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Accounting questions




Question;Instructions;Answer both Q1 and Q2;Question 1;Toni had worked as an apprentice baker in a large bakery;that supplied different types of bread ? from the standard white loaf to the;speciality bread such as rye, gluten-free and organic. At the end of her training, she decided to;start a small business specialising in producing cakes ? in particular, cakes;with ornate decorations made from icing sugar ? and Danish pastries because she;did not want to compete with the large bakeries for the "bread;market". As she was close to office;buildings, she decided to try and increase her daily cash-flow by selling;fresh-cut" sandwiches.;Having spent most of her savings on purchasing equipment and;supplies, renovating shop premises, and employing two shop assistants, she did not;want to spend;money for an accountant to set up an accounting system. She wondered whether she should base her;cost-management system on the system adopted in the large bakery.;As an apprentice, she had not been involved in the;management aspects of operating a bakery, and she did not know what sort of;information she would need to ensure that she did not lose her investment in;her business. She was certain that there;was a ready and reasonably large market for her bakery products. She felt;that all she needed was a cash-statement each week to show;her what her receipts and payments were, and an annual set of accounts to make;sure that she was operating at a profit. To ensure that she recovered her;costs, she intended to follow the product costing strategy used by the large;bakery that she was an apprentice in.;The large bakery produced a variety of bread using highly;automated processes. In ascertaining the;cost of its different types of bread, the large bakery treated flour as a;direct cost. All other costs were treated as indirect costs, and were;allocated. It was a simple system that;Toni thought she could emulate. However;the large bakery did not produce cakes and pastries. Cakes and pastries require highly specialised;labour skills because the processes may not be easily;standardised and automated.;Required;Toni is relying on weekly cash flow and annual financial;accounts to ensure that she remains in business in the long-term. She is also attempting to ensure that her;pricing and cost-management strategies are appropriate by adopting the cost;management system used in the large bakery.;Do you agree with Toni's approach? Support your opinion by addressing;the following issues;a) How does one ensure that a cost-management system;provides relevant and useful information?;(5 marks).;b) Toni is relying on financial feedback, and the product;costing method adopted by the large bakery. What are the strengths and;weaknesses of these approaches?;(10 marks).;c) Outline any changes you would recommend that would help;Toni to manage her business. Explain how;your changes would address the weaknesses that you have identified in Toni's;proposed system.;(5 marks).;When answering Question 1, please maintain the 3 parts (a to;c above). The word length: the answer to;each part should address the question for the marks awarded to each part.;[Total: 20 marks];Question 2;Zubick Corporation produces and supplies 2 types of;component parts to industrial equipment manufacturers. These parts are known as X123 and R907.;There are 2 departments in the factory: the machining and;assembly departments. The machining department has highly automated operations;while assembly has labour-intensive operations.;Table 1: Annual production data by product;Product X123;Product R907;Units produced;1,000;2,000;Total directlabour;hours;(DLH) consumedper;unit;5DLH;15DLH;Totalmachinehours(MH);consumedper;unit;15MH;5MH;The overhead cost incurred in the Machining department was;$1,300,000, while the overhead cost in the Assembly department was $350,000.;Table 2: Annual overhead costs and production activity by;department;Machining dept;Assemblydept;Total;Overheadcost;$1,300,000;$350,000;$1,650,000;Directlabourhours;(DLH) consumed per dept;5,000DLH;30,000DLH;35,000DLH;Machinehours;(MH) consumed;per dept;23,000MH;2,000MH;25,000MH;The manager, Rex, decided to allocate costs to the 2;products in the following manner: he divided the total overhead costs of;$1,650,000 by the total number of labour hours utilised in the factory (ie;(1000 x5) plus (2000 x 15) = 35,000 DLH).;Therefore his overhead rate was $1,650,000/35,000 = $47.14;per DLH.;The overhead allocated to each product using Rex's rate was;as follows;Product X123 = 5 DLH x$47.14 = $235.70;Product R907 = 15 DLH x $47.14 = $707.10;But Rex was losing sales of product R907 to his competitor;who was able to sell a similar product at a lower price, and recover all costs;of production.;Additional information;Tables 3 and 4 show how much direct labour and machine time;is consumed by each product in each production department.;Table 3: Machine hours (MH) consumed by each product in;production departments.;Machining dept;Assemblydept;Totalperunit;of;product;Per unit of product;X123;14.5 MH;0.5MH;15MH perunit of;X123;Per unit of product;R907;4.25 MH;0.75 MH;5MH;per unitof;R907;Table 4: Direct labour hours (DLH) consumed by each product;in production departments.;Machining dept;Assemblydept;Totalperunit of product;Per unit of product;X123;2DLH;3DLH;5DLH per unit of;productX123;Per unit of product;R907;1.5DLH;13.5DLH;15DLHper unitof;productR907;Required;i) Do you agree or disagree with Rex's overhead allocation;method? Explain. You should draw on;information provided in Tables 1 to 4 to help explain and support your answer.;(5 marks).;ii) How would you improve it? Calculate alternative rates that you would;use and explain why you think it would help Rex. You should draw on information provided in;Tables 1 to 4 to support your recommendation.;(15 marks). [Total: 20 marks]


Paper#42971 | Written in 18-Jul-2015

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