
the fixed cost per unit
reduces with the increase in
production. Therefore, per
unit fixed cost is inversely
proportional with produced
units.
Per unit variable cost remains
same
Incurred when These costs are definite and
are incurred even if there is
no production
These costs are incurred only
when production takes place
Combination It is the combination of fixed
administration overhead,
production, distribution and
selling overhead
It includes direct material,
labour, expenses, variable
production overhead, and
distribution and selling
overhead
Product cost and period cost –

11MANAGEMENT ACCOUNTING
Product cost is attributable to product that is the traceable cost to the product and
forms the part of the inventory values. On the other hand, period cost is opposite of product
cost as it is not associated with the production and cannot be allocated to the product and
charged under the period to which they relate (Mishan, 2015). The main differences among 2
types of costs are as follows –
Basis of difference Product cost Period cost
Basis and nature These costs are volume based
and variable cost
These costs are time based
and fixed cost
Includes It includes production cost or
manufacturing cost
It includes non-
manufacturing cost that is
selling, administration,
distribution and office costs
Examples Cost of production
overheads, raw materials,
wages and depreciation for
machinery
Rent, salary, depreciation for
office assets and audit fees
(ii) Relevant range
Relevant range is the specific level of activity and is bounded by maximum and
minimum amount. Within designated boundaries, specific cost or revenue levels are expected
to occur. Outside of the relevant range the expenses and revenues are expected to differ from
expected amount. Identification of the relevant range is crucial as knowing production level
at which the costs will be changed is crucial for budgeting, financial planning and accounting
(Seuring & Goldbach, 2013).