WEEK 2 (UNIT 1) - TUTORIAL SOLUTIONS

REVIEW QUESTION
1.7 The ‘Real life’ report of Australian organisations in the twenty-first century demonstrates
issues such as increasing competition and pressure to reduce costs. This pressure makes
it imperative to have a clear idea of a business’ costs. Management accountants’ role then
has become essential to the continuing success of organisations, in terms of providing
information that allows management to plan and control their organisations in response
to today’s rapidly changing business environment.

EXERCISE 1.28 (30 minutes) Management accounting information

There can be many answers to this question. A brief example of what can be found follows.

An excerpt from the Myer Chairman’s Letter in their 2010 Annual Report:

…THE BUSINESS IS POSITIONED FOR GROWTH. After four years and more than half a
billion dollars of investment in supply chain, technology, brands and stores, we have
built what we know to be a world-class operating platform that will give us real
competitive advantage and will help sustain our growth into the future. We are now
on the cusp of a new phase, the growth phase, which will see us expand our store
portfolio by 15 new stores over the next four years. The first of these opened at Top
Ryde in New South Wales in August 2010 and the second is due to open at Robina in
Queensland in October 2010. The complete rebuild of our Melbourne flagship store is
almost complete, with the majority of the store due to be open in time for Christmas,
and the team is excited about offering Myer customers a truly international-class retail
experience.

Examples of the use of management accounting information in the decision making include:

• costing the projects in which investments were made

• evaluating the benefits of the new technology

• assisting in the analysis of each stage of the supply chain, such as value-adding,
environmental impacts and social impacts

• costing alternative courses of action so that informed choices could be made

• analysing costs and benefits of opening the new outlets and refurbishing the Melbourne
 store.

Source: Myer Investor Centre, available at [Link]

[Link]/media_files/irol/23/231681/2010AR/2010AR/chairmans_letter.html, accessed 27 July
2011.

PROBLEM 1.35 (25 minutes) Information for management

1 Areas of concern for Murphy include (but are not limited to) the following:

• inventory control

• seasonal sales

• lack of cash flow

• cost increases

• increasing costs of ski trips

• supplier management

• customer satisfaction.
2 There is a variety of information that Murphy could use to help him run his business
more effectively. The main areas of concern appear to relate to inventory, cash flow,
supplier performance and loss of customers. Also, the ski business may not be profitable.
The following information may be useful:

• inventory—inventory turnover, reporting of monthly inventory balances, all by

product line

• sales—monthly sales units by product line, sales forecasting

• weekly cash flow budgets

• monthly cost budgets versus actual costs (look for variance or difference)

• monthly profitability statements by sales outlet, by product line, by business (for

example, ski trips)

• detailed analysis of costs of the skiing business

• supplier performance indicators, including those that relate to delivery performance,

cost and quality

• customer performance measures—customer satisfaction, customer complaints,

number of customers retained

• benchmarking of products and selling prices with competitors.

3 No. As an accountant it is important to be able to use both financial and management
accounting to analyse and improve businesses, to enable business owners to make better
decisions. The role of the accountant is to provide information to managers to assist in
managing resources and creating value. This requires that both financial and non-
financial information be analysed. Merely providing financial information is not
sufficient. There is no evidence that budgeting systems are in place, and these are needed
to provide a framework for planning and for controlling operations and the overall
business. Profit statements need to focus on areas of the business that are of interest to
managers, such as sales outlets and the ski business. Performance indicators will be
needed, to assess areas of the business where performance needs to be improved. The
accountant could suggest that Murphy needs to put in place more detailed reporting
systems, including a budgeting system, detailed profit reporting and performance
indicators. If the accountant will not assist in these developments, then other managers
may need to be employed to assist—or perhaps the accountant needs to be replaced!

CASE 1.39 (45 minutes) Objectives, strategy and management accounting

systems

1 There are many advantages in implementing processes to determine organisational

objectives, strategies and planning systems. Clarification of objectives and strategies
would encourage the company to formally evaluate the competitive market in which
it operates, including the activities of competitors and the preferences of customers.
It would allow managers to assess the strengths and weaknesses of the company and
put in place future plans that would allow it to undertake its strategies to achieve its
objectives. The company can formally consider opportunities for producing new
products and evaluate whether or not it is advisable to focus solely on old, established
product lines. If new products are to be introduced then formal planning systems will
allow the business to consider the cash flow implications and establish timelines for
introducing those new products. The formalisation of objectives and detailed plans
will provide the business with targets against which actual performance can be
measured, and communicate to employees the future directions of the business.
Currently there seems some uncertainty as to what types of products the company
should be offering. As part of the strategic planning process, customer preferences
need to be assessed and predictions made of the likely future demand for products.
 2 The control system that can be put in place may include monthly targets that should
derive from the yearly budget and longer-term plans, and a system that monitors areas
of key strategic interest. These targets will be used by employees and managers to
compare against actual performance. The targets may be financial, such as cost
targets and sales revenue. However, it will also be important to set non-financial
targets, such as those relating to quality and delivery performance. In selecting these
targets the company needs to decide which areas are of the most importance in
managing the company. Customer preferences are obviously crucial to this business.
The company needs to put systems in place to monitor any changes in customer
preferences for particular products. The company must keep track of what competing
bakeries are offering and try to anticipate changes in demand for its products by
carefully monitoring changes in sales mix.

REVIEW QUESTION

2.12 The three main components of product cost are direct material, direct labour and
manufacturing overhead. Direct material is the cost of materials consumed in the process
of manufacturing the product that can be directly traced to each product. Direct labour is
the cost of personnel who work directly on the manufactured product, including salary,
wages and labour on-costs. Manufacturing overhead covers all other costs of
manufacturing the product that are not direct material or direct labour, including indirect
materials, indirect labour and costs of depreciation, insurance, utilities and costs of
manufacturing support departments. For example, if we consider Calvin Klein jeans, the
cost of the denim used to make the jeans would be classified as direct material, the wages
of the workers who cut and sew the jeans would constitute a direct labour cost and the
heating and lighting of the assembly area would be part of the manufacturing overhead
cost. A useful discussion can cover the classification of stitching thread as indirect
material although it could technically be traced to the jeans. However, when fancy
stitching is a design feature of the jeans, how should that thread be classified?
PROBLEM 2.32 (25 minutes) Product cost classification: manufacturer

1 Total prime costs:

Direct material $4 200 000

Direct labour:

Wages 970 000

Labour on-costs 190 000

Total prime costs $5 360 000

2 Total manufacturing overhead:

Depreciation on factory building $ 230 000

Indirect labour wages 280 000

Production supervisor’s salary 90 000

Service department costs 200 000

Indirect labour: labour on-costs 60 000

Labour on-costs for production supervisor 18 000

Total overtime premiums paid 110 000

Cost of idle time: production employees 80 000

Total manufacturing overhead $1 068 000

3 Total conversion costs:

Direct labour ($970 000 + $190 000) $1 160 000

Manufacturing overhead 1 068 000

Total conversion costs $2 228 000

4 Total product costs:

Direct material $4 200 000

Direct labour 1 160 000

Manufacturing overhead 1 068 000

Total product costs $6 428 000

5 Total period costs:

Advertising expense $198 000

Administrative costs 300 000

Rental of office space for sales personnel 30 000

Sales commissions 10 000

Product promotion costs 20 000

Total period costs $558 000