200494 Management Accounting

Case Study

7-1: Primus Consulting Group and Case Study

7-2: Five Star Tools All calculations must be clearly explained. Both case studies aim to examine students’ understanding of incremental revenues and costs. They also aim to examine students’ ability to make simple management decisions using the incremental analysis technique. This is to facilitate student development of deep understanding of use of cost information identified in the module learning outcomes.

Students are required to read following topics:

Introduction to Managerial Accounting

The use of cost information in management decision making The attached files are the both case studies.

Case 7.1

Primus is a consultancy firm and it has been operating at excess capacity. Therefore, the company can complete more assignments without increasing fixed costs. The company is planning to provide consultancy services to Northwood Industries. Northwood limited has offered price of $75,000 for this job and cost calculated by Primus through its normal costing method is as under:

Thus, it can be seen from the above working that total cost calculated through normal costing method is more than price offered by the customer. Therefore, this offer should be rejected according to normal costing technique.

According to Boyd (2013), in this type of cases the company should use incremental costing as only incremental revenue and incremental costs are relevant for decision making in the short run. As the company is operating at below capacity, it can complete more assignments without incurring any extra fixed costs. Therefore, fixed costs are not relevant in this case and only variable costs are relevant.

-        Salary of Partner, Senior Consultant and Staff Consultant: The Salary paid to Partners, Senior Consultants and Staff Consultants are relevant costs for this project as they will have to devote their time for this project. However, actual hourly rate paid by the company to these staff should be considered instead of standard rate.

-        Overheads: We have been also given that 80% of the overhead costs are fixed. Therefore this fixed overhead costs are also not relevant for our decision making. Only 20% variable overhead costs are relevant for our decision making as accepting this job will increase these 20% variable overheads.

-        Travel Costs: The Company has practice of billing travel costs on actual basis to its customers. Travel costs are relevant for our decision making as they are incremental costs relating to this decision.

Thus, it can be seen from above table that incremental revenue of this offer is only $75,000 against incremental costs of $76,760. Thus, accepting this offer will result in incremental loss of $1,760. Therefore, this offer should be rejected.

According to Davis and Davis (2011), following qualitative factors should also be considered in deciding whether to accept this type of jobs or not:

Northwood is a new customer. The company can bear this initial loss if it expects to receive more profitable work in the future.

 Primus can develop expertise in conducting study to improve on-time delivery. This can provide new learning to the firm and add new feature to services of the firm.

This new assignment can provide near learning to partners and employees of the firm. This can increase their motivation and job satisfaction.

The company can get similar assignments from other firms by demonstrating its capabilities in this assignment.

The firm has excess capacity. Therefore, it can use this excess capacity to complete this assignment.