Management Accounting Information Case Study Homework Help
- July 29, 2017
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- Category: Accounting QA
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Kotak Ajaib, a division of Television Kita Corporation, is a manufacturer of two large-screen television models: the Ajaib Tradisional (AT) has been produced since 2004 and the Ajaib Modern (AM), a newer model introduced in early 2010. The senior management at Television Kita Corporation would like a target gross margin of at least 20% for each of the products in all its divisions. Upon reviewing the latest income statement for Kotak Ajaib, the senior management at Television Kita Corporation have decided to concentrate Kotak Ajaib’s marketing resources on the AM model and to begin phasing out the AT model in the coming year.
The budgeted costs and data for year 2012 are as follows
Budgeted Sales, Production and Selling Price
AT | AM | |
Units to be sold and produced | 22,000 | 4,000 |
Price per unit (RM) | 600 | 1140 |
Budgeted Direct Materials
Raw materials (RM) per unit | AT | AM |
In Assembly Department | 158 | 484 |
In Packing Department | 50 | 100 |
Budgeted Direct Labour and Machine Hours
Raw materials (RM) per unit | AT | AM |
In Assembly Department | 75 minutes | 15 minutes |
In Packing Department | 15 minutes | 15 minutes |
Machine hours per unit: | ||
In Assembly Department | 420 minutes | 240 minutes |
In Packing Department | 30 minutes | 60 minutes |
The average direct labour rate is RM18 per hour for the assembly department and RM10 per hour for the packing department. The average machine hour costs is RM10 per hour for the assembly department and RM5 per hour for the packing department.
Budgeted Overhead Costs
Both products are produced in a single plant at the Nilai Industrial Park. Kotak Ajaib uses a Plantwide rate, with manufacturing overhead being applied on the basis of machine hours. Kotak Ajaib’s controller, Mr. Azri Idris, has a gut feeling that something is wrong. He has been talking to a few costing experts to explore various options. One of the professors has suggested the use of activity based costing. After reading a few articles and books, he feels that the activity based concept could address many of the issues that he has been seeing at Kotak Ajaib. He is now advocating the use of activity-based costing to management and has gathered the information about the company’s budgeted manufacturing overhead costs for the year ended December 31, 2012.
He has identified six categories of support systems that were currently being allocated to television production
Activities | Activity Drivers | Total Activity Costs Per Year (RM) | Units of the Cost-Allocation Base(AT) | Units of the Cost-Allocation (AM) |
Soldering | Number of solder points | 942,000 | 1,185,000 | 385,000 |
Shipments | Number of shipments | 860,000 | 16,200 | 3,800 |
Quality control | Number of inspections | 1,240,000 | 56,200 | 21,300 |
Purchase orders | Number of orders | 950,400 | 80,100 | 109,980 |
Machine maintenance | Number of production runs | 57,600 | 176,000 | 16,000 |
Machine set-up | Number of set-ups | 750,000 | 16,000 | 14,000 |
Azri has determined the units of cost allocation base for each of the products, as follows:
Activities | Activity Drivers | Total Activity Costs Per Year (RM) | Units of the Cost-Allocation Base(AT) | Units of the Cost-Allocation (AM) | Total |
Soldering | Number of solder points | 942,000 | 1,185,000 | 385,000 | 1,570,000 |
Shipments | Number of shipments | 860,000 | 16,200 | 3,800 | 20,000 |
Quality control | Number of inspections | 1,240,000 | 56,200 | 21,300 | 77,500 |
Purchase orders | Number of orders | 950,400 | 80,100 | 109,980 | 190,080 |
Machine maintenance | Number of production runs | 57,600 | 176,000 | 16,000 | 192,000 |
Machine set-up | Number of set-ups | 750,000 | 16,000 | 14,000 | 30,000 |
After completing the analysis, Azri shows his results to Mr. Simon Lee, the Kotak Ajaib division’s CEO. Simon does not like what he sees, and comments
“If you show headquarters this analysis, they are going to ask us to phase out the Ajaib Modern line, which we have just introduced. This whole costing stuff has been a major problem for us. First Ajaib Tradisional is not as profitable as we thought, and now Ajaib Modern. Looking at the ABC analysis, I see two problems. First, we do many more activities than the ones you have listed. If you had included all activities, maybe your conclusions would be different. Second, you used number of setups and number of inspections as allocation bases. The number would be different had you used setup-hours and inspection-hours instead. I know that measurement problems precluded you from using these other cost-allocation bases, but I believe you ought to make some adjustments to our current numbers to compensate for these issues. I know you can do better. We can’t afford to phase out either product.” Azri knows that the numbers are fairly accurate. As a quick check, he calculates the profitability of AT and AM using more and different allocation bases. The set of activities and activity rates he had used resulted in numbers that closely approximate those based on more detailed analyses. However, he is also aware that a sizeable portion of Simon’s bonus is based on division revenues. Phasing out either product would adversely affect Simon’s bonus. Azri has a line responsibility to Simon. Simon is responsible for the recommendations of Azri’s increment and bonus at year end. Azri also has a staff responsibility to the Group Financial Controller at Television Kita Corporation. Azri is in a dilemma now. He is feeling severe pressure from Simon to do something about the costing numbers. Azri decides to seek the advice of Brilliant Consultancy firm. You are working in Brilliant Consultancy during your internship. You have been asked to analyse Kotak Ajaib’s case and write a business report to the manager in charge of the case in Brilliant Consultancy, Ms. Vanessa Murugam, to assist the latter understand the situation in Kotak Ajaib better. You would need to cover the information listed in the next page in your report.
Part A: Calculations (Show detailed workings)
1.) Calculate the unit budgeted costs of direct materials for each of the products.
2.) Calculate the unit budgeted costs of direct labour for each of the products.
3.) Calculate the unit budgeted machine hours and costs of machine hours for each of the products.
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4.) Calculate the overhead costs allocation rate under the current costing system.
5.) Calculate the unit costs, gross margin and gross margin percentage for each of the products under the current costing system.
6.) Calculate the costs allocation rate for each of the identified activities using the proposed activity based costing system.
7.) Show an overview of the proposed activity based costing system.
8.) Calculate the total and unit costs for manufacturing overhead for each of the products from the underlying activity cost pools.
9.) Calculate the unit costs, gross margin and gross margin percentage for each of the products under the proposed activity based costing system.
Part B: Analytical Discussion
1.) Describe the current cost system including its weaknesses.
2.) Describe the proposed activity based costing system, the benefits from using it, and why those benefits occur.
3.) Should Kotak Ajaib cease the production of Ajaib Tradisional model and focus entirely on the production of the Ajaib Modern model? Discuss thoroughly.
4.) Comment on the concerns of Mr. Simon Lee’s about the accuracy and limitations of the proposed activity system.
5.) Suggest how Mr. Azri Idris should response to the ethical dilemma that he is facing.
6.) What recommendations would you make to Kotak Ajaib?
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