Introductory Management Accounting Assignment
Unit Learning Outcomes covered in this assessment - The purpose of this assignment is to assess the following Learning Outcomes:
a. Describe and discuss the function and role of management accounting in the contemporary business environment.
b. Demonstrate broad knowledge of management accounting and explain appropriate approaches to generate cost information.
c. Produce business reports which present analyses of financial solutions to management issues.
d. Apply knowledge to generate adaptable and flexible approaches to problem solving and decision making.
e. Apply management accounting practices and theories to analyse and solve business and management problems.
Assignment Description - This assessment task is comprised of two parts.
In part 1, students review current literature relating to various product costing systems, approaches to applying overhead costs to each product, and write a report comparing costs and benefits of various approaches to applying overhead costs.
In part 2, students write a memo to the monthly management meeting comparing economic consequences of using different approaches to overhead cost allocations.
Part I: Costing Systems
The following quotes are based on Mowen, M., Hansen, D., Heitger, D., Sands, J., Winata, L. & Su, S., (2016). Managerial Accounting, 1st edition. South Melbourne: Cengage Learning.
Plant-wide and departmental rates based on direct labour hours, machine hours, or other volume-based measures have been used for decades to assign overhead costs to products and continue to be used successfully by many organisations. However, for many settings, this approach to costing is equivalent to an averaging approach and may produce distorted, or inaccurate, costs. Firms operating in competitive business environments in particular need accurate cost information in order to make informed decisions (Mowen 2016, p. 278).
The underlying assumption that is activities consume resources, and cost objects, in turn consume activities have lead up to the development of Activity Based Costing system in the contemporary manufacturing firms (Mowen 2016, p. 289).
Required - With reference to the above statement, write a report to discuss:
- Problems associated with the traditional costing systems for product costing in a modern manufacturing environment.
- Explain how contemporary manufacturing companies/businesses can benefit from adopting activity-based costing.
- Describe the limitations of activity-based costing and factors that may impede the introduction of ABC.
Report should incorporate the following sections:
1. Cover page
2. Executive summary
3. Table of contents
4. Introduction
5. Body: this section should include topics such as
- Various product costing systems
- Traditional approaches to overhead cost allocation
- Limitations/shortcomings of traditional approaches to overhead cost allocation
- Contemporary approach to overhead cost allocation (Activity Based Costing)
- Limitations and impediments of the Contemporary approach to overhead cost allocation
6. Conclusion and recommendations
8. Reference list (8-10 references must be cited)
To achieve this task, you are required to:
- review literature from a range of sources, including books, and peer reviewed articles (cite at least 8-10 sources including 6-8 peer reviewed articles)
- investigate and analyse articles written on various product costing systems
- investigate and analyse articles written on traditional approaches to overhead cost allocation
- investigate and analyse articles written on contemporary approach to overhead cost allocation (Activity Based Costing)
Part II: Calculation of costs
The telecommunication industry is one of the most price sensitive and consumer driven industries in Australia's business market. Singtel is a manufacturer of electronic products and assemblies for the telecommunications industry. The Singtel produces two different telephone systems for the corporate market, i.e. "Basic" and "Advanced" telephone systems. The cost estimates for the "Basic" and "Advanced" telephone systems for the current year are as follows.
Cost information of Basic and Advanced telephone models
|
|
Basic ($)
|
Advanced ($)
|
|
Direct material
|
800
|
1600
|
|
Direct labour (20 hrs @ $30 per hour)
|
600
|
600
|
|
Manufacturing overhead (Predetermined overhead rate is $40 per direct labour hour.)
|
800
|
800
|
|
Total
|
2200
|
3000
|
Each model of telephone system requires 20 hours of direct labour. The basic system requires 5 hours in Fixing Department and 15 hours in Testing Department. The advanced system requires 15 hours in Fixing Department and 5 hours in Testing Department. The budgeted overhead costs in these two production departments are as follows:
|
|
Fixing Department
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Testing Department
|
|
Variable cost
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$ 32 per direct labour hour
|
$8 per direct labour hour
|
|
Fixed cost
|
$400,000
|
$400,000
|
The Singtel's management expects to operate at level of 20000 direct labour hours in each production department during the current year.
The following table provides manufacturing overhead costs with the activity cost pools and activity driver data. Additionally, you are provided the information relating to various cost pools and activity drivers.
|
Activity
|
Activity cost ($)
|
Total
|
Activity drivers
|
|
Basic
|
Advanced
|
|
Machine setup
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200000
|
200 setups
|
50 setups
|
150 setups
|
|
Material receiving
|
120000
|
80000 kilograms
|
30000 kilograms
|
50000 kilograms
|
|
Inspection
|
160000
|
1600 inspections
|
700 inspections
|
900 inspections
|
|
Machinery related
|
840000
|
60000 machine hours
|
20000 machine hours
|
40000 machine hours
|
|
Engineering
|
280000
|
7000 engineering hours
|
3000 engineering hours
|
4000 engineering hours
|
|
Total overhead
|
1600000
|
|
|
|
Singtel plans to produce 1000 units of each model.
Required -
1. Calculate cost per Basic telephone system and Advanced telephone system using departmental rates (traditional volume based approach).
2. Calculate cost per Basic telephone system and Advanced telephone system using Activity Based Costing approach.
3. Write a memo to the monthly management meeting comparing cost per Basic telephone system and Advanced telephone system if Singtel uses:
- Departmental rates to allocate overhead costs to products
- Activity Based Costing approach to allocate overhead costs to products.
4. Discuss implications of adopting traditional costing approaches and Activity Based Costing approach separately, and the impact on the firm's pricing policy.
Note: Include all calculations in the memo.