QUESTION
Question One Ethics 20 marks
The following are extracts from an article published by Paul McDougall in “Information Week” dated 3rd April 2006
Extract 1
“Dinner and drinks at posh restaurants, vendor-provided tickets to premium events, quid pro quo contracts awarded to big customers: They’re part of the way big business is done”.
Extract 2
“Some companies evaluate gift giving case by case. Equity One recently returned four iPods that were a gift from a vendor that had just sealed a big deal with the shopping center operator, CIO Ilan Zachar says. Equity One, however, will allow gifts or trips from vendors provided there are valid business reasons, he says”.
Required:
Referring to the above extracts, do you agree with both the extracts? Briefly explain.
In explaining, identify and explain the IMA code of ethics that are raised in both of the above extracts.
(The length of your answer should be between 250-300 words)
Above questions Extract 1 just 50 words are enough and for Extract 2 just 50 words please.
Question Two 20 Marks
Holtz Company makes three products in a single facility. Data concerning these products follow:
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Product |
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A |
B |
C |
| Selling price per unit…………………………… |
$75.90 |
$71.10 |
$73.40 |
|
| Direct materials…………………………………. |
$29.70 |
$30.20 |
$33.40 |
|
| Direct labour……………………………………… |
$21.20 |
$19.80 |
$19.60 |
|
| Variable manufacturing overhead………… |
$4.90 |
$5.60 |
$7.60 |
|
| Variable selling cost per unit……………….. |
$1.30 |
$3.90 |
$1.80 |
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| Mixing minutes per unit………………………. |
2.10 |
1.70 |
1.30 |
|
| Monthly demand in units…………………….. |
4,000 |
1,000 |
2,000 |
|
The mixing machines are potentially the constraint in the production facility.
A total of 12,500 minutes are available per month on these machines.
Direct labour is a variable cost in this company.
Required:
- How many minutes of mixing machine time would be required to satisfy demand for all four products?
(4 marks)
- How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.)
(10 marks)
- Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.) Briefly explain your answer.
(6 marks)
Question three 20 Marks
Imai Draperies makes custom draperies for homes and businesses. The company uses an
activity-based costing system for its overhead costs. The company has provided the following
data concerning its annual overhead costs and its activity cost pools.
| Overhead costs:
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| Production overhead… |
$240,000 |
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Office expense…………. |
160,000 |
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Total……………………….. |
$400,000 |
| Distribution of resource consumption:
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Making |
Job |
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Activity Cost Pools |
Drapes |
Support |
Other |
Total |
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Production overhead……… |
35% |
45% |
20% |
100% |
||
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Office expense………………. |
15% |
55% |
30% |
100% |
||
The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.
The amount of activity for the year is as follows:
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Activity Cost Pool |
Annual Activity |
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Making drapes…… |
4,000 metres |
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Job support……….. |
100 jobs |
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Other………………… |
Not applicable |
Required:
- Prepare the first-stage allocation of overhead costs to the activity cost pools.
- Compute the activity rates (i.e., cost per unit of activity) for the Making Drapes and Job Support activity cost pools.
- Prepare a Job Margin report for Job # 2022 that involves making 53 metres of drapes. For Job #2022 direct materials and direct labor cost were $1,480 while the sales revenue from this job was $5,200.
SOLUTION
“Dinner and drinks at posh restaurants, vendor-provided tickets to premium events, quid pro quo contracts awarded to big customers: They’re part of the way big business is done”.
Ans. This is not as per code of professional conduct of IMA (www.imanet.org). Contracts should be awarded on the basis of competence. If there are more than two parties showing the same level of competence, then other evaluation criteria can be company related services and not personal related services. Company related services can be free training, free service etc. Personal related services would include personal favors such as free dinners or tickets for a single or a group of persons and cannot be considered ethical .
Extract 2
“Some companies evaluate gift giving case by case. Equity One recently returned four iPods that were a gift from a vendor that had just sealed a big deal with the shopping center operator, CIO Ilan Zachar says. Equity One, however, will allow gifts or trips from vendors provided there are valid business reasons, he says”.
Ans. This is in accordance with professional code as per IMA. Gift giving should be assessed on case to case basis. Some gifts can be meant as sample, a dinner setting can be a meeting environment, trips can be provided for imparting training and enriching knowledge regarding particular business etc. If gifts specifically indicate efforts to win the favors of a particular influential person or group, then such gift is not ethical.
Question Two
- a. How many minutes of mixing machine time would be required to satisfy demand for all four products?
| I | Products | A | B | C | Total |
| II | Mixing minutes per unit | 2.10 | 1.70 | 1.30 | |
| III | Monthly Demand in Units | 4000 | 1000 | 2000 | |
| Total mixing minutes required per month(II*III) | 8400 | 1700 | 2600 | 12700 |
b. How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.)
Ans. To answer this question first we have to calculate net operating income per unit from the given data
Net operating Income/Unit=Selling price per unit-cost per unit.
Constructing a table from the data given in the question:
| Products | A | B | C | |
| I | Selling Price Per Unit | $75.90 | $71.10 | $73.40 |
| II | Direct Materials | $29.70 | $30.20 | $33.40 |
| III | Direct Labour | $21.20 | $19.80 | $19.60 |
| IV | Variable Manufacturing Overhead | $4.90 | $5.60 | $7.60 |
| V | Variable selling cost per unit | $1.30 | $3.90 | $1.80 |
| VI | Total Cost per Unit | $57.10 | $59.5 | $62.4 |
| VII | Net Operating Income per Unit (I-VI) | $18.8 | $11.6 | $11 |
From above table we see that product C has the least net operating income per unit.
Given in the question that total mixing minutes available per month=12500
In answer 1 above we have seen that to produce as per demand total mixing minutes required =12700
Hence we need to reduce 200 minutes. We should remove this from demand of product C as this has the least net operating income per unit, then only we can maximize the total net operating income.
It is given that Mixing Minutes per unit for C=1.3
Therefore 200 minutes are required for how many units of C?
=200/1.3=154(rounded to the nearest whole unit)
Therefore we have to reduce 154 units from the units demanded of C per month
This equals 2000-154=1846.
The other two products A and B can be produced as per monthly demand.
Therefore to maximize net operating income the units that should be produced for each product A,B,C ,monthly , would be 4000,1000,1846 respectively.
c) Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.) Briefly explain your answer.
Ans. The other two products A and B are being produced as per demand. There is scope for increasing the production of C .
It is given that 1 unit of C requires 1.3 mixing minutes per unit
Therefore how many units of C would be produced in 60 minutes (1 hour).
=60/1.3=46 units (rounded to the nearest whole)
It has been calculated above that net operating income per unit of C is $11
Therefore producing 46 more units will generate additional net operating income of $506 for one hour additional sourcing of mixing machine time. Hence it would make sense to source additional mixing machine time if the cost of doing so is significantly less than $506.
Also the existing mixing machines are fixed assets. The per hour cost of the existing machines can be estimated by considering their total cost, depreciation, life, scrap value. Also, the machines could also have been procured on hire purchase; the cost per hour of machine for hire purchase arrangement can also be estimated. The cost of sourcing an additional hour of mixing should not be significantly higher than this cost.
This range should be compared with the prevailing market rates of sourcing additional hour of mixing machine time.
Question three
a. Prepare the first-stage allocation of overhead costs to the activity cost pools.
| Activity Cost Pools | Total in $ | Making Drapes(4000m) | Job Support(100 jobs) | Other | ||||||
| % | $ | % | $ | % | $ | |||||
|
$240,000 | 35% | 84000 | 45% | 108000 | 20% | 48000 | |||
| Office expense | $160,000 | 15% | 24000 | 55% | 88000 | 30% | 48000 | |||
b. Compute the activity rates (i.e., cost per unit of activity) for the Making Drapes and Job Support activity cost pools.
(5 marks)
| Activity Cost Pools | Total in $ | Making Drapes(4000m) | Job Support(100 jobs) | Other | |||||||
| % | $ | % | $ | % | $ | ||||||
| I |
|
$240,000 | 35% | 84000 | 45% | 108000 | 20% | 48000 | |||
| Activity Rates(Per unit cost) | 21 | 1080 | NA | NA | |||||||
| III | Office expense | $160,000 | 15% | 24000 | 55% | 88000 | 30% | 48000 | |||
| Activity Rates (Per unit cost) | 6 | 880 | NA | NA | |||||||
c. Prepare a Job Margin report for Job # 2022 that involves making 53 meters of drapes. For Job #2022 direct materials and direct labor cost were $1,480 while the sales revenue from this job was $5,200.
Ans. Job Margin=Sales Revenue-Total Cost of Job=$5200-$4871=$329
| Cost Items | Making Drapes | Job Support | Total ($) | ||
| Rates($ per unit) | (53 meters) | Rates | 1 Job | ||
| Production Overhead | 21 | 1113 | 1080 | 1080 | 2193 |
| Office Expense | 6 | 318 | 880 | 880 | 1198 |
| Direct Materials and labour costs | 1480 | ||||
| Total Cost | 4871 | ||||
Reference
IMA, (2012). IMA Statement of Ethical Professional Practice. Retrieved from http://www.imanet.org/pdfs/statement%20of%20Ethics_web.Pdf
Khan M.Y. & Jain P.K. (2007).Management Accounting. New Delhi, India: Tata McGraw-Hill Publishing Company Ltd.
KH55
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