Buacc5933 Cost And Management Accounting Assessment Answers

Total annual overhead cost is estimated at $960,000. Overhead cost allocated to the processing activity cost pool is $640,000, and $320,000 is allocated to the packaging activity cost pool.

 

Requirements:

 

a) Calculate the overhead rate using the traditional (factory-wide) approach and allocate the total overhead costs to the two products using this method..

 

b) Calculate the overhead rates using the ABC approach and allocate the total overhead costs to the two products using this method.

 

c) Explain how an organisation should select an appropriate “cost driver” for an activity cost pool.

Answer:

(a)

Statement presenting allocation of total overhead costs(factory-wide approach)

	VegieGrow	FlowerFood
Overhead costs [$960000 in 18:42]	$288000	$672000

Calculation of overhead rate

	VegieGrow	FlowerFood	Total(Homegardens Ltd.)
Overhead(A)	$288000	$672000	$960000
Direct labour Hours(B)	180000	420000	600000
Overhead rate(A/B)	$1.6/direct labour hour	$1.6/direct labour hour	$1.6/direct labour hour

(b)

Calculation of overhead rates(activity based costing system)

Processing= $640000/Total number of kilograms processed

=$640000/512000

=$1.25/kilogram processed

Packaging=$320000/Total number of units packaged

=$320000/200000

=$1.6/unit packaged

Allocation of Total Overhead Cost(activity based costing system)

	VegieGrow	FlowerFood
Kilograms processed(kgs)(A)	192000	320000
Units Packaged(B)	90000	110000
Total Overhead($) [(A*1.25)+(B*1.6)]	384000	576000

(c) Determination of an appropriate cost driver is very important and usually the following principles are adopted for such process:

• Service or use
• Survey method
• Ability to bear

A basis once adopted must be reviewed at periodic intervals to improve upon the accuracy of apportionment.

(a)Statement presenting calculation of overhead rates

	Scheduling and travel	Setup time	Supervision
Estimated overhead($)(A)	85000	90000	60000
Cost drivers	Hours of travel	Number of setups	Direct labour costs
Total of cost drivers(B)	1250	600	400000
Overhead rate(A/B)	$68/hour	$150/setup	$0.15/direct labour$

Assignment of overhead cost to each product line

Product line	Details	Overhead($)
Commercial	[(750*68)+(350*150)+(100000*0.15)=]	118500
Residential	[(500*68)+(250*150)+(300000*0.15)=]	116500

(b)Statement presenting operating income(using activity based overhead rates)

	Commercial		Residential
Revenues($)		300000		480000
Direct material costs($)	30000		50000
Direct labour costs($)	100000		300000
Overhead costs($)	118500	248500	116500	466500
Operating income/(loss) ($)		51500		13500

(c)The controller should follow activity based product costing model[as shown in (b) above]. This method is much more rational as compared to the existing system of overhead distribution as it involves distribution of the overhead based on the scheduling and travel time, setup time and the supervision time. 

(a)Net income of Ocenia Ltd.= Total of Income from all three models(viz. spotter, snooker and stunner)

=30000+70000+(40000)

=$60000

(b)If the company discontinues the Stunner product line, then:

Statement presenting computation of net income of Ocenia Ltd.

Particulars	SPOTTER	SNOOKER	TOTAL
Sales	$300000	$500000	$800000
Less: Variable expenses	150000	200000	350000
Contribution margin	150000	300000	450000
Less: Fixed expenses(Note1)	142500	267500	410000
Net Income	$7500	$32500	$40000

(c)Ocenia Ltd. should not eliminate product line stunner as eliminating stunner results in a $20000 decrease in net income.

Working notes:

1)Calculation of fixed cost

Fixed Cost	Spotter	Snooker	Total
Common cost[$300000 allocated in sales ratio,i.e,3:5](A)	$112500	$187500	$300000
Additional Fixed expenses(B)	30000	80000	110000
Total fixed cost(A+B)	$142500	$267500	$410000

(1)Statement presenting calculation of equivalent number of units(using FIFO)

INPUT	PARTICULARS	OUTPUT	MATERIAL		CONVERSION COST
			COMPLETION %	EQUIVALENT UNITS	COMPLETION %	EQUIVALENT UNITS
1500	Completed units
	-out of opening WIP	500	NIL	NIL	40%	200
	-out of units introduced in current year	400	100%	400	100%	400
	Closing WIP	600	100%	600	40%	240
1500		1500		1000		840

(2)Statement presenting unit cost of production

Particulars	Cost(A)	Equivalent number of units(B)	Cost/equivalent unit(A/B)
Material	$2400	1000	$2.4
Conversion cost	$2820	840	$3.357

(3) Statement presenting cost of units transferred out and closing WIP

Particulars	Details	Cost
Units transferred out	$[1350+(400*2.4)+(600*3.357)]	$4324.2
Closing WIP	$[(600*2.4)+(240*3.357)]	$2245.68

Working Notes:

• FIFO method has been used to value costs.
• Due to absence of information relating to normal and abnormal loss, entire completed units have been assumed to be transferred to finished goods stock.

(b)Production cost report of Tasman Ltd. for the month of July(for tennis rackets)

(only includes cost incurred in the manufacturing process in the current year)

Particulars	Amount($)
Direct Material	2400
Direct Labour	1580
Prime Cost	3980
Manufacturing Overhead	1240
Add: Opening WIP	1350
Less: Closing WIP	(2246)
Cost of Goods Sold/Cost of Sales	4324

Processes, institutions, systems, laws, mechanisms, policies, and relations through which corporations are controlled and directed are known as Corporate Governance. It involves balancing the main interests of the stakeholders of an organization. It also lays a definition of the goals for which it is governed apart from managing the relationships among the stakeholders. Earlier, the corporations used to emphasize mostly on rules and policies in order to disperse power between agents and principals and also to govern management activities. In the recent development, it is noticed that the core element of corporate governance is financial reporting (Mariana & Maria, 2016). The shareholders of a corporate are unable to evaluate the performance of the management so as to take considerate required investment decisions without legitimate transparency, relevance and reliable information. A certain untimely collapse of popular and giant like companies such as Parmalat1, Enron1 or Worldcom1 along with remarkable financial reporting restatements at Ahold1, Xerox1, Shell1, etc have not only broken faith in financial reporting but also shaken the confidence in the financial system totally. This bought global pension systems under enormous pressure and also made stock markets compensate for many years.

Significance of accounting information and financial reporting in enhancing corporate governance

In order to have a corporation work under proper corporate governance principles, it is required for the corporation to treat financial reporting as a central priority and not as a low-priority bookkeeping. Earlier, the objective behind making financial statements was to provide information about the financial situation and status of a corporation which might be of great utility to a large number of users for making economic decisions and keeping a check on the management’s performance. The main part of the various domestic accounting systems in context to its financial reporting is its decision oriented objective. The financial information with regards to the timing, amounts, and uncertainty of the company’s future cash inflows and outflows is always desired by the investors as these are the factors on which the decision related to investments are made. It is seen that information is generally required for 2 major reasons.

Firstly, financial reporting is one significant and dependable source of information from an economic view which allows effective and efficient utilization and allocation of capital. Fabricated statements that carry misleading and fraudulent information might result from fund investments in ineffective corporations (Viney, 2010). When users who make business and financial decisions are of the opinion that there is insufficient, biased or misleading information in the financial statements there are chances for the capital markets to get crashed. Information gap between the management (insiders) and the investors (outsiders) is also reduced as a result of financial reporting. The capital market is badly impacted by improper financial reporting. The financial reporting data is also influenced and affected by the market performance of an organization.

Secondly, with appropriate, true and fair information in the financial statements, the interests of the investors are more secured and protected legally. People indulged in manipulating and fabricating the statements have to go through legal consequences. The information must be made available to all in such a manner that it reaches the maximum for if fewer outsiders are informed lesser will they be able to safeguard themselves by making legitimate financial decisions. With this, it can be concluded as the effective corporate governance system is dependent on effective information system which is further dependent on an effective financial reporting system. So, corporate governance can rather be accounted useless in the absence of an effective financial reporting.

Financial information system facilitates transparency in the financial statements by providing a high quality of accounting information. In order to reduce and eradicate information gap and asymmetry between market participants and managers, it is essential for the organizations to opt for high-quality financial reporting. Incentive problems are one of the examples of information asymmetry that arises due to the actions of the manager’s that are unknown to the principal. Contracting and monitoring costs arise due to the occurrence of such issues and the conflicts of interests between company’s shareholders and management. Mitigation of agency costs is emphasized with the help of accounting information that plays an important role in designing contracts. Information relevant to regulating managerial behavior that is significant for effective contract mechanisms sets limitations for the financial accounting information to perform its important role. Financial reporting plays an important role in solving conflicts and issues related to corporate governance as per the evidence. The incompleteness of the contracts that require being fused with more information is the aspect on which financial reporting and accounting information in corporate governance is largely focused on. The efficiency of governance and contracting mechanisms by having increased transparency and higher quality of financial reporting can eliminate agency issues and disputes between shareholder and managers of the company (Goergen & Renneboog, 2011). The performance evaluation and management rewarding become easy with the identification of factors that are of no utility to the management. Credibility, timeliness, and relevance of information in the financial reports are the substantial modes of communication with parties like independent directors. The monitoring performance of the board of directors can be enhanced with high-quality financial reports. The demand for public information and corporate transparency is enormous and unaffected with the board of directors having access to internal reports because of the various rules and policies and monitoring is done by auditors for every public disclosure and financial information (Core et. al, 1999).

It is required for the majority of members of the boards to become independent directors due to recent regulatory pressure so as to improve governance systems in corporations. This is because of the perception that if the directors are independent and unaffected from corporate insiders then there might be effective monitoring of management performance. Minimal or less access to credible, relevant and reliable information is the major threat faced by outside independent directors and outside shareholders. The quality of information received by the board constructs the efficiency of a board’s decision-making. The capability of a board to evaluate the performance of managers effectively is affected by the availability of limited information. In order to monitor the performance of the board of directors, it is required and important to have a transparency in the information environment. In order to enhance governance mechanisms in corporations, the effect of regulations and legal systems is required as it will not only facilitate but also enforce accounting standards as well.

What catches the attention of regulatory bodies, academics and practitioners are the increased transparency, effective corporate governance and higher quality of financial reporting. The efficiency of contracts, transparency in information and governance mechanisms are interrelated and dependent and closely knitted with each other (Conchon, 2011). Such transparency can be enhanced and can resolve information gap and asymmetry between managers, directors and outside shareholders by means of higher quality of financial reporting and informative accounting earnings that can improve contracting arrangements. The incentives of management that withhold information and engage in accounting flexibility like in the case of earnings management can also be reduced with the efficiency of corporate governance. Agency issues are resolved with the help of such mechanisms as they substitute or complement one other (Cohen et. al, 2013). The incentives of managers and corporate insiders are arranged in accordance with the interests of the shareholders so as to maximize the value of the organization by considering important and legitimate monitoring mechanisms. This further helps in investigating and evaluating the relationship between financial accounting information and monitoring mechanisms (Uyar et. al, 2016). The corporate governance can be strengthened and controlled with improvisations in financial reporting. Better and improved the financial reporting better will be corporate governance. Current financial reporting system provides information that recent years accounts scandals. There has been the ample number of shortcomings in financial reporting such as the measurement of assets and liabilities at nominal value and the ignorance of intangible assets and non-financial aspects.

Conclusion

Corporate governance and financial reporting knead together the management and the users of the information i.e. the outsiders as it is an information gathering system and mechanism. A better understanding of financial reporting is required along with sufficient resources in order to fill the expectation gap but it is sad that in maximum scenarios only opposite happens.  It serves a purpose for the users to evaluate decisions regarding making investments in the company with the help of information derived from the financial statements of the company.

References

Cohen, D. A., Dey, A., and Z., L. T. (2013) Corporate governance reform and executive incentives: Implications for investments and risk taking. Contemporary Accounting Research. [online]. 30(4), p. 1296 – 1332. Doi: https://doi.org/10.1111/j.1911-3846.2012.01189.x

Conchon, A. (2011) Board-level employee representation rights in Europe: Facts and trends. ETUI. European Trade Union Institute.

Core, J. E., Holthausen, R. W., and Larcker, D. F. (1999) Corporate governance, chief executive officer compensation, and firm performance. Journal of Financial Economics. [online]. 51, p. 371–406. Doi: https://doi.org/10.1016/S0304-405X(98)00058-0

Goergen, M. and Renneboog, L. (2011) Managerial compensation. Journal of Corporate Finance. [online]. 17(4), p. 1068–1077. DOI: 10.1016/j.jcorpfin.2011.06.002

Mariana, M and Maria, C. (2016) Transparency of Accounting Information in Achieving Good Corporate Governance. True View and Fair. Social Sciences and Education Research Review. [online]. 3(1), p 41-62. Available from: https://sserr.ro/wp-content/uploads/2016/05/3-1-41-62.pdf [Accessed 22 May 2018]

Uyar, A.,  Gungormus, A.H., and Kuzey, C. (2017) Impact of the Accounting Information System on Corporate Governance: Evidence from Turkish Non-Listed Companies. Australasian Accounting, Business and Finance Journal. [online].11(1),p.  9-27. Available from: https://ro.uow.edu.au/cgi/viewcontent.cgi?article=1751&context=aabfj  [Accessed 22 May 2018]

Viney, C. (2010)  McGrath’s Financial Institutions, Instruments and Markets. Sydney.