Acct204 Management Accounting & Contrary Assessment Answers

1.The CEO, Luis Franco, and the financial controller, Arthur Batten, are currently evaluating the usefulness of Activity based costing (ABC). Provide an argument for and against the benefits of ABC. The arguments must be backed up by peer review journals and articles from the CPA/CA journals only.

2.Luis Franco is concerned that his manufacturing manager Julius Frino is not familiar with the Industrial award that should be used for his staff. Find an appropriate award and provide a summary of the hourly wages/weekly wages and associated penalties inclusion overtime.

3.Discuss the results of sensitivity analysis of the changes in the selling prices (Casual and Deluxe type) and costs of raw materials (XX and YY) have on the operating income of Stylish Ltd. The workings as well as the master budget (operating budget) needed for Stylish Ltd should be included at the back of the assignment as appendix and excluded in the word count.

4.Suggest what might be done to solve the problem or improve the situation of Frank Morton.

Question 1

Activity Based Costing is an accounting model that singles out operations that firm undertakes and then allocates indirect costs to the items produced. The uniqueness of the Activity Based Costing is based on the fact that it identifies costs, activities and products, analyzes the relationship between the variables and finally carries out an allotment of indirect costs to the respective items produced. Just like any model, Activity Based Costing has both merits and demerits (okwuduche, 2017).

First and foremost, Activity Based Costing strengthens the process of cost allocation. This is so because of a number of ways (okwuduche, 2017). One way in which the enhancement of costing process is achieved is through expansion of the number of groups of accounts that serves to demonstrate the cost of products and services that can be assigned within a firm; cost pool (okwuduche, 2017). The cost pools is used to organize and muster overhead costs (okwuduche, 2017). Contrary to the traditional method of costing, Activity Based Costing brings together costs separately by pooling costs by activity rather than assembling all costs in a single firm-wide pool. Besides, Activity Based Costing makes new grounds for allocating overhead costs to the items that has been produced enabling costs to be allocated based on activities that produce costs rather than on the basis of measurement of volume that normally entails direct labor costs, among other items (okwuduche, 2017). Additionally, Activity Based Costing is advantageous due to the fact that it changes the nature of many indirect costs. This makes costs that are considered indirect such as power, depreciation and inspection activities to be certain activities of a firm (okwuduche, 2017).

Besides the three advantages of Activity Based Costing (Rojas, 2017), the method has its own dark sides. One the disadvantages of the Activity Based Costing is its cost when it comes to implementation. ABC requires that the activities of the firm be critically analyzed and broken down into their respective elements. The process consumes a lot time and is very expensive (Rojas, 2017). This is because the whole process mainly use valuable resources due to the data collection, measurement of the collected data and feeding the data into the new system being employed. Besides, professional expertise may be needed by the firm during the implementation of the ABC method to advise on the set up process and educate the relevant stock holders on the use of the new system; a process that requires money. To automate the ABC process, a firm requires a software that further digs into the pocket of the firm (Rojas, 2017).

Additional to the expensive nature of ABC, high probability of misinterpreting the data is another demerit of the Activity Based Costing. Contrary to the traditional costing methods, ABC reports contains more information including the margin of products. This information may be interpreted wrongly hence leading to wrong managerial decisions (Freedman, 2017). The possibility of bad decision is only limited to the reports but even due to the fact that ABC does align itself to the accounting standards. Thus in brevity, interpretation of ABC report, which vary considerably from the traditional norm of costing, may be confusing leading to bad decisions (Freedman, 2017).

Question 2

Using the Fair Work Ombudsman Industrial Award provided by the government of Australia, Stylish Limited can acquire appropriate Industrial Award System (Anon., 2017). This approach has a number of conditions that a firm need to adhere to. The Industrial Award has two main parts and other smaller aspects than need to be considered. One of the main part is checking whether the employer is award and agreement free (Anon., 2017). Secondly, a firm need to under the minimum wages and conditions set by the government for award and agreement free employees. The checks under award and agreement free involve (Anon., 2017):

1. Checking whether the employee is award free: To determine there are things to look into. These include checking whether job classification and the industry is under the award.
2. Checking whether the employees is agreement free. This can be done by confirming from the Fair Work Commission’s website(Anon., 2017).

Relevant conditions under the award and agreement free need to be identified thereafter and adhered to. These are (Anon., 2017):

1. Minimum leave days
2. The minimum pay
3. Duration (hours) of work, breaks involved and overtime
4. How public holidays will be dealt with
5. Terms of termination of contract.

The following other relevant payment and hours of work summaries required (Anon., 2017).

1. Employees who are 21 years and above
2. Either part time or full time employees should be paid $17.70 per hour; totaling to *$672. 70 in a week.
3. Casual workers should be paid $22.13 per hour; this because it include 25% casual loading; totaling to $840.94 per week.
4. Hours of Wok Agreed Upon
5. Less 38 hours in a week
6. Alternative mode can be agreed upon by employer and employee; which should be paid for.
7. In the absence of ordinary hours of work.
8. 38 hours for full time employees
9. Casual worker should work a maximum of 38hrs. That is, they should either work the number of hours allocated to them as long as the number of hours do not exceed 38.

Question 3

The change is the pricing system of the Stylish Limited inflates its costs and deflates the revenue. This results into a great loss to the company.

Question 4

Frank Morton is a big mess and his main challenge is striking a balance between cost variables and revenue variables (Driscol, 2013). Consequently, it is important to ensure that manufacturing costs be looked into. Frank Morton should think of having to cut down the price paid to its suppliers of the inputs. Frank Morton can think of approaching the suppliers to check the possibility of getting slightly cheaper inputs (Anon., 2017).

Besides, Frank Morton can think of implementing an existing manufacturing process. For instance, he can think of having to use either six sigma or lean manufacturing process. The models assist the manufacturers to reduce the amount of raw materials wasted during production (Gray, 2013).

Last but not least, Frank Morton can think of increasing the output and widen its sales through proper marketing channels. By largely increasing units and produced and sales, while maintaining the cost of production, the revenue may be enough to cover up for the costs associated with productions (Mulligan, 2017).

References

Anon., 2017. Award & agreement free wages & conditions. [Online]
Available at: https://www.fairwork.gov.au/awards-and-agreements/award-and-agreement-free-wages-and-conditions
[Accessed 14 5 2017].

Anon., 2017. The way to decrease costs for your manufacturing. [Online]
Available at: https://businessknowledgesource.com/manufacturing/the_way_to_decrease_costs_for_your_manufacturing_024495.html
[Accessed 14 5 2017].

Driscol, J., 2013. Reducing Current Product Costs — Challenges And Opportunities. [Online]
Available at: https://www.manufacturing.net/article/2013/11/reducing-current-product-costs-%E2%80%94-challenges-and-opportunities
[Accessed 14 5 2017].

Freedman, J., 2017. Advantages & Disadvantages of Activity Based Costing. [Online]
Available at: https://yourbusiness.azcentral.com/advantages-disadvantages-activity-based-costing-11280.html#
[Accessed 14 5 2017].

Gray, J., 2013. A transport of delight: Reducing costs in the manufacturing supply chain. [Online]
Available at: https://www.themanufacturer.com/articles/a-transport-of-delight-how-to-reduce-transport-costs-in-the-manufacturing-supply-chain/
[Accessed 14 5 2017].

Mulligan, T., 2017. Ideas for Cost-Reduction in Manufacturing. [Online]
Available at: https://smallbusiness.chron.com/ideas-costreduction-manufacturing-59401.html
[Accessed 14 5 2017].

okwuduche, c., 2017. Activity Based Costing. [Online]
Available at: https://www.accountantnextdoor.com/activity-based-costing-abc-brief-background-criticisms-problems-weaknesses-benefits-and-strengths/
[Accessed 14 5 2017].

Rojas, E., 2017. The Disadvantages & Advantages of Activity-Based. [Online]
Available at: https://smallbusiness.chron.com/disadvantages-advantages-activitybased-costing-45096.html
[Accessed 14 May 2017].