Assignment
Task 1
Description:
Your answers to the requirements for the four case studies will form the basis of this individual assessment task.
Purpose
The purpose for this assessment is to assess you on (1) your knowledge and understanding the course content, (2) your application of that knowledge, (3) your critical analysis of information provided in the four (4) case studies.
The case study answers will relate to material covered for modules 1, 2 and 3, including week 1 to week 6.
The case studies will be used to assess your learning outcomes 1, 2, and 3 listed below.
1. To demonstrate a theoretical knowledge of the role of strategic management accounting in supporting strategy development and the day-to- day operations of a sustainable organisation
2. To apply strategic management accounting tools and techniques to improve the contribution and sustainability of value creating activities
3. To utilise strategic management accounting tools and techniques skills to ensure the role of performance measurement and control systems in value creation is achieved, strategies are implemented and performance monitored and adjusted to improve the success of the strategies.
Case Study 1: Activity-Based Supplier Performance Costing
Tractor Company (TC) manufactures tractors for agricultural usage. TC purchases the engines needed for its tractors from two sources: Johnston Engines and Wilson Company. The Johnston engine has a price of $1,400. The Wilson engine is $1,300 per unit. TC produces and sells 22,000 tractors. Of the 22,000 engines needed for the tractors, 4,000 are purchased from Johnston Engines, and 18,000 are purchased from Wilson Company. The production manager, Jamie Dunn, prefers the Johnston engine. However, Jane Boots, purchasing manager, maintains that the price difference is too great to buy more than the 4,000 units currently purchased from Johnston Engines. Boots also wants to maintain a significant connection with the Johnston source just in case the less expensive source cannot supply the needed quantities. Jamie, however, is convinced that the quality of the Johnson engine is worth the price difference.
Frank Wall, the financial controller, has decided to use activity costing to resolve the issue. The following activity cost and supplier data have been collected:
|
Activity
|
Cost
|
|
Replacing enginesa
|
$900,000
|
|
Expediting ordersb
|
1,200,000
|
|
Repairing enginesc
|
1,500,000
|
a All units are tested after assembly, and some are rejected because of engine failure. The failed engines are removed and replaced, with the supplier replacing any failed engine. The replaced engine is retested before being sold. Engine failure often causes collateral damage, and other parts often need to be replaced.
b Orders are expedited due to late or failed delivery of engines.
c Repair work is for units under warranty and is often due to engine failure. Repair usually means replacing the engine. This cost plus labor, transportation, and other costs make warranty work very expensive.
|
|
Wilson
|
Johnston
|
Total
|
|
Engines replaced by source
|
1,880
|
20
|
|
|
Late shipments/ expedited orders
|
395
|
5
|
|
|
Warranty repairs (by your company)
|
1,450
|
50
|
|
Required: All requirements for Case Study 1 must be answered
Calculate the activity-based supplier cost per engine (the engine acquisition cost plus supplier-related activity costs). (Round to the nearest cent.)
What is the SPI (Supplier Performance Index) for each supplier.
Which of the two suppliers is the lower-cost supplier? Explain why this is a better measure of engine cost than the traditionalengine acquisition costs assigned to the engines.
Consider the supplier cost information obtained in Requirement 1. Suppose further that Johnson can only supply a total of 20,000 units. What actions would you advise Tractor Company to undertake with its suppliers based on the information you have identified in requirements 1, 2, and 3?
Case study 2
Pet TreatzProprietary Ltd has 2 factories manufacturesa high quality product called "pet treats". One factory is located in Melbourne and the other in Toowoomba both product the same "pet treats" product. The selling price for this"pet treats" product is $35 for a kilogram packet. Pet Treatz usually sells 500,000 packets of this"pet treats" producteach year.
Recently the Melbourne factory reduced the selling price to $30 to meet market competition where the Melbourne factory sells its product. It was able to offer this selling price because it was able to reduce Non-Value Added activities within the production process. Below is information about the prices, cost, and profit per unit after the Melbourne factory reduced its prices and costs. The current selling prices, cost, and profit per unit for the Toowoomba factory.
The market competition where the Toowoomba factory sells its product is becoming more competitive too. Toowoomba production manager is willing to find ways to reduce cost to meet the new market selling price, but the manager must retain the same dollar value of profit.
|
|
Melbourne factory's new
|
Toowoomba factory's current
|
|
Selling price
|
$30
|
$35
|
|
Cost
|
$24
|
$28
|
|
Profit Margin (% and $)
|
20% = $6
|
20% = $7
|
A consultant has identified the Value-Added and the Non-Value Added activities (and their % Profit margin)for Toowoomba factory, which are provided in the table below.
|
|
Value-Added Activities
|
Non-value added activities
|
Total activities
|
Actual cost of total activities
|
|
Materials (kgs)
|
900,000
|
100,000
|
1,000,000
|
$10,000,000
|
|
Labour (hours)
|
18,000
|
6,000
|
24,000
|
$720,000
|
|
Machine set ups
|
500
|
750
|
1,250
|
$250,000
|
|
Materials handling
|
0
|
40,200
|
40,200
|
$2,010,000
|
|
Warranties and customer complaints
|
0
|
30,000
|
30,000
|
$1,020,000
|
|
Total
|
|
|
|
14,000,000
|
|
Total number of units
|
|
|
|
500,000
|
A local producer sells a similar product for $30. If the Toowoomba factory can match its price, it will retain its market share.
Required:
Calculate the Non-Value Added cost per activity and per unit of product.
Ascertain the following information
It is possible for the Toowoomba factory to reduce all the Non-Value Added costs? Explain your answer based on you calculations from requirement 1.
The total capital investment cost to re-engineer the production process to attain this Zero Non-Value Added process will be $200,000, which will be capitalised based on a useful life for 10 years (straight-line depreciation). Can the Toowoomba factory match the Melbourne factory if it will increase cost the Toowoomba factory by $20,000 per year to re-engineer the production process to attain this Zero Non-Value Added process?Show all calculations.
Calculate the target cost required to produce the product so thatPet Treatz may match the selling price of the local competitor, and thus, retain its market share and the required 20% profit margin per unit.
What is the lowest possible selling price that the product can be sold for in the Toowoomba factory's market, while still retaining the required 20% profit margin per unit?
Describe the advantages and disadvantages of benchmarking with the achievements of the Melbourne factory. Relate your answer to the calculations that you made for the case of the Toowoomba Pet Treatz factory.
Case Study 3. Managing cost and quality
MountainBikes Ltd is a major Australian bicycle manufacturer. Over the last decade, bicycle manufacturers from Taiwan and Korea have been able to price their bikes below those of MountainBikes' products, but the company has retained its market share due to the poor quality of the imported bikes. Recently, however, the quality of the imported bikes has improved, and MountainBikes has had to cut prices to maintain market share. The managing director, John Small, is concerned about the viability of the business at these lower prices and asks the accountant, Colleen Martin, to investigate the problem.
Martin's initial investigation indicates that the lower prices cannot be sustained in the longer term, as they do not cover the costs of manufacture, or contribute to the company's selling and administrative costs. She looks for possible cost reductions. The company has always had a reputation for high quality, but Martin feels that there are substantial costs incurred in attaining this level of quality. She knows that there are extensive quality inspection checks throughout the production process and that many employees spend part of their time reworking defective parts. She also has noticed the buckets full of scrapped parts and components spread throughout the factory. These costs are not recorded separately in the existing accounting system. Martin asks Small to support the development of a cost of quality system.
Small: What do you mean, a system that records the costs of poor quality! Our bikes are among the best in terms of quality!
Martin: I know that John, and we know what it costs us to make our bikes, but we've got no idea how much of that cost is related to ensuring quality. I think the cost of quality here is very high. What if it is a third of our manufacturing costs? And what if we could reduce it without compromising our quality? We could keep our prices down and still make a good profit.
Small: Okay, Colleen. Give your cost of quality system a try, though I don't see how it will help. Everybody knows that good quality costs money. Even if we do find out our cost of quality, I don't see how it will help us reduce it.
Martin: John good quality doesn't seem to cost money in Taiwan and Korea. Their prices haven't gone up, even though their quality has. You'll soon see that understanding quality costs can help you to reduce them and to improve quality at the same time.
Over the next six months Martin identifies the following costs of quality in Table 1 below:
During this period, total manufacturing costs were $600,000.
During this period total Sales Revenue was $750,000
Table 1 Quality Cost Report for MountainBikes Ltd
|
|
Current Half-Yearly Cost
|
Percentage 6 Month's of Total Quality Costs
|
|
Prevention costs:
|
|
|
|
Cost of quality training programs
|
3,000
|
|
|
|
$3,000
|
%
|
|
Appraisal costs:
|
|
|
|
Quality inspection in the goods receiving area
|
15,000
|
|
|
Quality inspections during processing
|
23,000
|
|
|
Laboratory testing of bikes and components
|
13,000
|
|
|
Operating an X-ray machine to detect faulty welds
|
15,000
|
|
|
Inspection of each bike put into finished goods warehouse
|
16,000
|
|
|
|
$82,000
|
%
|
|
Internal failure costs:
|
|
|
|
Rework on defective wheels
|
8,000
|
|
|
Engineering costs to correct production line quality problems
|
15,000
|
|
|
Committed machine hours that become idle due to machine 'downtime' during correction of production line quality problems
|
25,000
|
|
|
Cost of faulty components that are scrapped
|
4,000
|
|
|
Cost of rewelding faulty joints discovered during processing
|
19,000
|
|
|
Cost of faulty bikes that are scrapped after finished goods inspection
|
10,000
|
|
|
|
$81,000
|
%
|
|
External failure costs:
|
|
|
|
Cost of replacement bikes provided under warranty
|
7,500
|
|
|
Cost of bikes returned by customers and scrapped
|
9,000
|
|
|
Cost of repairs under warranty
|
1,000
|
|
|
|
$17,500
|
%
|
|
Total quality costs
|
$183,500
|
%
|
All requirements for Question 3 must be answered
A cost of quality report has been prepared for the six months grouping each quality cost into one of the four quality cost categories.
Calculate the total cost of each quality for each cost of quality category [e.g., Prevention is one category]. Write your answers in the above table {which can be copied into your assignment} You will need to add more columns. Calculate the cost of quality as:
(a) a percentage of Total Quality Costs for each cost item and for each category
(b) a percentage of Manufacturing Costs for each cost item and each category.
(c) a percentage of Total Sale Revenue for each cost item and each category
Identify the three worst performing cost activities across the four cost categories and explain why you believe these to be the three worst cost activities. Suggest some reasons why they may have been incurred. Suggest some ways in which they could be reduced or eliminated.
Which cost category is the most important category to invest in so that the quality of the bikes can be improved, and so that quality costs can be reduced over time? Suggest three additional costs that could be added into this category to help the company work towards use the "Zero-Defects" strategic model and briefly explain how they would work.
When John Small receives the cost of quality report, he is amazed and says,
'Colleen, you're the accountant. Why didn't you tell me before this that our quality costs were this high?'
Explain to Small why Martin was unable to tell him much about the cost of quality because of the existing accounting system. (Hint: compare traditional costing with ABC, ABM and Cost of Quality reporting).
Before the competitors improved the quality of their products, Mountain Bikes Ltd was selling its bicycles for $187.50 but now must match the competitors' selling price of $145.
If the company targets this selling price to retain its current half-yearly sales volume of 4,000 units for the next 6 months and it decides to maintain its usual profit margin (as 20% percentage of sales), what must be set as the new target cost?
What is the new Revenue amount expected for the next 6 months if the company can increase its market share by 25% if selling at the new lower price? What is the expected profitor the next 6 months?
Case study 4
SSHA Holdings Pty Ltd owns two business units; Rotor Electrics in Nauru and Green Acres in Australia. Each business unit is treated as a profit centre by SSHA Holdings. Rotor Electrics manufactures electric motors in Nauru, which it sells in the International market for AUS$240 per unit. Green Acres Ltd. makes ride-on mowers using electric motors similar to those manufactured by Rotor Electrics Ltd. Currently, Green Acres buys these similar electric motors from an Australian supplier (external supplier that is not part of the SSHA Holdings group) for $240. Both companies pay 10% sales commission only when they sell their products to external customers.
The unit selling prices and relevant costs are given below.
|
|
Rotor Electrics Amounts per motor
|
Green Acres Amounts per ride-on mower
|
|
Selling Price per unit
|
$240
|
$2100
|
|
Production Cost per unit
|
$135
|
$1300 (including the electric motor)
|
|
Selling Expenses (10% sales commission)
|
$24
|
$210
|
Requirements
Calculate the profits made by (1) Rotor Electrics business unit (per motor), (2) Green Acres business unit (per mower), and (3) SSHA Holdings Ltd (as a whole group), when Rotor Electrics sells to external customers and Green Acres buys from an external supplier 4 marks
SSHA Holdings management decides that Rotor Electrics must sell its electric motors to Green Acres. The managing director is aware of the 20% tax rate in Nauru compared to Australia's 30% tax rate and decides to set a transfer price that will minimise SSHA Holdings overall income tax. To achieve this tax minimisation goal, the managing director sets a transfer selling price of AUS$400 per motor for Rotor Electrics to sell to Green Acres.
Using this new transfer selling price for Rotor Electrics, calculate the profits made by (1) Rotor Electrics business unit (per motor), (2) Green Acres business unit (per mower), and (3) SSHA Holdings Ltd (as a whole group).
The managing director (MD) cannot see why the current performance measures (Profit and Return on Investment) for each manager should be changed (the managing director does not consider whether the new arrangement will affect bonuses or future promotion prospects for the managers of each company). Using your answers to requirement 1 and 2 above, explain to the MD whether the Rotor Electrics manager and the Green Acres manager would both support the decision to transfer the electric motors from Rotor Electrics to Green Acres at AU$400. Describe (using your calculations) the impact of the new transfer selling price on the performance measures for both managers if the existing performance measures are retained, and possible managerial behaviours.
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.