ACCOUNTING FOR MANAGERIAL DECISION MAKING

ACCOUNTING FOR MANAGERIAL DECISION MAKING

Case 1 ;

WeRConsultants offers three professional services to its clients: (1) management

consultancy, (2) corporate training, and (3) outbound program.

Ruby Rahme, the chief accountant of the company, wants to apply the Activity-

Based Costing (ABC) system to determine the cost of each service. She obtains

the following cost information for 2014 as follows:

a. Professional labour annual salaries:

Type of          Numbers of        Salary per        Total salary

Professional       Professional        person           per year

labour            labour           per year

Consultants                5           $ 120,000         $ 600,000

Team Leaders               8              75,000           600,000

Trainers                  12              40,000           480,000

b. All other 2014 annual costs are support costs, and categorised into four

activity costs, as follows:

Supplies                                  $ 45,000

Building rent and maintenance                 80,500

Administrative costs to manage clients       240,000

Subcontract services                          90,000

$ 455,500

c. Consumption of supplies depends on the number of clients per year.

Other information about individual professional services:

Management       Corporate        Outbound            Total

consultancy      Training         Program

Square metre of           600           1,200            500               2,300

building space

occupied by each

service

Number of clients             30           70              60               160

per year

Number of                  50             100            300                450

subcontract

services per year

d. Professional labour allocations to individual professional services:

Management             Corporate              Outbound

consultancy             training              program

Consultants               5                     –                      –

Team leaders              2                     3                      3

Trainers                  2                     7                      3

2

Required:

a.   Using the Activity-Based Costing data presented above, choose the most

appropriate cost driver for each activity pool, and compute the cost-driver

rate for each activity. (3 marks)

b.   Compute the annual cost of each professional service for 2014. (7.5 marks)

Case 2

DingedIn manufactures Sweaters and Jumpers. The company’s product line

projected income statement follows:

Total   DingedIn’s DingedIn’s

Sweaters Jumpers

Sales revenue                                      $840,000   $620,000   $220,000

Cost of Goods Sold

Variable                                         203,000    128,000        75,000

Fixed                                            300,000    202,000        98.000

Total Cost of Goods Sold                            503,000    330,000       173,000

Gross profit                                        337,000    290,000        47,000

Marketing and administrative expenses

Variable                                         150,000     78,000        72,000

Fixed                                            115,000     88,000        27,000

Total marketing and administrative expenses         265,000    166,000        99,000

Operating income (loss)                            $ 72,000   $124,000     $ (52,000)

Management is considering to discontinue the DingedIn’s Jumpers product line.

Management accountants for the company estimate that dropping the DingedIn’s

Jumpers line will decrease total fixed Cost of Goods Sold by $45,000 and total

fixed marketing and administrative expenses by $9,500.

Required:

Prepare an analysis supporting your opinion about whether or not the DingedIn’s

Jumpers product line should be dropped.