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Designing a new management accounting system
You have just been appointed as the new management accountant to manage the transition of the existing Royal Adelaide Hospital to the proposed new site. The hospital has a number of separate departments responsible for direct patient care, such as Accident and Emergency, Intensive Care, Neurology, and Cardiology, as well as a number of support departments such as Radiology and Patient Records. You are a little uncertain as to what your role will be in this new hospital, as consultants have been engaged to design the new management accounting systems. You thought that as a management accountant you would be responsible for developing the new systems!
Required:
1. Write a report to senior management explaining how you, as the management accountant, may contribute to the design and operation of the new management accounting systems for the new hospital.
2. Outline the types of management accounting information that you believe senior managers may require on a regular basis (say, weekly and monthly) to manage the operations of the new hospital. Consider both financial and non-financial information.
3. The new hospital plans to invest in the latest computer technology to run various aspects of the organisation, including the management information systems. Discuss the opportunities that this may present for the way in which you supply weekly and monthly reports to managers.

Flintoff Fashions

Schedule of cost of goods manufactured

For the year ended 31st Dec

Particulars 

$

Amount ($)

Direct material:

Raw material inventory, 1st Jan

               24,000

Add: Purchases of raw material

             108,000

Raw material available for use

             132,000

Less: Raw material inventory, 31st Dec

               15,000

Raw material used

            117,000

Direct labour

            120,000

Manufacturing overhead:

Indirect material

                 6,000

Indirect labour

                 9,000

Electricity: plant

               24,000

Depreciation: plant and equipment

               36,000

Other manufacturing overhead

               48,000

Total manufacturing overhead

            123,000

Total manufacturing costs

            360,000

Add: Work in process inventory, 1 January

             24,000

Subtotal

            384,000

Less: Work in process inventory, 31 December

             18,000

Cost of goods manufactured

 

            366,000

Flintoff Fashions

Schedule of cost of goods sold

For the year ended 31st Dec

 Particulars

Amount ($)

Finished goods inventory, 1 Jan

             12,000

Add: Cost of goods manufactured

            366,000

Cost of goods available for sale

            378,000

Less: Finished goods inventory, 31 Dec

             30,000

Cost of goods sold

 

            348,000

Flintoff Fashions

Income Statement

For the year ended 31st Dec

 Particulars

Amount ($)

Sales revenue

            570,000

Less: Cost of goods sold

            348,000

Gross margin

            222,000

Selling and administrative expenses

             90,000

Profit before taxes

            132,000

Income tax expense

             54,000

Net profit

 

             78,000

  1. (a) If raw material purchases amounted to $110,400

Flintoff Fashions

Schedule of cost of goods manufactured

For the year ended 31st Dec

Particulars 

$

Amount ($)

Direct material:

Raw material inventory, 1 January

               24,000

Add: Purchases of raw material

             110,400

Raw material available for use

             134,400

Less: Raw material inventory, 31 December

               15,000

Raw material used

            119,400

Direct labour

            120,000

Manufacturing overhead:

Indirect material

                 6,000

Indirect labour

                 9,000

Electricity: plant

               24,000

Depreciation: plant and equipment

               36,000

Other manufacturing overhead

               48,000

Total manufacturing overhead

            123,000

Total manufacturing costs

            362,400

Add: Work in process inventory, 1 January

             24,000

Subtotal

            386,400

Less: Work in process inventory, 31 December

             18,000

Cost of goods manufactured

 

            368,400

Flintoff Fashions

Schedule of cost of goods sold

For the year ended 31st Dec

 Particulars

Amount ($)

Finished goods inventory, 1 January

             12,000

Add: Cost of goods manufactured

            368,400

Cost of goods available for sale

            380,400

Less: Finished goods inventory, 31 December

             30,000

Cost of goods sold

 

            350,400

Flintoff Fashions

Income Statement

For the year ended 31st Dec

 Particulars

Amount ($)

Sales revenue

            570,000

Less: Cost of goods sold

            350,400

Gross margin

            219,600

Selling and administrative expenses

             90,000

Profit before taxes

            129,600

Income tax expense

             54,000

Net profit

 

             75,600

  1. (b) If indirect labour was $9600:

Flintoff Fashions

Schedule of cost of goods manufactured

For the year ended 31st Dec

Particulars 

$

Amount ($)

Direct material:

Raw material inventory, 1 January

               24,000

Add: Purchases of raw material

             108,000

Raw material available for use

             132,000

Less: Raw material inventory, 31 December

               15,000

Raw material used

            117,000

Direct labour

            120,000

Manufacturing overhead:

Indirect material

                 6,000

Indirect labour

                 9,600

Electricity: plant

               24,000

Depreciation: plant and equipment

               36,000

Other manufacturing overhead

               48,000

Total manufacturing overhead

            123,600

Total manufacturing costs

            360,600

Add: Work in process inventory, 1 Jan

             24,000

Subtotal

            384,600

Less: Work in process inventory, 31 Dec

             18,000

Cost of goods manufactured

 

            366,600

Flintoff Fashions

Schedule of cost of goods sold

For the year ended 31st Dec

 Particulars

Amount ($)

Finished goods inventory, 1 Jan

             12,000

Add: Cost of goods manufactured

            366,600

Cost of goods available for sale

            378,600

Less: Finished goods inventory, 31 Dec

             30,000

Cost of goods sold

 

            348,600

Flintoff Fashions

Income Statement

For the year ended 31st Dec

 Particulars

Amount ($)

Sales revenue

            570,000

Less: Cost of goods sold

            348,600

Gross margin

            221,400

Selling and administrative expenses

             90,000

Profit before taxes

            131,400

Income tax expense

             54,000

Net profit

 

             77,400

  1. Calculation of profit per package and total profitability

Particulars

Bali Adventure

Thailand Discovery

Malaysian Orienteering

Total

Total Revenue

$900,000

$1,440,000

$1,120,000

$3,460,000

Less: Direct Costs

Tour leader

$50,000

$240,000

$90,000

$380,000

Tour assistant

$20,000

$60,000

$60,000

$140,000

Air travel

$280,000

$600,000

$320,000

$1,200,000

Accommodation

$150,000

$520,000

$240,000

$910,000

Equipment hire

$40,000

$0

$90,000

$130,000

Meals

$180,000

$300,000

$80,000

$560,000

 

$720,000

$1,720,000

$880,000

$3,320,000

Less: Indirect Costs

Salaries

$52,023

$83,237

$64,740

$200,000

Phone

$520

$832

$647

$2,000

Depreciation on equipment

$1,301

$2,081

$1,618

$5,000

Utilities

$520

$832

$647

$2,000

Rent and property taxes

$2,341

$3,746

$2,913

$9,000

Other department costs

$3,121

$4,994

$3,884

$12,000

 

$59,827

$95,723

$74,451

$230,000

Net Profit

$120,173

-$375,723

$165,549

-$90,000

Profit per package

$12,017

-$18,786

$16,555

 

WN-1: Calculation of revenue

Bali Adventure

=

No. of packages sold x No. of people per package x Revenue per person

=

10 x 5 x 18000

=

$900,000

Thailand Discovery

No. of packages sold x No. of people per package x Revenue per person

=

20 x 6 x 12000

=

$1,440,000

Malaysian Orienteering

No. of packages sold x No. of people per package x Revenue per person

=

10 x 8 x 14000

=

$1,120,000

Total Actual revenue of last year

=

900000 + 1440000 + 1120000

=

$3,460,000

  1. Out of three tour packages, one, Thailand Discovery is running at loss. Other two, Bali Adventure and Malaysian Orienteering, are earning profit. Pricing of Thailand Discovery package needs correction as it is not even able to recover its direct costs. Malaysian Orienteering is earning the highest profit. Bali Adventure is earning slightly lower profit than that of Malaysian Orienteering. As discussed earlier, Thailand Discovery is incurring losses.
  1. Allocation of overhead costs should be done in the ratio of number of packages, instead of actual sales revenue. Actual sales revenue will change when pricing of package is changed whereas there will not be any change in effort made by corporate. Further, for each package, there will be equal effort put by the corporate. Therefore, ratio of number of packages appears to be the best way of allocation of overhead costs. This kind of allocation refers to the Activity Based costing method.
  1. Currently, company is incurring losses (taking all packages). Following steps are suggested to the company to become profitable:
  1. Overhead Costs: Efforts are required from the company for reduction in overheads. Salary appears to be the biggest component of overhead which is almost 87%.
  1. Direct Costs: Partnering with the Hotels and Flights is recommended to reduce the direct costs. This will be a win-win situation for both company and the partner (Hotel or Airline) Company.
  1. Premium Pricing: When the booking date is too close to actual tour date, charging premium becomes necessary. As at short notice, hotels and airlines charge premium for booking.
  1. Pricing of Thailand Discovery needs revision so as to cover direct as well as overhead costs.
  1. The cost of goods manufactured for February

Cool Cooking Tools Ltd

Schedule of cost of goods manufactured

For the month ended on 28th Feb

Particulars 

$

Amount ($)

Direct material:

Raw material inventory, 1 Jan

               -   

Add: Purchases of raw material

         26,000

Raw material available for use

         26,000

Less: Raw material inventory, 31 Dec

               -   

Raw material used

           26,000

Direct labour

           20,000

Manufacturing overhead

           30,000

Total manufacturing costs

           76,000

Add: Work in process inventory, 1 Jan

             9,000

Subtotal

           85,000

Less: Work in process inventory, 31 Dec

             4,600

Cost of goods manufactured

 

           80,400

  1. The amount of over applied or under applied overhead to be closed to cost of goods sold on 28 February

Predetermined overhead rate as % of direct labour cost is 150%.

Direct Labour cost

         20,000

Overhead applied (20000 x 150%)

         30,000

Overhead incurred

         32,000

Under application of overhead

          2,000

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