Question: Module Overview: Consider a company that produces two hundred different products. Due to mass production, management might lose sight of a product. If that product becomes unprofitable, the company will lose money on every sale of that product. This might lead to repercussions such as increasing the sales price of the product, cut its production cost, or discontinue its production.
This could be the scenario with all the different products.Typically, a company produces variant product lines that generate revenue. Many companies start at a small scale, grow over time with the addition of new products, and develop new markets. At a certain stage of growth, every company needs to analyze whether its existing products or the addition of new products will prove profitable or add any value to its shareholder value. Therefore, to sustain profitability and build a business with profitable products, managers need to do operational planning and make decisions based on predictions of costs and revenues.
This module describes how cost-profit-volume (CVP) analysis can be used to perform break-even analysis-a critical tool essential for determining profit margins.
Module Readings: Complete the following readings early in the module:
Read the online lectures for the Module
From the textbook, Accounting for Managers: Interpreting Accounting Information for Decision Making, 5th, read the following chapters:
Chapter 9: Accounting and Information Systems
Chapter 9 textbook Microsoft PowerPoint slides
Chapter 13: Overhead Allocation Decisions
Chapter 13 textbook Microsoft PowerPoint slides
Chapter 14: Strategic Investment Decisions
Chapter 14 textbook Microsoft PowerPoint slides
Assignment: OAES Entry
Instructions: "Save" your response to each question by changing the color to the answer to RED as you work through the assignment
1. Information systems that include both financial and non-financial information which can be presented graphically with highlighting of performance relative to target are:
Choose one:
Enterprise resource planning systems
Expert systems
Transaction processing systems
Management information systems
2. Information systems that integrate financial and non-financial information and provide holistic information across multiple business activities are:
Choose One:
Enterprise resource planning systems
Expert systems
Management information systems
Transaction processing systems
3. Reporting on a horizontal perspective provides information about:
Choose One:
an organization's structure of departments or business units
business activities or processes that cut across departments or business units
an organization's structure of processes
an organization's processes reflected in its organization chart
4. Information systems design and control is important:
Choose One:
For all new and existing systems
For all systems except those by established suppliers such as SAP and Oracle
Only for accounting systems
Only for new information systems
5. Williams, a professional services firm has overhead of £625,000. It operates three divisions and an accountant's estimate of the overhead allocation per division is 38% for Division 1, 22% for Division 2 and 40% for Division 3. The divisions respectively bill 4,100, 1,950 and 3,300 hours.
The business-wide overhead recovery rate and the cost-centre overhead recovery rate for Division 2 are, respectively:
Choose One:
£57.93 and £72.51
£66.84 and £70.51
£55.55 and £62.50
£62.50 and £55.55
6. Randy's Components uses an activity based costing system for its product costing. For the last quarter, the following data relates to costs, output volume and cost drivers:
Overhead Costs £
Machinery 172,000
Set-ups 75,000
Materials Handling 25,000
Total 272,000
Product information A B C
Production and sales units 5,000 3,500 2,800
Number of production runs 11 9 6
Number of stores orders 15 10 9
Choose & Match
Product A
Product B
Product C
1. £8.65
2. £8.24
3. £9.27
7. The method of determining overhead allocation using absorption costing and that under activity-based costing differs because: Choose One
Activity-based costing allocates costs to cost pools and traces costs to products based on cost drivers whereas absorption costing allocates costs to cost centres and then to products based on a measure of activity such as direct labour hours
Absorption costing allocates costs to cost pools and traces costs to products based on cost drivers whereas activity-based costing allocates costs to cost centres and then to products based on a measure of activity such as direct labour hours
Absorption costing is based on a business-wide allocation of overheads whereas activity-based costing is based on a departmental (or cost centre) allocation of overheads
Activity-based costing can never accurately allocate overheads to products because the method of allocation is arbitrary whereas absorption costing is always more reliable because it uses predictable causes of overhead costs to trace those costs to products
8. The main proposal made by Cooper & Kaplan in their article "How cost accounting distorts product costs" is that, Choose One
nearly all product costs are variable and cost systems need to reflect the variability of these costs in terms of the number of transactions
cost accounting has not reflected the shift from manufacturing to service industries
product cost information can lead to inappropriate decisions about product discontinuance
product costs that are calculated for inventory valuation purposes are not reliable for decision-making
9. The projected net cash flows for an investment are (in £'000):
Y0: ?
Y1: 130
Y2: 200
Y3: 330
Y4: 270
Y5: 180
Match the net present value of the investment assuming a 7% cost of capital and a 950 initial investment; a 8% cost of capital and a 850 initial investment; a 9% cost of capital and a 825 initial investment; and a 6% cost of capital and a 900 initial investment? Choose One & Match
8%/850
9%/825
7%/950
6%/900
1. -50.1
2. 24.8
3. 25.7
4. 26.1
10. Given the cash flow in the prior question (14a) and for the $900 initial investment, what is the IRR of the cash flows? Choose One
7%
9%
8%
6%
11. General Sales is considering three alternative investment proposals but can only accept one of these. The investments and cash flows are shown below:
Year 0 Year 1 Year 2 Year 3 Year 4
Project A: Cost of Capital 12%
Cash inflows -150,000 50,000 75,000 75,000 50,000
Project B: Cost of Capital 11%
Cash inflows -200,000 75,000 75,000 75,000 75,000
Project C: Cost of Capital 10%
Cash inflows -265,000 50,000 100,000 150,000 100,000
General uses discounted cash flow techniques to evaluate its investments, using a cost of capital as specified above. Compare for each alternative investment the Net present value, Profitability index, and the Internal rate of return. Which of the three investment proposals is the best for General Sales? Choose One
Project A
Project C
Project B
None of them have positive NPVs and are not acceptable.