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1. Please list the ethical standards, as provided by the Institute of Management Accountants (IMA) Statement of Ethical Professional Practice, which are being jeopardized by Paul hiring George the Plumber, and justify why these standards are being jeopardized. 

2. Classify the 8 activities among the four types of quality costs.

3. Using the information provided in Table 1, explain the behaviour between the four types of quality costs and what has changed throughout the years. 

Standards Jeopardized by Hiring Unqualified Personnel

In order to promote the ethical professional practices, the institute of management accountant has issued a statement in context of standards to be followed by the members of the institute while engaging themselves in the professional practices. The hiring of George as the management accountant of Fridges-R-Fun has jeopardised certain standards which are as follows:

  • Competence:

As George is not holding the professional degree in the field of management accountancy, he is not competent to be appointed as the management accountant of the company even though he possesses sound knowledge about the pipes (IMA, 2018).

  • Integrity:

As George is the relative of general manager of the company, the appointment of him as the management accountant will lead to conflict of interests in the company. 

Question 2.1

System Development

Prevention Costs

Technical support to suppliers of compressors

Prevention Costs

Technical support to suppliers of pipes

Prevention Costs

Field testing at customers’ sites

Appraisal Costs

Inspection on assembling line

Appraisal Costs

Rework on assembling line

Internal Failures

Warranty repairs of fridges

External Failures

Warranty replacements of fridges

External Failures

In the present case, Fridges-R-Fun has not taken up any activities to prevent or detect the errors occurred in the products of the company and due to this reason the company had to face higher quality cost to deal with the internal or external failures of the products. In year 2 the total quality cost has increased further because of implementation of such activities that could prevent or detect the product errors and failures. However, the quality costs are generally long term investments that take time to offer the benefits. Therefore, such activities could not result in sudden decline in the overall quality costs. However, in year 3 the quality cost again was settled down to the same level as that of year 1 due to reduction in the internal and external failures. 

John believes that it is better to spend cost and time to fix the defects of the products once they are ready to be delivered or once they are finally delivered to the customers rather than spending time and money to take up preventive and other actions that facilitates the identification of product errors or failures. However, Paul supports the view of company’s management accountant who believes that quality cost is a kind of long term investment that offers its benefits in sometime and not immediately. According to them, the company must investment more time and money to prevent and identify the product errors on time rather than waiting for customers to recognise such errors. 

If Ringo’s decision is executed, it will result in further reduction of changes of occurrence of internal as well as external failures of the products in year 4 as compared to year 3 as these failures will be avoided to an acceptable extent through the preventive and appraisal measures

If Ringo’s decision is not executed then it will amount to increase in the chances of internal or external failure due to absence of preventive measures such as testing, inspection etc.   

Variable Cost per fridge

Change in Total Cost/Change in Number of Units

($6200-$3700)

(600-350)

$2500 / 250

Variable cost per fridge

 $  10.00

Variable cost per fridge

$ 10

Total number of fridges sold

600

 Total Variable Cost

 $   6,000.00

 Total Cost incurred  

 $   6,200.00

 Fixed Costs

 $   200.00

Variable cost per fridge

$ 10

Total number of fridges sold

350

 Total Variable Cost

 $               3,500.00

 Total Cost incurred  

 $               3,700.00

 Fixed Costs

 $                  200.00

Variable cost per fridge = $ 10

Fixed cost per fridge = $ 200 

The actual delivery expenses are more than the expected expenses because more overheads are applied to the fridges and this has caused under-absorption of the fridge delivery expenses. There can be various reasons of differences between the actual and expected overheads of the company such as wrong estimation of overhead recovery rate (Hoque, 2002). 

Month

Units of Fridge

Workings

Expected

Actual

January

450

(450*10)+200

 $         4,700.00

 $      4,710.00

March

400

(400*10)+200

 $         4,200.00

 $      4,300.00

May

500

(500*10)+200

 $         5,200.00

 $      5,300.00

June

450

(450*10)+200

 $         4,700.00

 $      4,700.00

Total

 $      18,800.00

 $   19,010.00

 Welding function

Budgeted fixed overhead rate=

Total Fixed Overhead/Direct Machine Hours

$250000 / 7500

Fixed manufacturing overhead rate

$33.33

Variable manufacturing overhead rate

$1.5

Total manufacturing overhead rate

$34.83

Assembly function

Budgeted fixed overhead recovery rate=

Total Fixed Overhead/Direct Labour Hours

Assembly

$50000/5000

Fixed overhead rate

$10

Variable overhead rate

$2

Total manufacturing overhead rate

$12.00

Question 5.2

Applied overhead

Actual Hours * Budgeted Overhead Recovery Rate

Welding Function

50*34.83

$1741.67

Assembly Function

40*12

$ 480

Total applied overhead for job 232

$ 2221.67

 

Question 5.3

Total Manufacturing Overhead

Direct Material

Welding

 $ 500.00

Assembly

 $ 125.00

 Total Direct Material Cost

 $ 625.00

Direct Labour

Welding

 $ 250.00

Assembly

 $ 750.00

Total Direct Labour Cost

 $ 1000.00

Variable Manufacturing Overheads

Welding

$ 75                        (50*1.5)

Assembly

$ 80                        (40*2)

Fixed Manufacturing Overheads

Welding

Assembly

$ 1666.67                ( 50*33.34)                                                                    

$ 400                       (40*10)

Total Manufacturing Cost

 $  3,846.67

Question 5.4

Product Cost Per Unit

 =Total Manufacturing Cost / Total Number of units

  $ 3846.67/10

  $ 384.67

As in the welding department, more machine hours are consumed for the welding machine, it is more appropriate to choose machine hours as the suitable basis of overhead allocation. However, for the assembly functions more labour hours are used and hence it is more appropriate to choose labour hours for overhead allocation. 

Even if the estimated variable manufacturing overhead for the welding unit is increased, the overall assembly cost will remain unchanged as the assembly overhead per unit is determined on the basis of total labour hours consumed by the company and it has nothing to do with the machine hours consumed per unit 

In the present case of Fridges-R-Fun, the company has set the KPIs for it on the basis of various principles. However, there are certain principles which are not in the principles defined by Schrage and Kiron. They are discussed below:

The company must focus more on maintaining the high quality of the products and services it is dealing in rather than merely focusing on the sales maximisation. When the focus on customer satisfaction is enhanced it automatically enhances the sales of the company.

Are private information and such information should not be shared among employees:

KPIs are meant to gauge the progress of company towards the achieving of its goals and targets and it is necessary to share the information regarding KPIs with the employees of the organisation so that they may have proper knowledge of what is exactly they are expected to achieve and how those goals should be achieved (Schrage & Kiron, 2018).

May be reviewed by management once a year:

The review of KPIs of the company must be based on their sensitiveness, relevance and nature. Some KPIs are required to be reviewed on weekly basis, while others are required to be reviewed on monthly, quarterly or annual basis (Wu, H.Y., 2012). 

Under the cost plus pricing method prices of the products are fixed on the basis of adding sum percentage of profits to the cost of the product.

  1. Cost plus pricing method does not take into consideration the competitive prices and the price demand elasticity of the products.
  2. No guarantee is offered under cost plus pricing method for the cost coverage and profit generation. The cost plus pricing method often leads to too high or too low pricing of the products.
  3. Further the cost plus pricing method discourages the efficiency and cost control measures of the firm since quoting of lower cost leads to generation of lower profits and overall revenues (Dholakia, 2018). 

Under the value based pricing method products are priced on the basis of the value perceived by the customers and not on the basis of historical costs and the competitive forces existing in the market. This method is advantageous because it allows the company to focus more on the customer satisfaction rather than the wealth maximisation (Hinterhuber, 2004)). 

References:

Dholakia, U., 2018. When Cost -Plus Pricing is a good idea. Available at: < https://hbr.org/2018/07/when-cost-plus-pricing-is-a-good-idea> Accessed on: 06.08.2018.

Hinterhuber, A., 2004. Towards value-based pricing—An integrative framework for decision making. Industrial Marketing Management, 33(8), pp.765-778.

IMA, 2018. Ethics Centre. Available at: < https://www.imanet.org/career-resources/ethics-center?ssopc=1> Accessed on: 0.08.2018.

Schrage, M. & Kiron, D., 2018. Leading with next-generation Key Performance Indicators. Available at: < https://sloanreview.mit.edu/projects/leading-with-next-generation-key-performance-indicators/> Accessed on: 0.08.2018.

Wu, H.Y., 2012. Constructing a strategy map for banking institutions with key performance indicators of the balanced scorecard. Evaluation and Program Planning, 35(3), pp.303-320.

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[Accessed 13 July 2024].

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My Assignment Help. IMA Ethical Standards, Quality Costs, And Manufacturing Overheads Essay. [Internet]. My Assignment Help. 2021 [cited 13 July 2024]. Available from: https://myassignmenthelp.com/free-samples/maa262-management-accounting/recovery-rate.html.

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