Corporate Accounting Management Assignment

Introduction

This corporate accounting management assignment report described three different sections first one will focus over the activity based costing and its implications in context to the organisational operations.Second one will focus over the impact of pricing and pricing decisions over the organisational process of decision making. And in the end the third one will focus over the budget along with its benefits in context to the organisation.

Question 1 Activity Based Costing

1.Calculate the material handling rate that would have been used by Eloise Smith’s predecessor at East Coast Marine.

Formulae of Material Handling rate:

Budgeted material / Total component

Government Contract = 2,006,000

Commercial product = 874,000

Total budgeted material = 2,006,000 + 874,000 = 2,880,000

Calculation of total components:

Particulars Amount (in $)
Payroll 180,000
Employee on-cost 36,000
Telephone expenses 38,000
Material and Supplies 6,000
Depreciation 6,000
Other Utilities 22,000
Total components 288,000

Material handling rate = Budgeted material / Total component =2,880,000 / 288,000 = 10%

2.Calculate the revised material handling costs to be allocated on a per purchase order basis.

In order to calculate revised material handling cost such as:

Particulars Amount (in $)
Payroll 180,000
Employee on-cost 36,000
Telephone expenses 38,000
Material and Supplies 6,000
Depreciation 6,000
Other Utilities 22,000
Total components 288,000

Revised material handling cost = $288,000

3.Discuss why purchase orders might be a more reliable cost driver than the dollar amount of direct material.

As per the scenario given activity based method is utilised and as per this method of costing on the basis of departmental elements all the indirect cost get allocated among different departments. As per the scenario material handling cost is allocated among departments and in order to make allocation purchase order get considered as reliable cost drivers.Purchase order get utilised as a base for allocation as it renders the usage of different departments (Blair, 2014).

4.Calculate the difference due to the change to the new method of allocating material handling costs to government contracts.

Earlier cost of material handling department get allocated according to the contracts material value (contracts can be government contracts and commercial contracts) due to which cost get distributed unequally.But with the implementation of the activity based method material cost get allocated effectively as cost is allocated on the basis of the number of purchase order ordered (Ciel, 2011).Below is the calculation in order to render the difference among the two methods such as:

According to the traditional method such as:

Total cost of material handling department = 288,000

Base of allocation = 2,006,000: 874,000

= 2.30:1

Allocation = 288,000 * 2.30/3.30 = 200,727

As per the activity based costing method:

Allocation of cost = 80,000 / 242,000 * 288,000 = 95,206

Difference among both allocation = Allocation as per traditional method – Allocation as per activity based costing method

= 200,727 – 95,206 = 105,521 (Cyert & March, 2012)

5.Prepare a forecast of the cumulative dollar impact over a three-year period (based on the coming year plus 2 more years) of Eloise Smith’s recommended change for allocating Material Handling Department costs to the Government Contracts Unit.

Particulars Coming year Year 1 Year 2
Payroll 180,000 180,000 180,000
Employee on-cost 36,000 36,000 36,000
Telephone 38,000 38,000 38,000
Other utilities 22,000 22,000 22,000
Material and supplies (6000 + 2.5%) 6,150 (6150+ 2.5%)  6,304 (6304+ 2.5%)  6,462
Depreciation 6,000 6,000 6,000
Total 288,150 288304 288462


Note:
Except material and supplies all other components remain same.

For three years calculation of estimated purchase order such as:

Particulars Year 1 Year 2 Year 3
Revised purchase orders (242,000 + 5%) 254,100 (254,100 + 5%) 266,805 (266,805 + 5%) 280,145
Revised Government Contract @ 33% (254,100 * 33%) 83,853 (266,805 * 33) 88,045 (280,145 * 33%) 92,448

6.Referring to the standards of ethical conduct for accountants described in Chapter 1:

(a): Discuss why Eloise Smith has an ethical conflict.

The situation due to which Smith stuck into ethical conflict:

Smith is newly appointed as accounts manager in ECM Ltd.for the purpose of handling cost related to government contract. Ethical conflict is a situation when individual get stuck into dilemma among their personal and professional responsibilities and individual is not able to take effective decisions and if they took decisions then there is possibility that their decisions get influenced by their personal interest.As per the current scenario Smith is taking care of government contracts and with the benefits of the activity based costing method he influenced that it also provide benefits to the organisation but by implementing this method his department lose the share of remuneration.Now the ethical conflict arises whether he can recommend the method to the management or not (Ulrich, 2010).

(b) Identify several steps that Smith could take to resolve the ethical conflict.

The step which get followed by the Smith in order to resolve the ethical conflict such as:

Step 1: In this step Smith need to consult their team handling code of ethics as with the effect of this they become able to resolve the dilemma.

Step 2: Smith took the help of their marketing management level as discuss the ethical dilemma with them.

Step 3: In order to solve the ethical dilemma Smith can share his situation with his colleagues as they share their views or suggestions according to the experience.This will help the Smith in order to resolve the ethical dilemma (Ulrich, 2010).

Corporate Accounting Management Assignment

Question 2 Pricing And Possible Plant Closure

1.What unit selling price should management select for each of the Clean & Bright compounds for the remaining six months of the year to maximize profit?

Calculation of Standard compound: –

Standard Compound
Prices Sales volume Amount
18 120,000 21,60,000
20 100,000 20,00,000
21 90,000 18,90,000
22 80,000 17,60,000
23 50,000 11,50,000

Calculation of Commercial compound: –

Commercial Compound
Prices Sales volume Amount
25 175,000 43,75,000
27 140,000 37,80,000
30 100,000 30,00,000
32 55,000 17,60,000
35 35,000 12,25,000


Sales unit as per the standard compound:

Sales Units Price (in $) Amount (in $)
120,000 18 2,160,000
100,000 20 2,000,000
90,000 21 1,890,000
80,000 22 1,760,000
50,000 23 1,150,000


Sales unit as per the commercial compound:

Sales Units Price (in $) Amount (in $)
175,000 25 4,375,000
140,000 27 3,780,000
100,000 30 3,000,000
55,000 32 1,760,000
35,000 35 1,225,000

In the question it is given that 200,000 boxes normally produce by standard as well as commercial compound within a year.There is effective requirement of producing more boxes for the purpose of earning more profits.The revised target of producing boxes is below:

Standard compound need to produce = 250,000 boxes

Commercial compound need to produce = 350,000 boxes.

As per the scenario, the unit of 100,000 boxes is produced in the first half year and now they need to produce remaining boxes in remaining half year to attain profits.Now standard compound produce 150,000 boxes whereas commercial compound need to produce 250,000 boxes (Ciel, 2011).

As per the analysis of the above calculation it is observed that with the production of 120,000 boxes by standard compound and 175,000 boxes by commercial compound they attain margin of maximum profit.

2.Independently of your answer to requirement 1, assume that the optimum alternatives for the last six months were as follows: a selling price of $23 and volume of 50 000 boxes for the standard compound, and a selling price of $35 and volume of 35 000 boxes for the commercial compound.

(a) Should management consider closing down the plant’s operations until January 1 of the next year in order to minimise its losses? Support your answer with appropriate calculations.

Profit maximisation is the core concept of every organisation and in order to maximise the profits there is effective requirement of improvement on regular basis.There are various factors get considered in order to take decision for business and corporation shut down. According to costing terminology, shut down point get measured with the help of the variable cost and the sales revenues.The fixed cost is excluded from the calculation due to its fixed nature. Breakeven point and shut down point are two different things as break-even point is neutral situation when organisation earns such amount which didn’t render profits or loss (Cyert & March, 2012).Statement of comprehensive income is as follows:

Calculation as per Standard compound:

Particulars Amount
Sales revenue (50000units x $23) $1,150,000
Variable cost (50000units x $16) ($800,000)
Contribution $350,000
Fixed cost ($200,000)
Profit $150,000

Calculation as per Commercial compound:

Particulars Amount
Sales revenue (35000units x $35) $1,225,000
Variable cost (35000units x $21) ($735,000)
Contribution $490,000
Fixed cost ($175,000)
Profit $315,000

On the basis of the above calculations it is observed that there is effective level of net profits attained after deduction of variable and fixed costs from the revenues.With this effect it is calculated that there is no need of shutting down the business operations.

(b) Identify and discuss the strategic factors that should be considered in deciding whether the Fremantle plant should be closed down during the last six months of the current year.

 While taking the closing down decision there are various factors need to be considered in context to the business operations for last six months.There is effective loss faced by them in the processing for first six months.The factors need to be considered get discussed below such as:

They need to avoid the fixed cost in the process of decision making because it is considered as the period cost and must get deducted from their net profits at the end of year.After this the second factor need to be considered that they need to take care of the sales revenue and collection of debts within the tenure of last half year.In the process of decision making they need to consider all the variable cost as if they fails to recover their variable cost then they need to shut down or closed the business operations (Blair, 2014).

Question 3 Budgeting

1.Will HLW’s new membership plan and fee structure improve its ability to plan its cash receipts? Explain your answer.

HLW or Hawthorn Leisure Works implement the new membership as well as fee structure from October (starting of new financial year).There are some changes made in context to the fees structure according to the new structure members need to pay their membership fees as well as other applicable fees well in advance in there must be onetime payment.With the effect of the new payment plan the ongoing payment mode get removed such as hourly fees charged from members against the use of court get removed (Curtis, 2010).New plan renders effective cash management plan as they prepare cash receipts against the fee received and provide support to manage the available cash and reduce the administration cost.Top level management also get benefit with the effect of new plan as they get the fees receipts in order to make evaluation and for the purpose of managing or calculating they utilise fee receipts which termed as easiest mode.  With the implementation of the new plan HLW’s ability get enhanced as they manage their cash and activities with the use of the cash receipts (Blair, 2014).

2.Estimate the effect on sales revenue resulting from the planned change in fee structure for the next financial year, which starts 1 October and ends on 30 September.

Revenue earned with the old way of membership fee collection

Revenue from Membership fees
Particulars Calculations (Amount in $) Amount (in $)
Individual 500 * 45 22,500
Student 500 * 30 15,000
Family 1000 * 100 100,000
Total 137,500
Revenue from Court fees
Particulars Calculations (Amount in $) Amount (in $)
Prime time (2000 *90%) 181 days * 4 Hrs @ 12 86,400
Non-prime time (2000 *50%) 181 days * 7 Hrs @ 8 56,000
Off season (2000 *30%) 184 days * 6 Hrs @ 6 21,600
Total   164,000
  Total 301,500

Revenue earned with the new way of membership fee collection

Revenue from membership fees:

Calculation of New members = 2,000 * 70/100 = 1,400 Members

Under campaign:

Family = 700 * 450 * 45/100 = $141,750

Individual = 700 * 250 * 45/100 = $78,750

Total revenue of under campaign = $220,500

 

When there is no campaign:

Family = (700 – 315) * 500 = $192,500

Individual = (700 – 315) * 300 = $115,500 (Schmidt, 2014)

Total revenue under no campaign = $308,000

Total revenue as per new method such as = $220,500 + $308,000 = $528,500

There are few assumptions made in order to process the calculations such as:

Occupancy during prime time = 90%

Occupancy during non-prime time = 50%

Occupancy during off-season = 30%  (Cyert & March, 2012)

Conclusion

With the implementation of the new membership plan there is effective positive impact put over the revenues as there is increase in the revenues and there is increase of $227,000.After the whole discussion it is observed that activity based costing method of costing is referred as most reliable method in order to make allocation of the cost among the different departments.During the process of the pricing policy there is effective requirement of including the business analysis of sales and volume.There is effective need of considering the factors which maximise the organisational profits.Management prepare the statement of cash flow or cash budgets in order to manage the available in hand cash or put effective control over it in order to increase the ratio of profits.

Reference

  • Baker, H., & English, P. (2011). Capital budgeting valuation: finalcial analysis for today’s investment projects.
  • Bennouna, K., Geoffrey, M. G., & Marchant, T. (2010). Improved capital budgeting decision making. Management Decision , 1.
  • Blair, D. (2014). Cash Management Best Practice. Treasury Peer , 1.
  • Ciel, C. (2011). What Internal Controls Should Be in Place for Handling Cash. Bright Tude , 1.

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