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Part 1

Question 1

a) As an organisation expands, it is common for their product offering to become diversified. Explain the reasons that would cause management to change to an activity
based costing system and the benefits that could be expected by the organisation.

b) The following annual data related to Happy Cow Cheese manufacturing company for July, 2018. The company produces two types of cheese namely; Happy cow Slices
and Herbs Cheese.

Company uses machine hours as the cost driver.

You are required to,

i. Calculate the company’s predetermined plant-wide overhead rate 
ii. Estimate the overhead costs of each of the two products
iii. Compare the actual overhead cost to the amount of overhead applied to the two products in July


PART 2

Question 1

Two companies have identical products, total fixed costs and variable costs per unit, yet one company is able to set a much lower price for its product and still be as profitable as the other company. Explain how this can happen.

Question 2

A car rental company rents small, medium and family-sized cars. What assumptions would be made for the purpose of a cost volume profit analysis? Does this mean that CVP analysis is of little value to this business? Explain your answer.

Activity-Based Costing for Manufacturing Companies

In the present era, the production process of multiple products in manufacturing companies is supported by various activities and department due to which it is not feasible to allocate overhead as per the single rate (Oseifuah, 2018). Therefore, traditional costing is not suitable as it leads to a wrong decision regarding cost consumption and profit generation for individual product or departments. By considering this aspect, companies are required to adopt activity-based costing as it allocates overheads as per cost drivers which consider actual cost consumption. By implementing this model, business will be able to eliminate activities not providing value benefit to business in order to make optimum utilisation of available resources. Further, they can improvise product mix as per consider an actual contribution by each product (Mahaland Hossain, 2015).

(i)

i

Predetermined plant-wide overhead rate

Budgeted Manufacturing overhead cost

A

$819,000.00

Budgeted Machine Hours

B

    22,500.00

Plant-wide overhead rate

A/B

36.4

(ii)

ii.

Estimate the overhead costs of each of the two products

Particulars

Slices

Herbs

Total

Machine Hours for the month of July-18

A

900

450

1350

Plant-wide overhead rate

B

36.4

36.4

36.4

Estimate the overhead costs

A*B

$32,760.00

$16,380.00

$49,140.00

(iii)

iii

Compare the actual overhead cost to the amount of overhead applied to the two products in July

Actual overhead cost for the month of July-18

A

$76,500.00

Overhead applied to the two products in July-18 (ii)

B

$49,140.00

Adverse Variance (Budgeted - Actual)

B-A

$27,360.00

Yes, it is possible for two identical companies to charge different prices even if they have similar products with the same fixed costs and variable costs per unit. It is possible because of economies of scale. With the increase in production units company will be able to make a reduction in their fixed cost per unit and their overall profitability will be increased and therefore they will be able to offer products at low price and can earn profits (Brealey, Myers and Marcus, 2012). After surpassing the breakeven point, contribution per unit on each additional unit is a profit of the business as a fixed cost is already covered. 

By considering the above graph, it can be noticed that after attainment of breakeven point, additional units of production will provide higher profits as the cost will be entirely variable to the sales price (Tsorakidis et al. 2011).

Key assumptions to be considered for cost-volume-profit analysis are enumerated below:

  • All cost covered under operations can be categorised as fixed and variable cost as without categorisation this analysis is not possible.
  • The fixed cost associated with the production will remain the same in the short run,andthe variable cost is completely proportionate to the sale per unit (Weygandt, Kimmel and Kieso, 2015).
  • Selling price per unit will be constant during the production irrespective of the volume produced
  • This model assumes that there is no drastic modification in the inventory size. It means ether accounting of inventory is done as per variable costing or entire production has been sold within the same period (Lulaj and Iseni, 2018).

Cited assumptions provide the following linear equation regarding total costs and revenues

Total costs = fixed costs + (variable cost per unit × No. of units produced)

Total revenue = sales price per unit × No. of units produced

These assumptions are applied so that variables of cost-volume-profit analysis can be formed into a linear equation. However, in a real scenario, cost and revenues associated with the productions are non-linear which makes analysis more complicated in nature.

These assumptions do not reduce the viability of this tools,but it imposesa restriction on its application. This tool has various advantages for car rental business such as improvising a decision-making process (Otley, 2016). By applying this statistical model, the manager can determine targets to attain for achieving desired profitability. Further, application of this model providesa detailed analysis of activities of the business. However, inaccurate forecasting can also lead to making the wrong decisions (Said, 2016). Therefore, the value of this model for business is completely based on available information.

Application of Activity-Based Costing in Allocation of Overheads

This part of the study is based on assessing the importance of Sustainability Reporting by firms and corporations in Australia. Along with this study also covers the comparison and contrasting of different local and international sustainable reporting frameworks.

Sustainability reporting engages firms and corporations stating their corporate responsibility by measuring and reporting their performance based on economic, social and environmental conditions. Further, this can be served by the annual report of the corporation, a sustainability report, environmental impact report and triple bottom line report (Flower, 2015). Preparing a sustainability report is turning out to be an accepted aspect of corporate accountability. The reports are believed to demonstrate the approach of the company and their performance on such social, governance and environmental issues to the stakeholders (Parliament of Australia, 2018). The information based on sustainability performance might be presented as an element of the annual report of the organization, or on the basis of the standalone report; sustainability report, environmental impact report and triple bottom line report. It is the key measure wherein the company’s state, and judgement upon their performance is done, and their commitment towards corporate responsibility is considered.

In context with reporting structure, a rapid amount of companies based in ASX200 are now applying the  Several guidelines of reporting have also been established to help the procedure of sustainability reporting. The most broadly realized are the Global Reporting Initiative (GRI) Reporting Guidelines, in accordance with the same, it aims to make sustainability reporting as widespread and general as financial reporting so as to engage in company routine aspects to account their efforts they prepare on and have impact on the natural resources, economy and communities  globally (Australian Council of Superannuation Investors, 2017).  The adoption of the GRI framework is also related with the level of the transparency score of the firm and with its concerned analysts pursuing the acts as an aspect for the capital markets, calling for a high information environment. Corporate sustainability reporting inclusive of the risks of economy, environment, social and governmental is improvising, but there is still the presence of considerable gaps in regards to the climate associated disclosures. Majority of the ASX200 companies consider value in terms of sustainability disclosure, in which 92% have undertaken some reporting. Companies are encouraged by the ACSI to implement best and justified practice structure established by the Financial Stability Board’s Task Force based on the Financial Disclosures related to climate.

Two Products Identification and Cost Estimation through ABC

Moreover, prime principles of sustainability disclosure rapidly increased the norm, with more than 50% of the ASX200, currently reporting to a detailed or leading level, in comparison 19.5% in the year 2008. Furthermore, the 85% in each dollar being invested in the ASX200 moved to the corporations that reported to the high standard.

ACI and its involved members believe in their contributions, which are made to improve sustainability disclosure over the past few years. The improvements made them are inclusive of: several companies made report to either Leading or Detailed level has magnified from 39 in the year 2008 to 101 in the year 2016, the number of companies that made no reports have almost divided in 31(2008) to 16 (2016) (Higgins, Milne and Van Gramberg, 2015).With the rate of sustainability disclosure of all ASX200 companies and benchmarking in opposition to their industry and the ASX200, they provide companies with a perception of an institutional investor on their progress.  With the sustainability reporting and its disclosure, robust and evident business decisions are facilitated while long-term value creation is ensured.

It is highly effective when it comes to the disclosure of the material environmental, social and governance risks are determined, managed and mitigated. Sustainability reporting held in Australia is affected by the international development simultaneously. Within this, the significant developments climate-related changes, the United Nations Sustainable Development Goals, integrated reporting, the European Union (EU) Shareholder Rights Directive and the Sustainable Stock Exchanges Initiative.

In addition, the foreign companies having operations in Australia voluntarily report, being rated at over twice as of companies owned by Australia, with 43% and 18% respectively. The Sustainability reporting held within Australia is led by a range of core sectors like financing, manufacturing, mining, trading and utilities (Adams, 2015). The main reason behind the lower reporting rates is the insufficient involvement of the majority of financial markets.

In a situation where the financial analysts do not make use of sustainability information then there will be less prompt for companies to generate the same. On the other hand, the financial analysts make no demand for information; it is because it is not prepared in the specified format that the companies generally use.

Consequently, the non-financial activities of risk management that corporations are taking into account are not valued in the market as a whole (De Villiers, Rinaldi and Unerman, 2014). Although, it should be noted that, the low rate of the sustainability reporting in Australia does not demonstrate on the solid or weak company performance, but is only unreported and thereby complexity is faced while measuring.

Importance of Sustainability Reporting by Australian Firms and Corporations

The lawful compulsions held on the Australian sustainability reporting are demonstrated under the Corporations Act 2001 inclusive of:


  • s299 (1) (f)requiring the corporations while making it mandatory to comprise details regarding environmental laws and annual report licenses breaches.
  • ss1013(A) to (F) prescribed under Corporations Act 2001, requires financial items providers with an investment element to make disclosure to the degree by which the environmental or labour laws, social and ethical concerns are considered while making decisions regarding investments(A. Adams, Muir and Hoque, 2014).

On the other hand, as per the Australian Stock Exchange (ASX), the standards and best recommendation on practices of the good corporate governance with a code of conduct  are placed by the Corporate Governance Council, that can state the company’s commitment towards ethical compliance and practices (Parliament of Australia, 2018).

Reporting international companies to have several choices in terms of disclosures, such as GRI standards, IIRC, SASB, CDSB and CDP which offer many ways in front of them to be transparent. Emerging frameworks such as the International Integrated Reporting Council and Sustainability Accounting Standards Board can experience a rising struggle to hold grip till the time they can prove their actual value in context with providing a range of beneficial tools, market recognition and their part validation (Global Reporting Initiative, 2013). The most generally used detailed sustainability reporting standard internationally is the GRI Sustainability Reporting Guidelines. These guidelines are voted as the most useful and appropriate reporting framework, along with the CDP and the DJSI with the rate of 50% of individuals determining the GRI as the most suitable and favoured principle flowing between companies and other organizations.

There is the presence of various sustainability frameworks and principles which are internationally recognizable. The mainstream providers of the guidelines related to non-financial reporting are inclusive of Global Reporting Initiative (GRI Sustainability Reporting Standards), The Organisation for Economic Co-operation and Development (OECD Guidelines for Multinational Enterprises), UN Global Compact (Communication on Progress), International Organization for Standardization (ISO 26000 Guidance on social responsibility) and The International Integrated Reporting Council (IIRC International Framework). In relation to the rising demand for transparency, local standards are being improved along with the international frameworks (GRI, 2013). At present era, companies have criticized for the depressing effects of the environment on the community, there is a higher requirement of the proper disclosures maintained by firms, and for the same, and there are a range of sustainability reporting framework applied internationally which are GRI (Global Reporting Initiatives), DJSI (Dow Jones Sustainability Index) and carbon disclosure project.

On the basis of the present analysis, it can be concluded that Sustainability Reporting is a very important aspect when it comes to financial reporting. A range of international as well as local initiatives operates to help organizations with their sustainability reporting. Further, the analysis of local as well as the international framework shows that they have similar objectives however their effectiveness varies as per the factor considered for sustainability reporting (Flower, 2015). In addition to this, the GRI is considered to be the most suitable framework, as it a liberal international firm that assists the companies to communicate their effects on crucial sustainability issues and is more committed to improvising the optimum usage of guidelines.

Irrespective of the framework to be chosen by corporate for its non-financial reporting, it should be noted that while communicating the relationship among the business and sustainability, company’s value can be greatly improvised (GRI, 2013). This also helps in measuring and mitigating changes, while ensuring improvements and innovations simultaneously.

References

Adams, C., Muir, S. & Hoque, Z., (2014). Measurement of sustainability performance in the public sector. Sustainability Accounting, Management and Policy Journal, 5(1), pp.46-67.

Adams, C.A., (2015). The international integrated reporting council: a call to action. Critical Perspectives on Accounting, 27, pp.23-28.

Australian Council of Superannuation Investors, (2017). Corporate Sustainability Reporting in Australia (pdf). Retrieved from < https://www.acsi.org.au/images/stories/ACSIDocuments/generalresearchpublic/2017-Sustainability-Report-FINAL.pdf >.

Brealey, R. A., Myers, S. C., & Marcus, A. J. (2012). Fundamentals of corporate finance. McGraw-Hill/Irwin,

De Villiers, C., Rinaldi, L. & Unerman, J., (2014). Integrated Reporting: Insights, gaps and an agenda for future research. Accounting, Auditing & Accountability Journal, 27(7), pp.1042-1067.

Flower, J., (2015). The international integrated reporting council: a story of failure. Critical Perspectives on Accounting, 27, pp.1-17.

Global Reporting Initiative, (2013). Sustainability Reporting: Practices, performance and potential In association with GRI, (pdf). Retrieved from < https://www.cpaaustralia.com.au/~/media/Corporate/AllFiles/Document/professional-resources/sustainability/sustainability-reporting-practice-performance-potential.pdf>.

GRI, (2013). Collaboration among reporting frameworks: the future of sustainability reporting (Online). Retrieved from < https://www.globalreporting.org/information/news-and-press-center/Pages/Collaboration-among-reporting-frameworks-the-future-of-sustainability-reporting.aspx>.

GRI, (2013). Ranking the standards: Which sustainability frameworks are best? (Online). Retrieved from < https://www.globalreporting.org/information/news-and-press-center/Pages/Ranking-the-standards-Which-sustainability-frameworks-are-best-.aspx>.

Higgins, C., Milne, M.J. & Van Gramberg, B., (2015). The uptake of sustainability reporting in Australia. Journal of Business Ethics, 129(2), pp.445-468.

Lulaj, E., &Iseni, E. (2018). Role of Analysis CVP (Cost-Volume-Profit) as Important Indicator for Planning and Making Decisions in the Business Environment. European Journal of Economics and Business Studies, 4(2), 104-120.

Mahal, I. and Hossain, A., 2015. Activity-Based Costing (ABC)–An Effective Tool for Better Management. Research Journal of Finance and Accounting, 6(4), pp.66-74.

Oseifuah, E. K. (2018). Activity-based costing (ABC) in the public sector: benefits and challenges. Management, 12, 4-2.

Otley, D. (2016). The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31, 45-62.

Parliament of Australia, (2018). Chapter Six - Sustainability reporting: background and current status (Online). Retrieved from < https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/Completed_inquiries/2004-07/corporate_responsibility/report/c06>.

Parliament of Australia, (2018). Sustainability reporting (Online). Retrieved from < https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/Browse_by_Topic/ClimateChangeold/responses/economic/sustainability>.

Said, H. A. (2016). Using Different Probability Distributions for Managerial Accounting Technique: The Cost-Volume-Profit Analysis. Journal of Business and Accounting, 9(1), 3.

Tsorakidis, N., Papadoulos, S., Zerres, M., &Zerres, C. (2011). Break-even analysis. Bookboon.

Weygandt, J. J., Kimmel, P. D., &Kieso, D. E. (2015). Managerial accounting. Wiley.

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