MAA 262 : Management Accounting - Management Assignment

Part A: Browns Electronics Company is a manufacturer of small screen television models. The company produces three models called High definition (HD) televisions, LED-LCD televisions and Smart curved televisions. The company uses a job costing system with manufacturing overhead applied on the basis of direct labour hours. The system has been in place with not much change for the past 10 years. Brown Electronics Company’s product costs and annual sales data are as follows: High-definition  model            LED-LCD model Smart-curved model            Smart-curved model Annual sales (units)                                               30 000                                                1 500                                                            15 000 Product costs: Raw material                                                            $15.00                                                $37.50                                                            $63.00 Direct labour                                            $15.00 (0.5hour @$30)                     $30.00 (1 hour @$30)                            $30.00 (1 hour @$30) Manufacturing overhead                                                                $127.50                                              $255.00                                                             $255.00 Total product cost                                                      $157.50                                        $322.50                                                           $348.00 *Calculation of predetermined overhead rate: Manufacturing overhead budget: Depreciation, machinery                                               $ 2 220 000 Maintenance, machinery                                              180 000 Depreciation, taxes and insurance for factory         450 000 Engineering                                                                      525 000 Purchasing, receiving and shipping                            375 000 Inspection and repair of defects                                  562 500 Material handling                                                           600 000 Miscellaneous manufacturing overhead costs         442 500 Total                                                                                 $ 5 355 000 Direct labour budget: High definition (HD) model                               10 000 hours LED-LCD model                                                     1 000 hours Smart curved model                                             10 000 hours Total                                                                        21 000 hours Predetermined overhead rate: Budgeted overhead = $ 5 355 000 = $255 per hour Budgeted direct labour hours 21 000 hours For the past 10 years, Brown Electronics Company’s pricing formula has been to set each product’s budgeted prices at 115 percent of its full product cost. Lately, however, the high-definition model has come under increasing price pressure from overseas competitors. As a result of this increased competition, the price on the High-definition model has been lowered to $175.00.Brown Electronics Company’s CEO recently asked the financial controller, ‘Why can’t we compete with these other companies? They are selling their high definition televisions for $165.00. That is only a few dollars more than our production cost. Are we really that inefficient?’The financial controller responded by saying, ‘I think this is owing to an outdated product costing system. As you may remember, I raised a red flag about our existing product costing system last year.In my opinion, our product costing system is distorting and misrepresenting our product costs. Let me run a few numbers to demonstrate what I mean.’After getting the approval of the CEO, the financial controller compiled the basic data needed to implement an activity based costing system.These data are displayed in the following table. The percentages given are the proportion of eachactivity driver consumed by each product line. Required: 1. Calculate the budgeted prices for the three models, based on the traditional product costing system. (6 Marks) 2. Construct an excel spreadsheet showing new product costs for the three models, based on the new data collected by the financial controller. Round to the nearest cent. (10 marks) 3. Calculate a new budgeted price for the three products, based on the activity based costing system. Compare the new budgeted target price with the current actual selling price for the High-definition model. (8 marks) 4. Refer to the product costs developed in requirement 2 above. Prepare a table showing how Browns Electronics Company’s traditional product costing system distorts the product costs of the three television models. Part B: You have been asked to analyze the operations of an ‘Art, craft and music school’ for young children, in order to determine the ways and means that you can improve the quality of the service provided while reducing the costs. You have resolved to analyze the activities provided by the school and use an Activity Based Costing system to assign costs to activities. The list below contains potential activities from which to choose. ? Art and craft activities: These activities are conducted daily as a part of the school routine. The aim of these activities to enhance the creativity of the students involved. ? Music activities: This activity is conducted weekly and it aims to encourage the student’s interest in music and dancing. ? Learning activities: These are conducted as a part of the daily routine of the school, where the students are listening to stories and following directions as a part of games, play or other interactive activities. ? Meal activities: Snacks and light meals are provided by the teachers and one food-service employee. From time to time, the students are given the opportunity to prepare their own snacks. ? Free play activities: The school has allocated a time for the students to play. This can be indoors or outdoors and a few teachers observe them playing. ? Miscellaneous: These miscellaneous activities include greeting the students when they are coming in and leaving the school, helping them with any of their requirements and interacting with the parents of the students. ? Conferencing with the parents: This is a quarterly activity. The head teacher of the school meets and has a discussion with each student’s parents for about half an hour about the progress of the students and anything else that needs to be discussed. Required: 1. You are required to choose several activities to use for cost pools and identify cost drivers for those cost pools. Explain your choices. 2. You are required to discuss the potential benefits and costs of implementing an Activity Based Costing (ABC) system for an institution like above, using at least two academic research articles as your background research. (800 words)