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.
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Flintoff Fashions |
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Schedule of cost of goods manufactured |
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For the year ended 31st Dec |
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Particulars |
$ |
Amount ($) |
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Direct material: |
||
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Raw material inventory, 1st Jan |
24,000 |
|
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Add: Purchases of raw material |
108,000 |
|
|
Raw material available for use |
132,000 |
|
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Less: Raw material inventory, 31st Dec |
15,000 |
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Raw material used |
117,000 |
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Direct labour |
120,000 |
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Manufacturing overhead: |
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Indirect material |
6,000 |
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Indirect labour |
9,000 |
|
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Electricity: plant |
24,000 |
|
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Depreciation: plant and equipment |
36,000 |
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|
Other manufacturing overhead |
48,000 |
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Total manufacturing overhead |
123,000 |
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Total manufacturing costs |
360,000 |
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Add: Work in process inventory, 1 January |
24,000 |
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|
Subtotal |
384,000 |
|
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Less: Work in process inventory, 31 December |
18,000 |
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Cost of goods manufactured |
|
366,000 |
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Flintoff Fashions |
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Schedule of cost of goods sold |
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For the year ended 31st Dec |
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Particulars |
Amount ($) |
|
|
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 |
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Cost of goods sold |
|
348,000 |
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Flintoff Fashions |
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Income Statement |
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For the year ended 31st Dec |
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Particulars |
Amount ($) |
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Sales revenue |
570,000 |
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Less: Cost of goods sold |
348,000 |
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Gross margin |
222,000 |
|
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Selling and administrative expenses |
90,000 |
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Profit before taxes |
132,000 |
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Income tax expense |
54,000 |
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Net profit |
|
78,000 |
- (a) If raw material purchases amounted to $110,400
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Flintoff Fashions |
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|
Schedule of cost of goods manufactured |
||
|
For the year ended 31st Dec |
||
|
Particulars |
$ |
Amount ($) |
|
Direct material: |
||
|
Raw material inventory, 1 January |
24,000 |
|
|
Add: Purchases of raw material |
110,400 |
|
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Raw material available for use |
134,400 |
|
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Less: Raw material inventory, 31 December |
15,000 |
|
|
Raw material used |
119,400 |
|
|
Direct labour |
120,000 |
|
|
Manufacturing overhead: |
||
|
Indirect material |
6,000 |
|
|
Indirect labour |
9,000 |
|
|
Electricity: plant |
24,000 |
|
|
Depreciation: plant and equipment |
36,000 |
|
|
Other manufacturing overhead |
48,000 |
|
|
Total manufacturing overhead |
123,000 |
|
|
Total manufacturing costs |
362,400 |
|
|
Add: Work in process inventory, 1 January |
24,000 |
|
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Subtotal |
386,400 |
|
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Less: Work in process inventory, 31 December |
18,000 |
|
|
Cost of goods manufactured |
|
368,400 |
|
Flintoff Fashions |
||
|
Schedule of cost of goods sold |
||
|
For the year ended 31st Dec |
||
|
Particulars |
Amount ($) |
|
|
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 |
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|
Income Statement |
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For the year ended 31st Dec |
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|
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 |
- (b) If indirect labour was $9600:
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Flintoff Fashions |
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|
Schedule of cost of goods manufactured |
||
|
For the year ended 31st Dec |
||
|
Particulars |
$ |
Amount ($) |
|
Direct material: |
||
|
Raw material inventory, 1 January |
24,000 |
|
|
Add: Purchases of raw material |
108,000 |
|
|
Raw material available for use |
132,000 |
|
|
Less: Raw material inventory, 31 December |
15,000 |
|
|
Raw material used |
117,000 |
|
|
Direct labour |
120,000 |
|
|
Manufacturing overhead: |
||
|
Indirect material |
6,000 |
|
|
Indirect labour |
9,600 |
|
|
Electricity: plant |
24,000 |
|
|
Depreciation: plant and equipment |
36,000 |
|
|
Other manufacturing overhead |
48,000 |
|
|
Total manufacturing overhead |
123,600 |
|
|
Total manufacturing costs |
360,600 |
|
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Add: Work in process inventory, 1 Jan |
24,000 |
|
|
Subtotal |
384,600 |
|
|
Less: Work in process inventory, 31 Dec |
18,000 |
|
|
Cost of goods manufactured |
|
366,600 |
|
Flintoff Fashions |
||
|
Schedule of cost of goods sold |
||
|
For the year ended 31st Dec |
||
|
Particulars |
Amount ($) |
|
|
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 |
- Calculation of profit per package and total profitability
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Particulars |
Bali Adventure |
Thailand Discovery |
Malaysian Orienteering |
Total |
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Total Revenue |
$900,000 |
$1,440,000 |
$1,120,000 |
$3,460,000 |
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Less: Direct Costs |
||||
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Tour leader |
$50,000 |
$240,000 |
$90,000 |
$380,000 |
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Tour assistant |
$20,000 |
$60,000 |
$60,000 |
$140,000 |
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Air travel |
$280,000 |
$600,000 |
$320,000 |
$1,200,000 |
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Accommodation |
$150,000 |
$520,000 |
$240,000 |
$910,000 |
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Equipment hire |
$40,000 |
$0 |
$90,000 |
$130,000 |
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Meals |
$180,000 |
$300,000 |
$80,000 |
$560,000 |
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|
$720,000 |
$1,720,000 |
$880,000 |
$3,320,000 |
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Less: Indirect Costs |
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Salaries |
$52,023 |
$83,237 |
$64,740 |
$200,000 |
|
Phone |
$520 |
$832 |
$647 |
$2,000 |
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Depreciation on equipment |
$1,301 |
$2,081 |
$1,618 |
$5,000 |
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Utilities |
$520 |
$832 |
$647 |
$2,000 |
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Rent and property taxes |
$2,341 |
$3,746 |
$2,913 |
$9,000 |
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Other department costs |
$3,121 |
$4,994 |
$3,884 |
$12,000 |
|
|
$59,827 |
$95,723 |
$74,451 |
$230,000 |
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Net Profit |
$120,173 |
-$375,723 |
$165,549 |
-$90,000 |
|
Profit per package |
$12,017 |
-$18,786 |
$16,555 |
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WN-1: Calculation of revenue
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Bali Adventure |
= |
No. of packages sold x No. of people per package x Revenue per person |
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= |
10 x 5 x 18000 |
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|
= |
$900,000 |
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Thailand Discovery |
No. of packages sold x No. of people per package x Revenue per person |
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|
= |
20 x 6 x 12000 |
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|
= |
$1,440,000 |
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Malaysian Orienteering |
No. of packages sold x No. of people per package x Revenue per person |
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= |
10 x 8 x 14000 |
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= |
$1,120,000 |
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Total Actual revenue of last year |
= |
900000 + 1440000 + 1120000 |
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= |
$3,460,000 |
- 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.
- 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.
- Currently, company is incurring losses (taking all packages). Following steps are suggested to the company to become profitable:
- 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%.
- 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.
- 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.
- Pricing of Thailand Discovery needs revision so as to cover direct as well as overhead costs.
- The cost of goods manufactured for February
|
Cool Cooking Tools Ltd |
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|
Schedule of cost of goods manufactured |
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|
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 |
- 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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