QUESTION
1. General information
As per the course description, this assignment constitutes 30 per cent of the total assessment in this course and is due in week 10 of the semester.
2. Purpose
BUACC5933 covers a range of important cost and management accounting topics. The main purpose of this assignment is to provide students with the opportunity to extend their knowledge, skills, attitudes and values in connection with some of the topics covered during the course. Students are required to complete the assignment in groups and this is intended to foster the development of a capacity to work cooperatively with fellow students (as per the objectives for this course).
Formation of groups
Students are to complete the assignment in groups of two or three and do not have any entitlement to adopt some other arrangement (such as completing the assignment individually or in a group of four) without the permission of the coordinating lecturer. Students who have difficulty arranging membership of a group or who encounter other difficulties (for example, a group member withdraws from the course) should consult the coordinating lecturer.
3. Requirements
This assignment has two parts, as follows:
Part A: BYP Questions (40 marks)
Prepare responses to the following “Broadening Your Perspective” questions which are located at the end of the relevant chapter of the current (that is, sixth) edition of the textbook:
1) BYP2-9 Considering Your Cost and Benefits (p. 92) 8 marks
After Graduating, you might decide to start a small business. As discussed in this chapter; owner of any business need to know how to calculate the cost of their products. In fact, many small businesses fail because they don’t accurately calculate their product costs, so they don’t know if they are making a profit or losing money—until it’s too late.
Suppose that you decide to start a landscape business. You use an old picking truck that you’ve fully paid for: you store truck and other epuipment in your parent’s barn, and you store tress and shurbs on their land. Your parents will not charge you for the use of these facilities for the first two years, but beginning in the third year will charge a reasonable rent. Your mother helps you by answering phone calls and providing customers with information. She doesn’t charge you for this service, but she plans on doing it for only your first two years in business. In pricing your services, should you include charges for the truck, the barn, the land, and your mother’s services when calculating your product cost? The basic argument for and against are as follow.
Yes: if you don’t include charges for these costs, your costs are understand and your profitability is overstated.
No: At this point, you are not actually incurring costs related to these activities; therefore, you shouldn’t record charges.
Instructions
Write a response indicating your position regarding this situation. Provide support for your view.
2) BYP3-7 Considering People, Planet, and Profit (p. 143) 9 marks
In a recent year, an oil refinery in Texas City, on the Houston ship channel exploded. The explosion killed 14 people and sent a plume of smoke hundereds of feet into the air. The blast started as a fire in the section of the plant that increased the octane of the gasoline that was produced at the refinery. The Houston Ship Channel is the main waterway that allow commerce to flow from the gulf of Mexico into Houston.
The Texas Commission on Envirnment Quality expressed concern about the release of nitrogen oxides, benzene, and other known carinogens as a result of the blast. Neighbors of the plant complainted that the plant had been emitting carcinogens for years and that the regulators had ignored their compalints about emissions and unsafe working conditions.
Instructions
Answer the following questions.
(a) Outline the costs that the company now faces as a result of the accident.
(b) How could the company have reduced the costs associated with the accident?
3) BYP6-10 Considering People, Planet, and Profit (p. 289) 9 marks
Many politicians , scientists, economists, and the business people have become concerned about the potential implications of global warning. The largest source of the emission thought to contritube to global warning is from coal-fired plants. The cost of alternative energy has declined, but it is still higher than coal. In 1980, wind-power electricity cost 80 cents per kilowatt hour. Using today’s highly efficient turbines with rotor diameterof up to 125 meters, the cost can be as low as 4 cents (about the same as coal), or as much as 20 cents in places with less wind.
Some people have recently suggested that concentional cost comparisons are not adequate because they do not take environment costs into account. For example, while coal is a very cheap energy source, it is also significant contributor of greenhouse gases. Should environment costs be incorporated into decision formulas when planners evaluate new power plants? The basic arguments for and against are as follows.
Yes: As long as environment costs are ignored, renewable energy will appear to be too expensive relative to coal.
No: If one country decides to incorporate environment costs into its decision-making process but other countires do not, the country that does so will be at a competitive disadvantage because its products will cost more to produce.
Instructions
Write a response indicating your position regarding this situation. Provide support for your view.
4) BYP8-7 Ethics Case (p. 380)
Jumbo Airlines operate out of three main “hub” airports in the United States. Recently, Econo Airlinrs began operating flight from Reno, Nevada, into Jumbo’s Metropolis hub for $190. Jumbo Airlines offers a price of $425 for the same route. The mangment of Jumbo is not happy about Econo incading its turf. In fact, Jumbo has driven off nearly every other competing airline from its hub, so that today 90% of flights into and out of Metropolis are Jumbo Airline flight. Econo is able to offer a lower fare because its pilots are paid less, it uses older planes, and it has lower overhead costs. Econo has been in business for only 6 months, and it sevices only two other cities. It expect the Metropolis routr to be its most profitable.
Jumbo estimates that it would have to charge $210 just to break even on this flight. It estimates that Econo can break even at a price of $160. Within one day of Econo’s entry into the market, Jumbo dropped its price to $140, whenupon Econo matched its price. They both maintained this fare for a period of 9 months, until Econo went out of business. As soon as Econo went out of business, Jumbo raised its fares back to $425.
Instructions
(a) Who are the stakeholders in this case?
(b) What are some of the reasons why Econo’s break-even point os lower than that of Jumbo?
(c) What are the likely reasons why Jumbo was able to offer this price for this period of time, while Econo coldn’t?
(d) What are some of the possible courses of action available to Econo in this situation?
(e) Do you think that this kinf of pricing activity is ethical? What are the implications for the stakeholders in this situation?
Part (a) 3 marks; (b) 2 marks; (c) 2 marks; (d) 3 marks; (e) 4 marks 14 marks
Part B: Essay (20 marks)
Write an essay on the following topic:
“The challenge with activity-based costing (ABC) is not just to implement such a system, but rather to ensure that the system is effective and leads to improved management decision making and organisational performance.”
Identify and discuss the features of an effective ABC system.
20 marks
Total marks 60 marks
4. Presentation
The assignment is to comply with the University’s General Guide for the Presentation of Academic Work. Students are required to use the APA style of referencing. See comments below regarding word length. Each group is to submit a single copy of their assignment.
5. Assessment criteria
In assessing submitted assignments consideration will be given to:
- Overall neatness, completeness and quality of presentation. Graduate students are expected to achieve a satisfactory standard with respect to this criterion as a matter of course and for this reason no credit will be granted for achieving it. However, assignments that fail to achieve the minimum standard in connection with this criterion will be penalised. The expected standard concerning this criterion is as specified by the University’s General Guide for the Presentation of Academic Work.
- Timeliness of submission. Graduate students are expected to be able to meet reasonable deadlines for the submission of assessable work as a matter of course. For this reason no credit will be given for submitting the assignment by the due date. However, assignments that are submitted late will be penalised at the rate of six marks out of 60 per weekday that the assignment is late.
- Demonstrated application of appropriate cost and management accounting knowledge, skills, values and attitudes. This criterion pertains to the overall quality of the content of responses to the assignment requirements. Specific factors to be taken into account include the accuracy and completeness of submitted answers and the location and effective use of relevant research materials.
As a general guide, the assignment should not exceed 3,000 words, proportional to the mark allocations shown. That is, up to approximately 50 words per mark (except for Part (a) of BYP8-7, for which a list of stakeholders will suffice). For example, a questions worth 8 marks should be allocated up to 400 words (8 marks x 50 words per mark).
Students in a group will normally each be awarded the same mark for their assignment. This is based on the expectation that each student in the group will have contributed equally to the preparation of the assignment. Where this expectation has not been satisfied differential marks may be allocated. Selected students may be required to discuss their assignment with the person responsible for marking it. This discussion may be taken into account in marking an assignment where it provides evidence that a student has not made a fair contribution to the preparation of the assignment. This could, for example, be evidenced by a student being unable to explain the meaning of their assignment, or being unable to explain why certain information has been included.
SOLUTION
Part A
The costs are understated if these costs are not included in the cost sheet. The situation calls for the understanding of the accounting system and that of financial analysis. These costs have to be included in the actual case thus would have resulted in the reduced profits. Thus for the purpose of estimating the benefits that have been taken from not being charged.
In the case that the remt and other charges for the services is not charged, it adds to the benefit of the business but does not result in the reduced costs for the subsequent years. It has been clearly stated that these benefits will not be available from the third year of operation. So it is not the case that these costs should not be taken into account which will be the understatement of the costs and thus the profits becomes overstated.
These situations will have different implications from the accounting purposes and that from the viewpoint of estimation of profits. From the accounting perspective there is no cost that has to be accounted but a per the cost accounting and the budget preparation this cost has to be accounted. This is because of two reasons (Dearman & Beard, 2005). Firstly this cost will be accounted for in future years when the services will not be available and the price will have to be paid. Thus this will impact the profits. If these costs are not considered the profits will be inflated and thus the projections might not be correct.
Secondly the service that are currently not being harged have a cost associated. So if this cost is actually considered will give the actual figures of profit and thus will lead to proper planning. Rather if the costs are not considered the profits will be different and thus manipulations will have to be made to adjust this factor.
Thus overall the cost has to be considered for proper budget planning and the future projections for the company. If this costs are not considered it will be difficult for the future planning as well as another important point is that, if the profits are inflated in the current year and are reduced in the coming year will impact the company’s position in the market and thus may effect them. Thus it is fine to reduce the cost but it should be as a result of operational efficiency rather than the not including the costs associated with operations.
a)
This accident has effected the company as there are alot of factors that are asscoiated with the costs associated with the occurring of this accident. Firtly there is loss due to loss of business as the business will be effected due to the accident. Secondly there will be sunk cost as the plant has already been setup and thus any reduction in production or closing down of operations will result in loss of operations. The cost has already been incurred in setting up the plant and will be of no use. Thus there is sunk cost associated with it.
Also there will be opportunity cost. This cost will be associated with the loss of opportunity had the same investment been made in other options that are available. Thus this will be considered as loss for the company (Dearman & Beard, 2005). Lastly there will loss to the company as a resut of reduced interest of the investors in the market for the company. Thus this will also result as cost for the company and thus will put additional burden on the ompany. The fixed cost has been incurred by the company and the cost associated with the raw material and the inventories will also have to be considered as a result of reduced business in the region due to the accident.
b)
The costs that have been discussed above are attributed to the accident that has taken place rather than the operations of the company. The point to consider is that what possible solutions can be taken. The company can go in for certification and environmental clearance for the production and take steps to treat the chemicals that are the by product in production. Thus this may add to the cost to the company but will certainly reduce the future expense which can have huge impact on the profitability and sutainibility of the company.
Another important point to consider is that the company should make suitable arrangements for the safety and the protection of region which currently as it seems is not there. Thus this will also add to the cost to the company but most of it will be fixed cost and the variable contribution to the costs may well be attributed to the compliance of the industry.
3.
As discussed above the high cost associated with the renewable source of energy will certainly need some boost thus there must be some cost associated with the production of coal based energy. This may not be favourable as an increased cost of coal based power will take away the competitive edge and in the long run will result in the deficiency of power and thus lack of customer support (Colley, 2011). However if this is not levied the renewable energy will lag behind. Thus the possible solution is not that coal based energy be laden with extra cost as this will lead to the lower investments and thus lower the development.
The possible solution is that an extra incentive be set in place for both the consumer and producer of energy from the sources like wind and hydro. Thus this will not lead to the reduced interest in the producer of coal fired plants but will boost the consumption as well as the production of energy.
The high cost associated with the renewable source of energy will certainly need some boost thus there must be some cost associated with the production of coal based energy.In other words the solution to the problem has to be constructive rather than destructive of putting extra burden on the coal fired plants. Putting an incentive on the renewable energy will have two way impact. Firstly the profits and thus the incentives will be huge. This will encourage the renewable market and thus will make the producers to conider the option of renewable energy in the market. Secondly with the boost being provided the issue of production of energy will be lowered and thus the market will become competitive and will be beneficial for the consumers.
The possible way to introduce an additional cap on the purchase and thus there by making it feasible for the producers to go in with the production and also the consumption of energy should have some share of renewable energy. Lower the consumption than the prescribed limit will result in the penalty and the consumption more than the prescribed limit will get the subsidy that may make the costing equivalent. In this way the market can be boosted and thus the competition in the market can be maintained and at the same time the contribution of the renewable sources can be increased.
4.
(a)
The stakeholders are the peron who have interest in the operations of the company and the profits that the company generates by the operations. The stakeholders in tjis cae is the management of the Jumbo and Econo airines as well as the employees of both the airlines. Both the airlines have taken certain steps so that the market share is not eroded and thus the profitability is not impacted. Econo started its operation on the most buy route and then from there upon the airlines started the price war in order to mark the presence in the market. This decision of operating in the most busy route and to operate much below the break even point is made by the management and thus is the stakeholders as mentioned in this case. The employees of the companies are indirectly the stakeholders as they are also impacted by the operations and the profitability of the company as it has effect on the salaries and the other benefits. Decreae in profit level for the employees.
(b)
The break even point of the Econo airlines is much less than that of the Jumvo airlines. The reasone, a few of them as mentioned in the case are that the Econo company is using old aircrafts which result in the lower cost of purchase or of rent if the aircraft is on lease. Second reason for the reduced cost is that the Econo airlines is paying less to the planets.Lasty the Econo airines is having reduced overhead costs.(Lee,2001) All these have contributed to reduced costs of the Econo airlines and compete with the Jumvo airlines in the market.
(c)
Jumbo airlines was the market leader having 90% share in the market share of flights into and out of Metropolis. Airlines with such huge share in the market have considerable profits accumulated over the years and thus is able to make take a position where the company is facing losses to make up for the risk associated with the competition being given in the market. This can be understood as follows. The break even is occurring at $210 and thus at $425 the profit margin was more than 100%. In such a situation they can take the los for some time and meet the target which will certainly be less than 100%
(d)
There are various options available to Econo airlines. Firtly they can keep compete in the market operating at breakeven point thus be able to cut down the market share of Jumbo airlines it has been clearly seen that the Jumbo airline was shaken up by the entry of Econo airlines and thus shows that the market is driven by cost and much less on the quality of service. The effect of the competition may well have made it possible for Econo to operate.
Another option for Econo is to operate in the regions which has less competition due to monopoly but because of competition in providing the service. In this case Jumbo was having monopoly and thus was able to push Econo out of the market. Whereas if the market wa based on competition amongst the equi sized or the services being provided, Econo would have been able to capture the market and position itself better in the market rather than having a price fight in the market.
(e)
This kind of pricing activity is not ethical and shold also not be favoured as this is not favouring the development of the market and is leading to monopoly in the market. Monopoly has its own advantages but here in this cae it has not been proved as such (Dearman & Beard, 2005). This can be explained as the failure of Econo airlines to sustain in the market. The Econo airlines had a very good business model both in terms of pricing and also the targeting the customers. The Econo airlines had maintained the good returns and thus would have taken away the huge market hare of Jumbo airline. Whereas Jumbo airline which has the monopoly in the region had huge margins which would have impacted the customers. Had the market been competitive enough that the Jumbo airlines was not having huge margins the situation would have been favourable for both the customers and the market development.
The stakeholders of the Econo airline had much on stake as they had started their operations in the last six months only. Thus it has been a huge challenge for them from starting the business to giving up to the huge pressure from the Jumbo airlines. Whereas for the Jumbo airlines the stakeholders had the plan to wipe out the competition and they have succeeded. But in the future it will be very difficult for the Jumbo to face another such challenge by a competitor that is huge. In other words the stakeholders by taking the decision of operating under the breakeven point of even the Econo airlines has resulted in future issues for the company.
Part B
The two basic methods of cost accounting are job costing and the process costing. Activity based costing lies in between both of them. It attribute to the cost that is associated with the jobs or proceses (Yu Lee, 2001). In the traditional method of cost accounting the cost were collected at different levels like the production department and the service department. At the final stage the costs associated with the production department were taken up by jobs and processes.
In the context of activity based costing, the costs are collected according to the activities such as material ordering and handling, customer support etc. Activity based cost captures cause and effect relationship which was not done by the traditional costing method being followed by companies. Also the traditional costing methods fail to recognize the inter dependency of the departments that are associated with the production . (David and Beard, 2005) This is made possible under Activity based costing. The activity based costing also provide meaningful cost that has to be attributed to a product. The activity based costing also helps in understanding the behavior of overhead costs and the relationship with the difference in productivity. It does help in allocating resource efficiently so that the overall cost of production is reduced. With all these aspects it can be said that the shift to activity based costing from traditional methods being followed so that the interdependency between the department can be traced and the cost can be distributed over each department so that the effective cost of production is reached at.
However there are two issues associated with activity based costing is the implementation of such a system in practical life and another is to ensure that the system is effective and leads to improved management decision making and organisational performance. This has been argued that it is difficult to implement. However given the condition that it has been implemented successfully irrespective of the complexity, the another major issue comes is justifying it. In other words it is equally to estimate the advantage of it to the management as well as to the operations.
This can be explained with the help of an example. Considering a situation where there are four departments that are involved in production of two products. The activity based costing will reult in division of costs and allocate them to the products baed on the timing allocated in different departments and th resources used. But in actual how well i the utilization cannot be explained or becomes difficult.
Thus the activity based costing should be able to explain the crux of the issue before implememtation and should be attributed in the profit statement of the company (Cokins, 1998). This becomes the only way to explain the effectiveness of the method.
In the situation that the activity based coting has been implemented it may be beneficial for the company to show the comparison between the traditional costing and activity based costing by developing the costing as per the traditional method and then compared. This may be lengthy but will be effective in explaining the advantage ofactivity based costing. This method will however be costly and time consuming.
It is easier to associate the activity based system to service rather than to the production but can be implemented with equal effort there also (Lobo, Yane.& Paulo, 1998). Another important factor is that many times the activity based costing is done in two parts i.e. there is first allocation and then the second allocation which adds to the complexity of the system and thus it becomes difficult to show the effectiveness of the system.
Thus the essence of the discussion is that the activity based costing is effective but has ots cost associated with the working and the complexity. At the same time the activity based costing has the issue of justifying the effectiveness. Activity based cost captures cause and effect relationship which was not done by the traditional costing method being followed by companies. Also the traditional costing methods fail to recognize the inter dependency of the departments that are associated with the production . The ways that have been discussed to estimate the effectiveness may be costing but will certainly highlight the advantage of shifting to activity based costing. The ffectiveness of the system can be measured by measuring the effectiveness of operation over a long period of time (James). The company cannot have advantages right from the start as it takes time for the company to adjust to the system and thus show the results. Also the company will have to assign the task to a team who will control the activities and manage them rather than contrary to the traditional method wherein it was managed by one member of the accounting team or a small team was involved and applying the basic concepts.
The acitibity based costing is certainly advantageous but needs little consideration and thus can be termed as an advanced method of estimating the cost associated with the products and the activities that are there in the production of the products. Activity based costing is an advanced method and need little consideration and thus will result in benefit. This statement does not imply that it is beneficial only for big companies. It has been viewed that this method is beneficial for both the large and small companies. The extent of benefit depends on how the system has been implemented. This method needs some patience and good and effective implementation to show the effectiveness of the system.
References
Cokins, G. (1998). Activity-Based Costing: Making It Work.
Lobo, Yane R.O., and Paulo C.L. (1998). “A New Approach to Product Development Costing.” CMAhe Management Accounting Magazine.
James D.T. (n.d.). Activity Based Costing in the Information Age. Retrieved from http://www.theacagroup.com/activitybasedcosting.htm
Colley, J. (2011). The Dangers of Coal-Burning Power Plants . Retrieved from http://ecohearth.com/eco-zine/green-issues/401-the-dangers-of-coal-burning-power-plants-.html
David T. Dearman, James E. Beard (2005). Ethical Issues in Accounting and Economics Experimental Research: Inducing Strategic Misrepresentation . Retrieved 20May 2012, from http://info.cba.ksu.edu/skovar/centralstates/2005/dearman.pdf
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