BMAC5203
BMAC5203
1
OUM BUSINESS SCHOOL
MASTERS OF BUSINESS ADMINISTRATION
JANUARY 2015
BMAC5203
ACCOUNTING FOR BUSINESS DECISION MAKING
FACILITATOR : PROF. DR. INDRA DEVI KANDASAMY
ASSIGNMENT
Prepared by : Indrathavi a/p Kalamelu @ Kalamegam
MATRICULATION NO : CGS00956701
IDENTITY CARD NO. : 670909-04-5300
TELEPHONE NO. : 0122680119
E-MAIL :
[email protected]
LEARNING CENTRE : KUALA LUMPUR
Table of Contents
PAGE
Question 1 a) 1 - 2
Question 1 b) 3 - 6
Question 1 c) 7
Question 2 8 - 21
Question 3 a) 22 - 24
Question 3 b) 25
Question 3 c) 26-27
References 28
ACKNOWLEDGEMENT
I would like to take this opportunity here to thank our F2F facilitator Prof Dr.Indra Devi Kandasamy for all the guidance and support throughout the January 2015 semester for BMAC5203 course work and tutorial sessions.
THANK YOU DR.INDRA.
QUESTION 1 a)
Persiaran Sdn Bhd
Computation of overhead cost per unit using traditional costing
Total in RM
___________
Basic Super
Direct Labor per unit (RM) 40 60
Direct Material per unit (RM) 15 20
Direct Labor hours per unit 4.0 DLHs 6.0 DLHs
Estimated Annual Production 40,000 units 10,000 units
Total Overhead 1,000,000.00
Estimated Total Direct
Labor Hours 160,000.00 60,000.00 220,000.00
=========
Workings for Estimated Total Direct Labor Hours
Basic Super
Direct Labour hours per unit 4.0 DLHs 6.0 DLHs
x Estimated Annual Production 40,000.00 10,000.00
_____________________
160,000.00 160,000.00 220,000.00
=========
Working OAR
( Overhead Absorption Rate) 1,000,000.00 / 220,000.00 = 4.55
Production overhead / Unit base
OAR RM4.55
Computation of full cost per unit using traditional costing
RM RM
Basic Super
Direct Labour 40.00 60.00
Direct Material 15.00 20.00
__________________
Prime Cost 55.00 80.00
+ Overhead per unit
OAR x Direct labor hour 18.20 27.30
per unit
___________________
Full cost per unit 73.20 107.30
Markup pricing 18.30 26.80
( 25% of full cost ) ___________________
Selling price per unit 91.50 134.10
==================
The full cost per unit are RM 73.20 and RM 107.30 for Basic and Super respectively.
Where else the selling price per unit are RM91.50 and RM 134.10 for Basic and Super respectively using the traditional costing system.
QUESTION 1 b)
Persiaran Sdn Bhd
Computations of Activity based overhead rates per cost driver :
Activity Cost Pools
Total Cost in RM
÷
Expected Use of Cost Drivers per activity
+
Activity based
Overhead rate in RM
Machine setups
280,000.00
100 nos
2,800.00 per no
Quality control
Inspection
220,000.00
2000 nos
110.00 per no
Sales order processed
240,000.00
5000 nos
48.00 per no
General production
260,000.00
500,000 machine
hours
0.52 per machine
hours
Total
1,000,000.00
Assignment of each activity's overhead cost to products using ABC:
Basic
Activity Cost Pools
Expected use of
Cost drivers per product
x
Activity based
Overhead rate in RM
=
Cost
Assigned in RM
Machine setups
20
2,800.00
56,000.00
Quality control
Inspection
500
110.00
55,000.00
Sales order processed
1,500
48.00
72,000.00
General production
350,000
0.52
182,000.00
Total
365,000.00
Super
Activity Cost Pools
Expected use of
Cost drivers per product
x
Activity based
Overhead rate in RM
=
Cost
Assigned in RM
Machine setups
80
2,800.00
224,000.00
Quality control
Inspection
1,500
110.00
165,000.00
Sales order processed
3,500
48.00
168,000.00
General production
150,000
0.52
78,000.00
Total
635,000.00
Computation of overhead cost per unit:
Basic
Activity Cost Pools Cost Overhead cost per unit Assigned (RM) RM
________________ _____________ _________________
Machine setups 56,000.00 1.40
Quality controls inspection 55,000.00 1.38
Sales order processed 72,000.00 1.80
General production 182,000.00 4.55
------------- ---------------------------
Total 365,000.00 9.13
========= ================
Super
Activity Cost Pools Cost Overhead cost per unit Assigned (RM) RM
________________ ____________ __________________
Machine setups 224,000.00 22.40
Quality controls inspection 165,000.00 16.50
Sales order processed 168,000.00 16.80
General production 78,000.00 7.80
-------------- --------------------------
Total 635,000.00 63.50
======== ===============
Computation of full cost per unit using Activity based costing
RM RM
Basic Super
Direct Labor 40.00 60.00
Direct Material 15.00 20.00
_____________________________
Prime Cost 55.00 80.00
+ Overhead cost per unit
Machine setup 1.40 22.40
QC inspection 1.38 16.50
Sales order processed 1.80 16.80
General production 4.55 7.80
____________________________
Full cost per unit 64.13 143.50
Markup pricing 16.03 35.88
( 25% of full cost )
______________________________
Selling price per unit 80.16 179.38
============================
The full cost per unit are RM 64.13 and RM 143.50 for Basic and Super respectively.
Where else the selling price per unit are RM80.16 and RM 179.38 for Basic and Super respectively using the Activity based costing system.
QUESTION 1 c)
Findings
A comparison of unit of full manufacturing cost under traditional and activity based costing showing the following significant differences.
Basic
Super
Traditional
ABC
Traditional
ABC
Full cost per unit
RM 73.20
RM 64.13
RM 107.30
RM143.50
Overstated
RM 9.07
Understated
RM 36.20
The comparison shows that full cost per unit under traditional costing are significantly distorted. The cost of producing Basic is overstated by RM 9.07 per unit ( RM 73.20 – RM 64.13 ). The cost of producing Super is understated by RM 36.20 per unit ( RM 143.50 – RM 107.30 ). These differences are attributed entirely to how Persiaran Sdn Bhd assigns manufacturing overhead.
Recommendation
To use Activity based costing (ABC) to understand costs and limit costs to the product and customers driving them.
ABC system would help management to improve profitability.
ABC system gives insight to improve decision making at both operations and strategic levels.
Management must be creative to find reasonable activity cost driver. For example, to use material cost as a proxy for its weight. We should look for available drivers that have some correlation with how resources are spent.
To use simple ABC model and be updated frequently which is far more accurate than traditional cost allocation methods.
The whole master budget for Berjaya Sdn Bhd for quarter ending September 30th as follows ;QUESTION 2
The whole master budget for Berjaya Sdn Bhd for quarter ending September 30th as follows ;
Berjaya Sdn Bhd
Sales Quantity Budget
Quarter ending September 30
July
August
September
Quarter
Budgeted unit sales
30,000
40,000
50,000
120,000
Selling price per unit (RM)
x 12.00
x 12.00
x 12.00
x 12.00
Total sales (RM)
360,000
480,000
600,000
1,440,000
Account Receivable ,
beginning quarter balance Quarter July 1st
May
June
July
August
July 1st
May sales
90,000.00
54,000.00
36,000.00
36,000.00
( RM 180,000 x 50%, 30%, 20%)
June sales
120,000.00
72,000.00
48,000.00
120,000.00
(RM 240,000 x 50%,30%,20%)
Total credit collections (RM)
90,000.00
174,000.00
108,000.00
48,000.00
156,000.00
The Schedule of Expected credit collections
Quarter ending September 30
July
August
September
Quarter
Accounts
RM
RM
RM
RM
Receivable
Accounts receivable, beginning balance
156,000.00
156,000.00
July sales
180,000.00
108,000.00
72,000.00
360,000.00
( RM 360,000
x 50%, 30%, 20%)
Aug sales
240,000.00
144,000.00
384,000.00
96,000.00
(RM480,000 x 50%, 30%)
Sept sales
300,000.00
300,000.00
300,000.00
( RM 600,000 x 50%)
Total credit collections
336,000.00
348,000.00
516,000.00
1,200,000.00
396,000.00
Berjaya Sdn Bhd
Production Quantity Budget
Quarter ending September 30
July
August
September
Quarter
Budgeted unit sales
30,000
40,000
50,000
120,000
Add desired ending finished
8,000
10,000
7,000ƚ
7,000
goods inventory*
Total Needs
38,000
50,000
57,000
127,000
Less beginning finished goods
6,000
8,000
10,000
6,000
Inventory
Required production
32,000
42,000
47,000
121,000
*20% of the following month's budgeted sales
ƚ20% of the budgeted next quarter's following month sales
Berjaya Sdn Bhd
Direct Material Purchase Qty Budget
Quarter ending September 30
Quarter ending September 30
July
August
September
Quarter
Budgeted unit sales
32,000
42,000
47,000
121,000
Direct material needed per unit ( Kgs)
x2
x2
x2
x2
Production Needs (Kgs)
64,000
84,000
94,000
242,000
Add desired ending inventory of direct material (Kgs)
10,000
10,000
10,000
30,000
Total needs (Kgs)
74,000
94,000
104,000
272,000
Less beginning inventory of direct material (Kgs)
10,000
10,000
10,000
30,000
Direct material to be purchased (Kgs)
64,000
84,000
94,000
242,000
Berjaya Sdn Bhd
Purchases Cost Budget
Quarter ending Sept 30
Quarter ending September 30
July
August
September
Quarter
Direct material to
64,000
84,000
94,000
242,000
be purchased (Kgs)
Cost of direct material
x 1.50
x 1.50
x 1.50
x 1.50
@RM1.50 per Kg
Cost of direct materials
96,000.00
126,000.00
141,000.00
363,000.00
to be purchased (RM)
Schedule of Expected Cash Disbursement
for Direct Material
July
August
September
Quarter
AP ending
Accounts payable,
33,000.00
33,000.00
beginning balance (RM)
July purchases
48,000.00
48,000.00
96,000.00
( RM 96,000.00 x 50%, 50%)
Aug purchases
63,000.00
63,000.00
126,000.00
(RM 126,000.00 x 50%, 50%)
Sept purchases
70,500.00
70,500.00
70,500.00
( RM 141,000 x 50%)
Total cash disbursement
81,000.00
111,000.00
133,500.00
325,500.00
Berjaya Sdn Bhd
Direct Material Purchase Qty Budget
Quarter ending June 30
May
June
Budgeted unit sales
19,000
22,000
Direct material needed per unit ( Kgs)
x2
x2
Production Needs (Kgs)
38,000
44,000
Add desired ending inventory of direct material (Kgs)
10,000
10,000
Total needs (Kgs)
48,000
54,000
Less beginning inventory of direct material (Kgs)
10,000
10,000
Direct material to be purchased (Kgs)
38,000
44,000
Production Quantity Budget
May
June
Budgeted unit sales
15,000
20,000
Add desired ending finished goods inventory*
4,000
6,000
Total Needs
19,000
26,000
Less beginning finished goods inventory
-
4,000
Required production
19,000
22,000
Purchases Cost Budget
May
June
Direct material to be purchased (Kgs)
38,000
44,000
Cost of direct material @RM1.50 per Kg
x 1.50
x 1.50
Cost of direct materials to be purchased (RM)
57,000.00
66,000.00
Schedule of Expected Cash Disbursement for Direct Material
May
June
July 1st
May purchases ( RM 57,000.00 x 50%, 50%)
28,500.00
28,500.00
June purchases (RM 66,000.00 x 50%, 50%)
33,000.00
33,000.00
Total cash disbursement
28,500.00
61,500.00
Berjaya Sdn Bhd
Direct Labor Budget
Quarter ending September 30
Quarter ending Sept 30
July
August
September
Quarter
Required production
32,000
42,000
47,000
121,000
Direct Labor Hours
0.1
0.1
0.1
0.1
Total Direct Labors hours needed
3,200
4,200
4,700
12,100
Direct labor cost per hour (RM)
8.00
8.00
8.00
8.00
Total Direct labor cost (RM)
25,600.00
33,600.00
37,600.00
96,800.00
Berjaya Sdn Bhd
Manufacturing Overhead Budget
Quarter ending September 30
Quarter ending September 30
July
August
September
Quarter
Budgeted Direct Labour hours
3,200
4,200
4,700
12,100
Variable manufacturing overhead
10.00
10.00
10.00
10.00
Variable manufacturing overhead (RM)
32,000.00
42,000.00
47,000.00
121,000.00
Fixed manufacturing overhead (RM)
40,000.00
40,000.00
40,000.00
120,000.00
Total manufacturing overhead
72,000.00
82,000.00
87,000.00
241,000.00
Cash disbursement for manufacturing overhead
72,000.00
82,000.00
87,000.00
241,000.00
Total manufacuring overhead (a) (RM)
241,000.00
Budgeted Direct Labour hours (b)
12,100
Predetermined overhead rate
20.00
for the quarter (a)/(b) (RM)
Berjaya Sdn Bhd
Ending Finished Goods Inventory Budget
(absorption costing basis)
Quarter ending September 30
Item
Production Cost per unit
Quantity
Cost
Total RM
Direct materials
2.00 per kg
RM1.50 per kg
3.00
Direct Labor
0.1 hours
RM8.00 per hour
0.80
Manufacturing overhead
0.1 hours
RM20.00 per hour
2.00
Unit production cost (RM)
5.80
Budgeted finished good inventory
Ending finished goods inventory
7,000
Unit production cost
5.79
Ending finished goods inventory in RM
40,530.00
Berjaya Sdn Bhd
Selling and Administrative Expenses Budget
Quarter ending September 30
Quarter ending September 30
July
August
September
Quarter
Budgeted sales
30,000
40,000
50,000
120,000
Variable selling and administrative expenses per unit
1.50
1.50
1.50
1.50
Variable selling and administrative expenses (RM)
45,000.00
60,000.00
75,000.00
180,000.00
Total Fixed selling and administrative expenses
50,000.00
50,000.00
50,000.00
150,000.00
Total selling and administrative expenses
95,000.00
110,000.00
125,000.00
330,000.00
Less Depreciation
5,000.00
5,000.00
5,000.00
15,000.00
Cash disbursement for selling and administrative expenses
90,000.00
105,000.00
120,000.00
315,000.00
Berjaya Sdn Bhd
Cash Budget
Quarter ending September 30
July
August
September
Quarter
RM
RM
RM
RM
Cash balance, beginning
55,000.00
122,400.00
50,000.00
55,000.00
Add receipts
Collection from customers
336,000.00
348,000.00
516,000.00
1,200,000.00
Total cash available
391,000.00
470,400.00
566,000.00
1,255,000.00
Less disbursement
Direct Material
81,000.00
111,000.00
133,500.00
325,500.00
Direct Labor
25,600.00
33,600.00
37,600.00
96,800.00
Manufacturing overhead
72,000.00
82,000.00
87,000.00
241,000.00
Selling and administrative
90,000.00
105,000.00
120,000.00
315,000.00
Equipment purchase
-
150,000.00
-
150,000.00
Total disbursement
268,600.00
481,600.00
378,100.00
1,128,300.00
Excess (deficiency
122,400.00
(11,200.00)
187,900.00
111,700.00
of cash available
over disbursement)
Financing
Loans
61,200.00
61,200.00
Repayments
( the following month )
(61,200.00)
(61,200.00)
Interest
(765.00)
(765.00)
Total financing
61,200.00
(61,965.00)
(765.00)
Cash balance, ending
122,400.00
50,000.00
125,935.00
125,935.00
Berjaya Sdn Bhd
Budgeted Income Statement
Quarter ending September 30
RM
Sales
1,440,000.00
Cost of goods sold *
694,800.00
Gross margin
745,200.00
Selling and administrative expenses
330,000.00
Net operating expenses
415,200.00
Interest Expenses
765.00
Net Income
414,435.00
* 120000 units x RM 5.79 = RM 694,800.00
Berjaya Sdn Bhd
Budgeted Income Statement
Quarter ending September 30
Assets
RM
RM
Currents Assets
Cash
125,935.00
(a)
Accounts Receivable
396,000.00
(b)
Raw material Inventory
15,000.00
(c)
Finished goods inventory
40,530.00
(d)
Suspense Account
34,000.00
(e)
Total current assets
611,465.00
Plant and equipments
Property
434,047.50
(f)
Equipments
300,200.00
(g)
Accumulated depreciation
(15,000.00)
(h)
Plant and equipments net
719,247.50
Total assets
1,330,712.50
Liabilities and Stockholders' Equity
Current liabilities
Account payable (raw material)
70,500.00
(i)
Stockholder's equity
Ordinary shares
500,000.00
(j)
Retained shares
760,212.50
(k)
Total stockholders' equity
1,260,212.50
Total liabilities and stockholders equity
1,330,712.50
Explanation of Ending Quarter September 30, balance sheet figures :
The ending cash balance, as projected by cash budget in Page 20.
Accounts Receivable, from page 11.
From page 13, the ending raw material inventory will be 10,000 kilograms. This material costs RM1.50 per kilograms. Therefore, the ending inventory in ringgit will be RM 15,000.00.
Finished goods inventory from page 18.
Suspense account is accounted for RM 34,000.00 since the assets is lower than the liabilities due to unforeseen inaccurate figures from opening balance sheet.
Property amount have no changes from balance sheet ending June 30th.
From ending June 30, balance sheet indicated the equipment balance of RM 150,200.00. During August, RM 150,000.00 of additional equipment will be purchased ( Page 20 ) bringing the quarter ending September 30 to RM300,200.00.
During quarter ending September 30, RM 15,000.00 of depreciation will be taken. (Page 19)
Raw material purchases, Account Payable from page 14.
Ordinary share of RM 500,000.00 from quarter ending June 30th have no changes.
Retained earnings from quarter ending June 30th RM 345,777.50
Add net income RM 414,435.00
-------------------
Retained earning , quarter ending September 30th RM 760,212.50 ===========
QUESTION 3 a)
Builders Sdn Bhd
With the information given in the question, the management can determine that RM 45,000.00 of direct fixed expenses are associated with the Tiles line are avoidable and RM 10,000.00 are not avoidable as shown below :
Avoidable Expenses / Not Avoidable Expenses Analysis RM RM RM
Fixed Expenses Total Cost
assigned to Not
Direct Fixed Expenses Tiles Avoidable Avoidable
_______________________________________________________________________
Advertising 10,000.00 10,000.00
Salaries 35,000.00 35,000.00
Depreciation 10,000.00 10,000.00
________________________________________
Total 55,000.00 10,000.00 45,000.00
=====================================
If the tiles line is to be closed, Builders Sdn Bhd would lose the product's contribution margin of RM 10,000.00 but the firm would save its associated avoidable fixed expenses of RM 45,000.00. We now know that those avoidable fixed expenses totaling RM 45,000.00. Therefore, closing the tiles line would result in a RM 35,000.00 increase in net operating income as shown below :
Contribution margin lost if tiles line is discontinued (10,000.00)
Less Fixed Expenses that can be avoided if tiles line is
discontinued 45,000.00
--------------
Increase in overall company net operating income 35,000.00
========
A Comparative Format for Product Line Analysis
Differences :
Net Operating
Keep Drop Income
Line Tiles Increase/Decrease
RM RM RM
Sales revenue 150,000.00 0.00 -150,000.00
Less Variable Expenses 140,000.00 0.00 140,000.00
----------------------------------------------------
Contribution Margin 10,000.00 0.00 -10,000.00
Less direct fixed expenses :
Advertising 10,000.00 0.00 10,000.00
Salaries 35,000.00 0.00 35,000.00
Depreciation 10,000.00 10,000.00 0.00
-----------------------------------------------------
Total direct expenses 55,000.00 10,000.00 45,000.00
------------------------------------------------------
Net operating income (45,000.00) (10,000.00) 35,000.00
(loss) ===============================
In the case of Builders Sdn Bhd, the fixed expenses that can be avoided by dropping Tiles line of RM 35,000.00 is more than the contribution margin that will be lost ( RM 10,000.00). Therefore, based on the information given, the Tiles line should be discontinued.
QUESTION 3 b)
Qualitative factors (Non Financial) that should be given consideration before a decision on whether to keep or drop a product are as follows :
Consideration of employees that will be terminated if the product is dropped.
The effect of layoff / outsourcing that might have on the employees that are not terminated and they will be morally affected.
Effects of suppliers from which the materials are purchased for the product that is dropped is no longer sort for.
The effects of customers who previously purchased the product that is dropped turns to other competitors and no longer interested to buy other product line of the firm.
Consideration of productivity and quality level of other product line when the morale of retained employees is down.
QUESTION 3 c)
The Net Contribution Analysis if the Tiles line is dropped is as shown below :
Block
Bricks
Tiles
Total
RM
RM
RM
RM
Sales revenue
Less Variable Expenses
450,000.00
225,000.00
736,000.00
441,600.00
0.00
0.00
1,186,000.00
666,600.00
Contribution Margin
225,000.00
294,400.00
0.00
519,400.00
Less D.Fixed Expenses
Advertising
Salaries
Depreciation
10,000.00
37,000.00
53,000.00
10,000.00
40,000.00
40,000.00
10,000.00
20,000.00
77,000.00
103,000.00
Total direct expenses
100,000.00
90,000.00
10,000.00
200,000.00
Product Margin
125,000.00
204,400.00
(10,000.00)
319,400.00
Less Common
125,000.00
Fixed Expenses
Operating Income
194,400.00
The above analysis shows that the total net contribution is reduced to RM 519,400.00 if the tiles line is dropped compared to higher total net contribution of RM 580,000.00 if the tiles line was maintained. A reduced amount of RM 60,600.00 can be seen in the total contribution if we take accord of the suggestion made by the marketing manager of Builders Sdn Bhd.
The above analysis also shows that the operating income is reduced to RM 194,400.00 if the tile line is dropped compared to higher operating income of RM 210,000.00 if the tiles line was maintained. A reduced operating income of RM 15,600.00 can be seen.
Builders Sdn Bhd would be better off keeping the Tiles line. By keeping the product line, the firm's overall net contribution will be higher by RM 60,600.00 than if the product line were to be dropped. The firm will have a profit of RM 15,600.00 if the tiles line was maintained,
Additionally, the management need to retain the an unprofitable product line as suggested by their marketing manager if the line helps to sell their block and bricks products or if is serves as a "magnet" to attract customers. Moreover, the customers of Builders Sdn Bhd expect the Tiles line to be available and many of them would undoubtedly shift their purchases to other competitors if Builders Sdn Bhd decided to drop the Tiles line product.
We can conclude that it is better to keep the Tile product line.
REFERENCES
Text
Brigham E.F. and Ehrhardt M.C. (2002) Financial Management : Theory and Practice ( 10th Edition ), Thomson Learning Inc, Asia.
Martin T.K ( 2014) Financial Management : Principles and Applications (New International Edition ), Pearson Education Limited, UK.
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