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Ac211 Class Exercises Exam Revision Notes

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AC211 Class Exercises

MODULE 1 - MANAGEMENT ACCOUNTING FOR DECISION MAKERS Class 1 - Inglis Unversity Library Question 1 Activity - action or task with a specific objective, such as processing books
- e.g. the number of books processed Activity Measure - a quantitative measure of how much activity is performed Cost Driver - an activity that causes the total cost to change
As salary, stipend, facilities fixed the number of books process is not a cost driver for them, however would be a cost driver for RFID tags as it is varies with the amount of books processed Question 2 Relevant Range - band of activity within which operations are normally expected to occur or, alternatively, the range of activity within which the presumed cost structure and relationships are expected to remain valid
Relevant range is 800 - 1200 (given average of 1000 & maximum of 1200) Question 3 Cost Behaviour - the way costs react to changes in activity both within and beyond relevant range (fixed/variable) Cost Traceability - whether cost has a cause-and-effect relationship with cost object (direct/indirect) Cost Flexibility - whether costs incurred independently of cost object (committed/flexible) Cost





Librarian Salary Allocation

12000 F (to lib as a whole)*


Graduate Stipend

5200 F (to lib as a whole)*



Facility Cost Allocation

1200 F


RFID Tag (per book)

500 V




18900 *however if cost pool was donation department and salaries allocated on flexible hourly basis costs could be seen as variable within departments internal decision-making process Flexible Costs - resources acquired as needed; acquisition does not need LT commitment Committed Resources - resources acquired in advance of use (contractually fixed) Question 4 Unit Cost- Average cost for one level of activity, computed by dividing total costs by a specific level of activity
The computation of the unit cost is only correct given the assumption that the donations department processed an average of 1,000 books
Inclusion of FC can make unit costs problematic for managerial decision making as use of unit cost to predict total costs assumes all costs vary proportionally with activity level Question 5

* Did not take into consideration revenue from books

* Budget committee included the cost of the student help in the total costs

* Assume all costs are discretionary and can be eliminated if department is eliminated

AC211 Class Exercises

Question 6 Additional Financial Considerations

* Additional lost of funds due to a decrease in enrollment numbers and alumni donations

* Costs savings from books that had to be purchased if they would not have been donated Qualitative Considerations

* Reputation among other universities, alumni, students, general public may be affected

* How to quantify the value of the rare books? (i.e. does heritage need to be profitable?)
- Similar to argument about quantifying museums/natural parks in AC310 module 4

* Way to keep contact to alumni network

AC211 Class Exercises

Class 2 - Plastik (Refer to excel document for calculations!) Question 1 Should accept - profit increases by PS30,000 Question 2 a) Should accept - profit increase by PS15000 b) Indifferent c) Should reject - loss of PS15000 Question 3 Given CM for dolls > toys should produce maximum amounts of dolls and then use spare man hours for toys a) Produce 850000 dolls, 75000 toys - PS17500 increase in profits b) Produce 900000 dolls, 50000 toys - PS5000 increase in profits c) Product 950000 dolls, 0 toys - loss of PS7500 if dolls made
- making loss on toys due to extra fixed costs of the new mould Question 4 Should outsource whole order as differential cost is lower than subcontracting out part of order - increase profits by PS20000 Question 5

AC211 Class Exercises

Class 3 - Colombo Frozen Yoghurt (Calculations on excel) Question 1 There are two distinguishable channels of delivery for Colombo's products, each with their own levels of competition: (1) Shop environment solely dedicated to sale of frozen yoghurt - usually franchised (although Colombo is not) - face competition from other frozen yoghurt sellers (2) Impulse buying segment - focused on established stores, which sell Colombo's yoghurt to passing trade - face competition from product substitutes e.g. crisps General Mills strategy was to treat each channel the same way (i.e. charging same price, providing same promotions) Question 2

* Segment NI declined as SG&A allocation initially too low

* Marketing costs (price promotions, merchandising, shipping and SG&A) total to
PS13,125,000 - 44% of sales and 530% of net income
- If market support costs can be reduced without reducing sales, profit will increase 50%
for every 1% reduction

* Shop segments have 20% of sales and 71% of NI - very different therefore need different approaches for selling Question 3 Impulse Segments

* Serve impulse locations through distributors

* Simple & cheaper merchandising kits

* Machine technicians to explain operation of machines Shop Segments

* Change incentive calculations to encourage more shop sales

* Refresh merchandising kits

* Charge for kits

* Eliminate pricing promotions for segment

AC211 Class Exercises

Class 4 - Global Electronics Inc. Question 1 - Pre-existing Conditions

* Functional managers want to drop seemingly profitable lines

* Hard-to-make products show big profits

* Departments have own independent cost system

* Accounting department spends a lot of time on special projects

* Have a high margin niche all to self

* Competitors prices unrealistically low

* Customer's don't mind price increases

* Results of undertaken bids difficult to explain Question 2 - Strengths & Limitations

* Traditional cost systems assume that volume of production is lone overhead cost driver
- results in product-cost-cross-subsidization i.e. high-volume products over-costed, low volume under-costed
- As organisation overheads increased and quantity of direct labour used decreased, overhead rates skyrocketed - accurate cost allocation crucial for decision-making
- ABC recognises existence of non-volume-related activity cost drivers
- ABC ties costs of resources to activities that consumer them - provides closer match between costs and outputs (more accurately relating costs to actual work performed)

* Limitations of ABC:
- Scientific management bias (i.e. assumes activities are separable, repetitive, standard, performed for cost object chosen)
- Cause and effect links - are indirect costs truly 'direct' with respect to new cost drivers identified by ABC? more subjective than portrayed
- High costs of implementing
- Often implemented by external consultants who don't understand organisational context - those implementing ABC are not people performing them, lack of understanding can lead to hostility
- Performance redefined along lines of cost drivers chose (i.e. what's measures is all that matters - activities not measured but possibly useful ignored)
- Focuses more on reducing costs than enhancing customer value
- May be accompanied by individually motivated politics - often used to achieve 'unpopular' goals Question 3 - Steps in Designing ABC (1) Determine the scope, timing, and objectives of the project (2) ABC software base selection (i.e. decide on degree of computerization) (3) Develop project team to oversee implementation (i.e. define responsibilities) (4) Train project team in ABC principles (e.g. workshops, manuals, seminars etc.) (5) Interface with operations personnel to define activities to be included in cost model (e.g. through interviews, observation etc.) (6) Consolidate general accounts into a manageable number of resource categories (7) Interface with operations personnel to identify resource drivers and assign costs to activities (8) Interface with operations personnel to identify activity drivers (9) Pool activities with common activity drivers together and calculate ABC charge rates (10) Assign activity costs to products or product ranges as appropriate (11) Create reports and analyse the results (i.e. monitoring and evaluation systems)

AC211 Class Exercises

Question 4 - Success Factors (Anderson, 1995) Type of Factor


Individual (Behavioural)

* Disposition towards change

* Job/tenure/process knowledge

* Informal support/sponsorship

Organisational (Structural)






Centralisation Functional vs cross-functional orientations Extrinsic reward system Internal communication channels Individual training and support

Technological (System)






Complexity for users Compatibility with existing systems Representational accuracy/relative improvement Relevance to managers' decisions Compatibility with company strategies

External (Environmental)





Heterogeneity of demands Competition Environmental uncertainty External communication

Question 5 - Success Factors for ABC vs ABM

* Similar success factors included top management support, training, cross-functional involvement, linked to extrinsic reward system

* Differences related to centralisation - top down centralized approach does not create same buy-in at plant level as it does in top-level managers

* Scope of training for ABC is less than training scope for ABM

* Technological sophistication more important for ABM than ABC

AC211 Class Exercises

Class 5 - The Sourdough (Calculations on Excel) Question 1 NPV = 1230 Question 2 - Strategic Considerations

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