Question & Answer

Define the terms ‘sustainability’, ‘sustainability management’ and ‘sustainability management accounting’.

What is the link between sustainability strategies and management accounting?

How can the use of absorption costing lead managers to make dysfunctional decisions for the entity?

An entity uses variable costing for internal reports. It must convert the variable costing results to absorption costing results for external reports. How can this conversion be accomplished?

Why do the accounting standards require absorption costing for financial reporting?

If inventory physically increases during the period, income under absorption costing will be higher than income using variable costing. Explain.

Explain how breakeven point would be affected under both absorption and variable costing.

What is the difference between a cost that is variable and variable costing?

The basic issue in variable and absorption costing could be said to be one of timing rather than amount. Explain.

The volume of manufacturing in a period has an effect on income calculated using absorption costing but has no effect on income calculated using variable costing. Explain.

Explain how income could fall even though the unit sales level rises.

Explain how variable costing income statements can be reconciled to absorption costing income statements.

Explain the similarities and differences among absorption and variable costing.

            Evaluating a proposal for measuring performance

Benerux Industries has been in business for 30 years. The entity’s major product is a control unit for elevators. The entity has a reputation for manufacturing products of exceptionally high quality, resulting in higher prices for its units than competitors charge. Higher prices, in turn, have meant that the entity has been comfortably profitable. A major reason for the high product quality is a loyal and conscientious workforce. Production employees have been with the entity for an average of 18 years.

Recently the entity hired a cost accountant from the local university. After a few months at the entity, the new accountant proposed a performance measurement report consisting of two parts. The first part will report the actual number of units started during each month, the target number of units that should have been started, and a variance. The second part will calculate an actual cost per good unit completed during each month, the target cost per unit, and a variance.

The new accountant provided the following additional information concerning the performance report: The first part of the report concentrates on units started because many units are scrapped in the manufacturing process (to maintain high quality). Therefore, the best measure of effort expended is the number of units on which work was begun. The target number of units to be begun in a month is the number of units started in the corresponding month last year plus 5 per cent. In the second part of the report, actual costs per unit will be calculated by dividing total production cost incurred during the month by the number of good units completed during the month. The target cost per unit is the average cost for manufacturing this kind of product as determined from industry newsletters.

The proposal concluded with the following comments: ‘This report should be prepared and distributed quarterly. For maximum benefit I suggest that a bonus be awarded whenever units started exceeds target and costs are below target. This system will result in substantially improved profits for the entity. It should be implemented immediately.’

Required

(a)     Is it possible to develop a perfect system for monitoring and motivating worker performance? Why?

(b)     Explain what the managers might learn by monitoring each of the variances in the proposed performance measurement system.

(c)     Discuss possible reasons why the entity did not previously use a variance system to monitor and motivate worker performance.

(d)     Describe weaknesses in the proposed performance measurement system.

(e)     If you were the CFO of Benerux Industries, how would you respond to the new cost accountant’s proposal? Discuss whether you agree with the proposal and explain how you would communicate your response.

            Evaluate grading scheme; professional responsibilities

Variance analysis reflects information about actual performance relative to a standard. Variance analysis reports provide managers with information about the performance of employees, from direct labour to supervisors and managers. Grades provide similar information for recruiters who want to hire graduating students. Following is information about Professor Grader’s performance measurement system.

Professor Grader is popular; almost all of his students receive As. This phenomenon is widely attributed to Professor Grader’s superior teaching skills. Grades for this professor’s courses are determined as follows:

A student needs 700 points for an A, 600 points for a B, 500 for a C, and 400 for a D. From the 200 points given for perfect attendance, a student loses 5 points for every class missed (out of 40 class meetings); however, attendance is seldom taken.

If the major assignment paper is 20 pages or longer, 200 points are earned; 10 points are lost for each page less than 20 (thus, a 12-page paper is worth 120 points).

Professor Grader has given the same mid-semester exam for the past 20 years. To reduce the number of exam copies in students’ files, Professor Grader does not return the exams; grades are simply reported to individual students. A student group obtained a copy of the exam 15 years ago. They have chosen not to share the exam with any person not a member of the group; thus Professor Grader usually observes that grades on this exam are nearly normally distributed.

The final exam is a take-home exam that the students have two weeks to complete.

Required

(a)     Is it possible to develop a perfect system for measuring student performance in a course? Why?

(b)     How much variation is likely in student performance for each of the four graded items? Explain.

(c)     Describe the weaknesses in Professor Grader’s grading system as a performance measurement system.

(d)     What are Professor Grader’s professional responsibilities to various stakeholders in this situation?

(e)     Discuss whether Professor Grader has acted ethically in this situation. Describe the ethical values you use to draw your conclusions.

(f)      Is it ethical for students in this situation to access a copy of the prior mid-semester exam or to seek assistance in completing take-home assignments? Does Professor Grader’s system affect the students’ responsibilities? Describe the ethical values you use to draw your conclusions.

          Flexible budget variance analysis

Cardinal Products hired a new marketing manager early this year. After an informal consumer survey, the marketing manager decided to lower the firm’s selling price by 10 per cent and increase television advertising. The operating results at year end were disappointing. The marketing manager prepared the following analysis for the president. He assumed that direct materials and direct labour were variable costs and that advertising was a fixed cost.

‘As you can see’, the marketing manager reported, ‘the major problem is due to inefficiencies in production. My plan would have worked if production had kept its costs in line.’

Required

(a) Prepare a flexible budget report.

(b) What is the real source of the disappointing results? Explain.

            Flexible budget and variances; reasons for variances

Play Time Toys is organised into two major divisions: marketing and production. The production division is further divided into three departments: puzzles, dolls and video games. Each production department has its own manager. The company’s management believes that all costs must be covered by sales of the three product lines. Therefore, a portion of production division costs are allocated to each product line. The company’s accountant prepared the following variance report for the dolls production department.

Required

(a) Is Play Time Toys using a static budget or a flexible budget to calculate variances? Explain.

(b) Do you agree with this approach? Why or why not?

(c) Develop a flexible budget for the actual sales of 1100 units.

(d) Use the benchmark you created in part (c) to calculate variances.

(e) Review the variances from part (d). Briefly describe what the variances are suggesting regarding performance.

Cost variance analysis; use of variance information

Baker Street Animal Clinic uses a particular serum routinely in its vaccination program. Veterinarian technicians give the injections. The standard dose is 10cc per injection, and the cost has been $100 per 1000cc. According to records, 2000 injections were administered last month at a serum cost of $2270. The veterinarian noted that the serum for the injections should have cost $2000 [($0.10 per cc) × (10cc per injection) × (2000 injections)]. Moreover, she noted some carelessness in handling the serum that could easily lead to unnecessary waste. When this issue was brought to the attention of the technicians, together with the $270 discrepancy in costs, they claimed that the $270 excess costs must be due to the inflated prices charged by the veterinarian supply company. Purchasing records reveal that the price for the serum used last month had indeed increased to $105 per 1000cc.

Required

(a)     Provide variance calculations to help you evaluate the technicians’ argument.

(b)     Discuss whether a significant waste of serum occurred last month. Include quantitative and qualitative information in your discussion.

(c)     If you were the manager for the Baker Street Animal Clinic, how would you use the results of your analyses in parts (a) and (b)? Explain.

Developing direct cost standards; cost variances; use of variance analysis

The Mighty Morphs produces two popular games, Powerful Puffs and Mini-Mite Morphs. Following are standard costs:

The standards call for more than one disk and documentation book per unit because of normal waste due to faulty DVDs and poor binding.

Actual costs for last week follow:

Management decided that it would require too much effort to keep track of how many DVDs and hours are used for each of the games separately. Accordingly, the DVD materials and labour variances are combined rather than computed separately for each game.

Required

(a) What is the documentation price variance for Mini-Mite Morphs?

(b) What is the efficiency variance for DVDs?

(c) What is the sum of all variances for assembly labour for both games? (d) Discuss the pros and cons of building waste into the standards.

            Static and flexible budgets

Plush pet toys are produced in a largely automated factory in standard lots of 100 toys each. A standard cost system is used to control costs and to assign cost to inventory.

Variable overhead, estimated at $5 per lot, consists of miscellaneous items such as thread, a variety of plastic squeakers, and paints that are applied to create features such as eyes and whiskers. Fixed overhead, estimated at $24 000 per month, consists largely of depreciation on the automated machinery and rent for the building. Variable overhead is allocated based on lots produced. The standard fixed overhead allocation rate is based on the estimated output of 1000 lots per month.

Required

(a)        Prepare a production budget for the coming year based on planned production  12 000 lots.

(b)       Compare the budget prepared in (a) with a flexible budget based on actual activity of 15 000 lots.

            Variances and flexible budgets

Sherry North is the supply manager for West Industries, a manufacturer of garden furniture for the major department store in Australia. As part of her bonus plan, Sherry must meet the materials budget that was established at the beginning of the year. As West Industries manufactures three products in large volumes, standard costs are easily established for the factors of production. The reports for the first half of the year indicate that the materials variance is unfavourable. In an attempt to achieve her bonus target Sherry has been purchasing lower-grade materials at reduced costs for a new supplier. Management have been very pleased with the turnaround in the variance.

Required

What implications do Sherry’s actions have for West Industries as a whole (especially in relation to other variances that may be reported in the production area)?

            Calculation of budget variances

The accountant for Moon Industries has taken unexpected leave and has not completed the end-ofperiod budget analysis. The following incomplete budget analysis was found on her desk.

Additional information:

Required

(a) Complete the variance analysis report.

(b) Provide a brief report to management of any issues highlighted from your analysis in (a).

          Static and flexible budgets, variances, information quality

The photocopying department in the local polytechnic college has budgeted monthly costs at $40 000 per month plus $7 per student. Normally 800 students are enrolled. During March there were 730 students (which is within the relevant range). At the end of the month, actual fixed costs were $42 000 and variable costs were $3650.

Required

(a) Develop a static budget for photocopying costs based on 800 students.

(b) Calculate the March static budget variance for fixed and variable photocopying costs.

(c) Develop a flexible budget for the actual volume of students in March.

(d) Calculate the March flexible budget variance for fixed and variable photocopying costs.

(e) Which variance information — part (b) or (c) — is of higher quality? Explain.

            Flexible budget

Helium Industries manufactures glitter balloons used as party accessories. The balloons are bagged in packages of 100 and sold for $20 per pack. The company incurs fixed manufacturing overhead of $25 000 per year and the fixed overhead is applied based on packs produced. Standard costs are: material $8 per unit, direct labour $5 per unit and variable overhead $3 per unit. The marketing manager believes sales for the coming year will be somewhere between 10 000 and 15 000 packs.

Required

(a) Prepare a flexible budget for sales of 10 000, 12 000 and 15 000. (Allocate fixed overhead based on the sales volume.)

(b) What advantages are there for Helium Industries in using a flexible budget?

            Flexible budget and variances

Black Industries has a static budget based on production and sales of 24 000 units. Sales revenue is expected to be $96 000, variable costs $36 000 and fixed costs $32 000. Actual production and sales were 30 000 units with a profit of $50 000.

Required

(a) Calculate the amount of profit in the flexible budget.

(b) Calculate the overall variance between the flexible budget and actual results.