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ACC200 Introduction To Management Accounting

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  • Course Code: ACC200
  • University: Charles Sturt University
  • Country: Australia

Question:

Assignment

Beztec Limited produces two models of Printers: the Lexon, which Beztec has produced since 2014 and sells for $990; and the Protox, a newer model introduced in 2016 that sells for $1254. Based on the following income statement for the year ended 31 December 2017, senior management at Beztec have decided to concentrate marketing resources on the Protox model and to begin to phase out the Lexon model because the Protox generates a much bigger operating profit per unit.

Beztec Limited

Income statement for the financial year ended 31December 2017

 

Lexon

Protox

Total

Revenues

$23 760 000

$7524 000

$31 284 000

Cost of goods sold

15 048 000

5 266 800

20 314 800

Gross margin

8 712 000

2 257 200

10 969 200

Selling and administrative expense

6 996 000

1 613 700

8 609 700

Operating income

$1 716 000

$643 500

$2 359 500

Units produced and sold

24 000

6 000

 

Operating income per unit sold

$71.50

$107.25

 

Details for cost of goods sold for Lexon and Protox are:

 

Lexon

Protox

Costs

Total

Per unit

Total

Per unit

Direct materials

$5 491200

$228.80

$3 854 400

$642.40

Direct production laboura

475 200

19.80

277 200

46.20

Machineb

3 801 600

158.40

475 200

79.20

Total direct

$9 768 000

$407.00

$4 606 800

$767.80

Production overheadc

$5 280 000

$220.00

$660 000

$110.00

Total cost of goods sold

$15 048 000

$627.00

$5 266 800

$877.80

a Lexon requires 1.5 hours per unit and Protox  requires 3.5 hours per unit. The direct production labour rate is $13.20 per hour.

bMachine costs include lease costs of the machine, repairs and maintenance. Lexon requires 8 machine-hours per unit and Protox requires 4 machine-hours per unit. The machine-hour rate is $19.80 per hour.

c Production overhead costs are allocated to products based on machine-hours at the rate of $27.50 per hour.

Beztec’s management accountant, Sue Smith, is advocating the use of activity-based costing and activity-based management and has gathered the following information about the company’s production overhead costs for the year ended 31December 2017.

 

Activity-cost-driver quantities

Activity-cost driver (driver quantity)

Total activity costs

Lexon

Protox

Total

Soldering (number of solder points)

$1 165725

1 333 125

433 125

1 766 250

Shipments (number of shipments)

1 064 250

18 225

4 275

22 500

Quality control (number of inspections)

1 534 500

63 225

23 963

87 188

Purchase orders (number of orders)

1 176 120

90 113

123 727

213 840

Machine power (machine-hours)

71 280

198 000

18 000

216 000

Machine set-ups (number of set-ups)

928 125

18 000

15 750

33 750

Total production overhead

$5 9400 000

 

 

 

After completing her analysis, Smith shows the results to Steven Kay, the CEO of Beztec. Kay does not like what he sees. ‘If you show headquarters this analysis, they are going to ask us to phase out the Protox line, which we have just introduced. This whole costing stuff has been a major problem for us. First, Lexon was not profitable and now Protox.

'Looking at the ABC analysis, I see problems. First, we do many more activities than the ones you have listed. If you had included all activities, maybe your conclusions would be different. We can’t afford to phase out either product, please alter the costs produced by the ABC system.’

Smith knows that her numbers are fairly accurate. As a quick check, she calculates the profitability of Lexon and Protox using more and different activity drivers. The set of activities and activity rates she had used results in numbers that closely approximate those based on more detailed analyses. She is confident that headquarters, knowing that Protox was introduced only recently, will not phase out Protox. She is also aware that a sizeable portion of Kay’s bonus is based on division revenues. Phasing out either product would adversely affect his bonus. Still, she feels some pressure from Kay to do something. She asks for your advice.

Required

1. Discuss the importance of accurate product costing. In your discussion you should highlight the problems associated with using traditional costing system which Beztec has been using.

2. Calculate the cost driver rates for the various activities identified in the activity-based costing (ABC) system.

3. Calculate the cost of each model under activity based costing.
 
4. Complete a profitability analysis by calculating the gross profit and gross profit percentage per unit for both models under ABC system.
 
5. Advise Smith on how she should respond to Kay’s suggestion that she alter the costs produced by the ABC system. You should discuss APES 110 Code of Ethics for Professional Accountants.
 
6. Using a predetermined overhead rate to allocate overhead cost will most probably result in over/under allocation of overhead coats. Explain why this may happen and three ways to dispose the amount of over/under applied overhead costs.
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