Managerial Accounting Case Study: Ethical Responsibilities and Costing

This case study assignment for MBA 605 at the University of Fujairah examines managerial accounting principles through a two-part case. Part 1 focuses on Al-Anwar Company and requires students to calculate unit product costs under absorption and variable costing for several years, analyze the impact of different costing methods on net operating income, and prepare income statements using both methods. Students must also reconcile the differences in net operating income and analyze the financial performance under different production and sales scenarios. Part 2 delves into the ethical responsibilities of a management accountant, prompting students to discuss ethical issues related to a manager's decision-making and apply the ethical code of conduct from the Institute of Management Accountants (IMA) to a given scenario involving production and sales strategies in light of a new competitor and market changes. The assignment emphasizes financial analysis, decision-making, and the ethical dimensions of managerial accounting practices, using the company’s data to assess the implications of various costing methods and management strategies.

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UNIVERSITY OF FUJAIRAH
COLLEGE OF BUSINESS ADMINISTRATION
ASSIGNMENT 2
MBA 605MANAGERIAL ACCOUNTING
Section 01
FALLSemester_ T1, 2017-2018
OCTOBER4, 2017
DR. RIFAT SALEH KHALAF
CLO # CLO Description Type of Examinations No. of
Items
Weighted
mark(s) Points Score
2
Describe management accounting tools and
techniques such as job-order costing, variable
costing, and activity based costing in financial
decision making. (Knowledge)
Case Study A- Part 1 8 2 Marks each 16
16
5 Apply the ethical responsibilities of a
management accountant to all aspects of
decision making. (Skills/Role in Context)
Case Study A- Part 2 1 9 Marks 9
9
 The maximum mark is 25.
 The weight of this instrument constitutes 25% of the total course grade.
TOTAL 25
Instructions:
 This is a group assignment (each group must not exceed 3 students).
 Submit on or before October13, 2017.
 Upload a soft copy online on moodle using Microsoft office word, and submit another signed hard
copy.
# Student’s ID: Student’s Name: Signature:
1
2
3
Assignment2– MBA 605Managerial Accounting Page 1 of 6

Case Study A:
Part 1: Absorption and Variable costing Income Statements
CLO 2 (----------/16 Marks)
Instructions: Answer the questions below in proper format, and justify your
answers, where needed, from managerial accounting perspectives.
Al-Anwar Company manufactures and sells a single product. Cost data for the
product are given below:
Cost item Cost data
Manufacturing:
 Direct materials
 Direct labor
 Variable manufacturing
overheads
 Fixed manufacturing
overheads
AED 14 per unit
AED 20 per unit
AED 10 per unit
AED 630,000 per
year
Selling and Administrative:
 Variable selling and
administrative
 Fixed selling and
administrative
AED 6 per unit
AED 490,000 per
year
The product sells for AED 120 per unit.Production and sales data for the past
four years were as follows (based on actual historical data):
Actual 2013 2014 2015 2016
Units
Produced
17,50
0
17,50
0
17500 10,00
0
Units Sold 15,00
0
20,00
0
14,00
0
12,50
0
The company has an annual capacity to produce up to 40,000 units.
The board of directors were unhappy of the financials and the fact that a huge
capacity is unutilized (idle capacity). Therefore, a new manager, Hamdan, was
hired and just signed a 3-years contract effective January 1st, 2017 who
promised to make utmost use of the factory capacity. Hamdan was contracted
to get a bonus on the improvements of the financial results as a percentage of
the cumulative net operating income at the end of his contract period.
According to Hamdan, the annual maximum capacity target will be hit by the
end of 2019. He designed a production schedule that increases by 10,000 units
every year as follows:
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Budget 2017 2018 2019
Planned productions
in units
20,00
0
30,00
0
40,00
0
After the first two years of his employment, the following actual datawas
revealed:
Actual 2017 2018
Units
Produced
20,00
0
30,00
0
Units Sold 15,00
0
20,00
0
Hamdan insisted that next year (2019) he will fulfil his promise and act just as
per his plan and reach the maximum production capacity of 40,000 units. The
board of directors were happy of the financial improvements in net operating
income and thus supported his decision and plan.
Required: (assuming all cost data remains the same from 2013 to 2018, there
was no beginning inventory in 2013, and assuming the company uses FIFI
method for inventory accounting)
1. Determine the unit product cost under the Absorption costing for the
five years below,explaining why the unit product cost differs from year to
year?
Absorption costing 2015 2016 2017 2018 2019
Direct materials 14.00 14.00 14.00 14.00 14.00
Direct Labor 20.00 20.00 20.00 20.00 20.00
Variable Manufacturing
Overhead
10.00 10.00 10.00 10.00 10.00
Fixed Manufacturing
Overhead
36.00 36.00 36.00 63.00 31.50
Total product cost per
unit
80.00 80.00 80.00 107.00 75.50
2. Determine the unit product cost under the Variable costing for the five
years below. Do you observe any changes on the unit product cost from
year to year, explainwhy?
Variable Costing 2015 2016 2017 2018 2019
Assignment2– MBA 605Managerial Accounting Page 3 of 6

Direct materials 14.00 14.00 14.00 14.00 14.00
Direct Labor 20.00 20.00 20.00 20.00 20.00
Variable Manufacturing
Overhead
10.00 10.00 10.00 10.00 10.00
Fixed Manufacturing
Overhead
36.00 36.00 36.00 63.00 31.50
Total product cost per
unit
80.00 80.00 80.00 107.00 75.50
3. Why would the board of directors be unhappy about 2016 financial
results? (Hint: you need to compute the 2016 net operating income using
the absorption costing income statement. Remember to consider the
beginning inventory in 2016).
Absorption costing
income statement
2016
Sales 1500000
Less: Cost of goods sold 1000000
Gross Margin 500000
Less: Selling and
administrative expenses
565000
Net operating income -65000
4. Why was the board of directors happy about 2017 and 2018 financial
results? (Hint: you need to compute the 2017 & 2018 net operating
income using the absorption costing income statement. Remember to
consider the beginning inventory each year).
Absorption costing
income statement
2017 2018
Sales 1800000 2400000
Less: Cost of goods sold 1200000 2140000
Gross Margin 600000 260000
Less: Selling and
administrative expenses
580000 610000
Net operating income 20000 -350000
5. Prepare contribution format income statement using variable costingfor
the three years 2016, 2017, and 2018.(Hint: remember to consider the
beginning inventory each year).
Assignment2– MBA 605Managerial Accounting Page 4 of 6

Variable costing income
statement
2016 2017 2018
Sales
Less: Variable expenses
Contribution Margin
Less: Fixed expenses:
Net operating income
6. From all above, reconcile the absorption costing and variable costing net
operating incomes/ (losses) in the years 2016, 2017, and 2018.
2016 2017 2018
Variable costing net operating income/ (loss)
Absorption costing net operating income/
(loss)
7. Was the board of director’s satisfaction from Hamdan, the new manager,
justified?
Assignment2– MBA 605Managerial Accounting Page 5 of 6

8. What if, due to the rise of a new competitor in the field, sales in 2019 will
suddenly drop by 10% from previous year 2018, and production remains
the same as scheduled (40,000 units). Calculate the net operating income
under each of the methods; absorption and variable costing. (Hint:
remember to consider the beginning inventory each year).
Traditional income
statement using
absorption costing
2019 Contribution income
statement using variable
costing
2019
Sales
Less: Cost of goods sold
Sales
Less: Variable expenses
Gross Margin Contribution Margin
Less: Selling and
administrative expenses
Less: Fixed expenses:
Net operating income Net operating income
Case Study A (Continued):
Part 2: Ethical Code of Conduct and responsibilities CLO 5
(-----------/ 9 Marks)
With reference to the previous part 1 of the case study (A);
Being the Management accountant of the company, you discussed
decreasing production with the manager in the light of the new competitor, the
market share, and the expected drop in sales volume, but he still claims
that“there is an idle capacity that could be utilized to produce extra units to
meet future demand that might suddenly arise”
a. Discuss the ethical issues involved in the decision of the new manager.
Explain in details.
b. Describe your ethical responsibilities in this regard based on the ethical
code, “Statement of Ethical Professional Practice”, adopted by the
Institute of Management Accountants (IMA).
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