Table of Contents Part A: Annual report exercise Part B: Activity-Based Costing Case Study Part C: Ethics case studies

References

1 2 9 10

Part A: Annual report exercise What are the principal activities of the company? What specific products does it manufacture? The principle activities of the Brickworks Group are manufacturing building products, property realisation, land and land development, waste management and investment. The company produces following products: Pavers, Bricks, Building materials, Faade systems Landscaping products Concrete masonry Terracotta Diverse range of timber products

Identify the amount of each of the following inventories as at 31 July 2010: finished goods; raw materials; work in process Finished Goods: As the company value finished goods at lower of standard cost and net realisable value so the value of finished goods is 101066 + 2142 = 103208 Raw Materials: To calculate the value of raw materials here we only include the value of current raw material and exclude non-current portion. The value of raw material is: 27833 Work in Progress: The value of work in progress is: 8224 What are the companys policies for valuing raw materials and finished goods? Raw materials are measured at the lower of actual cost and net realisable value. Finished goods are measured at the lower of standard cost and net realisable value. The cost of manufactured products includes direct materials, direct labour and appropriate portion of variable and fixed overhead. Overheads are applied on the basis of normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. According to the Brickworks annual report, Overheads are applied on the basis of normal operating capacity. Why would overhead be applied on the basis of normal capacity (rather than, for example, the actual or expected level of output)? What are the advantages and disadvantages of this approach?

In valuing inventory the company determines the overhead cost of manufacturing on the basis of normal operating capacity, this is because normal capacity is the most likely outcome of a company in an equilibrium position. So, it is rational to expect that the company will be able to maintain its normal capacity and thus finished goods will be assigned fixed costs according to normal production capacity. In a normal situation this policy tends to provide correct estimation of costs. The advantages of this policy are: Under this policy the estimated costs are most likely. This policy tends to price finished goods more precisely as this outcome is normally expected The disadvantages are: Under this policy if unwanted any unwanted event occurred and production reduced then the costs will be underestimated Using the expected or actual output will provide more correct costs of production This policy may sometimes overvalued the costs of the products. Part B: Activity-Based Costing Case Study 1. Profitability of the Redford and Hepburn models, using ABC.

Designing Activity Based Costing includes some major steps like indentifying resources costs and activities, assigning resource costs to activities and finally assigning activity costs to cost objects. Through performing these steps Activity Based Costing provide better costing and can helps firms manage efficiently as well as understand their competitive advantage and ultimately a better profitability. A more precise costing can be applied here and more accurate profitability can be measured through the ABC system. A calculation of profitability of the Redford and Hepburn models of Ballarat Electrics Ltd is given below:

Units of the cost-allocation base Activity centre (costallocation base) Total activity costs Redf ord Hepb urn Total Cost for Redf ord Cost for Hepb urn Per activi ty cost for Redf ord 0.6 43 16 5 0.3 25 Per activi ty cost for Hepb urn 0.6 43 16 5 0.3 25 Ratio (Redford /total) Ratio (Hepburn /total) redf ord porti on on per acti vity 0.45 34.8 3 11.6 0 2.11 0.28 13.3 3 hepb urn porti on on per activi ty 0.15 8.17 4.40 2.89 0.00 11.6 7 consum ption ratio

Soldering (number of solder points) Shipments (number of shipments: batches) Quality control (number of inspections) Purchase orders (number of orders: batches) Machine power (machine hours) Machine set-ups (number of set-ups: batches) Total manufacturing overhead

$942,0 00 86000 0 12400 00 95040 0 57600 75000 0 $4,800 ,000

1185 000 1620 0 5620 0 8010 0 1760 00 1600 0

3850 00 3800 2130 0 1099 80 1600 0 1400 0

1570 000 2000 0 7750 0 1900 80 1920 00 3000 0

7110 00 6966 00 8992 00 4005 00 5280 0 4000 00

2310 00 1634 00 3408 00 5499 00 4800 3500 00

0.75 0.81 0.73 0.42 0.92 0.53

0.25 0.19 0.27 0.58 0.01 0.47

0.6 43 16 5 0.3 25 89.9

1529 500

5350 80

2079 580

3160 100

1635 400

89.9

89.9

4.16

1.76

62.6 0

27.2 8

Here, per activity cost is determined by dividing total activity cost with total activity which represents per activity cost. Than the ratio of each department activity is worked out where red/total represents Redford departments activity is divided by total activity. After that we get the cost for Redford and Hepburns activity cost according to assigned activity. Than these activity costs are included in determining the profitability of Ballarat Electronics Ltd through activity cost approach. The profitability statement of Ballarat Electronics Ltd is following: (Jawahar Lal, 2005)

Profitability using ABC costing

$
Unit Selling Price per unit

Redford $

$ 19800000

Hepburn $

$ 4560000

Total $ 24360000

Unit Product Cost: Direct Material Direct Labour Machine Cost Fatory Overhead per unit: soldering shipment quality control purchase order machine power machine set-ups COGS Gross Margin Selling and ad ex operating profit operating profit per unit

$4,576,000 396000 3168000

711000 696600 899200 400500 52800 400000 231000 163400 340800 549900 4800

$2,336,000 168000 288000

$6,912,000 564000

3160100

350000

1639900 $4,431,900 $128,100 978000 ($849,900) ($212.48)

3160100 total units 5830000

22000

$11,300,100 $8,499,900 total units 978000 5830000 $2,669,900 $121.36

4000

4800000 $15,732,000 $8,628,000 6808000 $1,820,000 ($91.12)

From the above profitability statement we see, the profitability of Ballarat Electronics Ltd has increased in ABC costing approach because this approach deals with the exact activity of each overhead through cost driver. So no extra cost is assigned which is not under the cost pool. That why, in this case the overhead cost is lower than the traditional approach which boost the operating profit. In fact, real picture of the costs. (Jawahar Lal, 2005)

2.

The difference between the profitability of existing costing system with ABC costing system.

Profitability of Redford and Hepburn models is different in two approaches. A clear view with explanation is provided below:
Profitability using ABC costing Redford $ Unit Selling Price per unit Unit Product Cost: Direct Material Direct Labour Machine Cost Fatory Overhead per unit: 711000 soldering shipment quality control purchase order machine power machine set-ups COGS Gross Margin Selling and ad ex operating profit operating profit per unit 696600 899200 400500 52800 400000 3160100 total 5830000 units 22000 3160100 $11,300,100 $8,499,900 5830000 $2,669,900 $121.36 total 978000 units 4000 $4,576,000 396000 3168000 231000 163400 340800 549900 4800 350000 1639900 $4,431,900 $128,100 978000 ($849,900) ($212.48) 4800000 $15,732,000 $8,628,000 6808000 $1,820,000 ($91.12) 12540000 $7,260,000 5830000 $1,430,000 $65.00 3192000 $1,368,000 978000 $390,000 $390,000 15732000 8628000 6808000 1820000 390065 $0 $390,156 ($4,800,000) $0 $0 $2,336,000 168000 288000 $6,912,000 564000 ($6,912,000) ($564,000) $ $ 19800000 $ Hepburn $ $ 4560000 Total $ 24360000 Profitability using traditional costing Redford $ $19,800,000 Hepburn $ $4,560,000 Total $ $24,360,000 $0 Differences

Traditional costing system bears a limitation that is it normally undercosts complex low-volume products and overcosts high-volume products. Now, the Activity Based Costing system represents a reliable and more accurate measurement pattern of indirect consumptions. The comparison above indicates that the traditional product costing system may significantly show the overhead cost high both for two models. On the other hand, Activity Based Costing assigns each cost drivers with the cost objects to determine actual overhead cost. So the real picture is the profitability is shown lower according to the traditional costing system. Finally, we can say, traditional costing system can cause fuzzy inventory measurement, fuzzy product-line decisions, unrealistic pricing, ineffective resource allocations, misplaced strategic decision, incorrect identification of critical success factors, and moreover, lost of competitive field. In a nut shell, ABC is more accurate than the traditional system. (Jawahar Lal, 2005)

3.

Benefits, cost and limitation in implementing ABC in the Home Theatre Division of Ballarat Electrics Ltd.

Benefits: Activity Based Costing provides a guideline to reduce distortions caused by traditional cost allocations. It also helps in providing a clear view of how the mix of a firms diverse products, services, and activities put a contribution to the bottom line in future. Some of the major benefits that must be mentioned which will help in the home theatre division of Ballarat Electrics Ltd are followings: 1. Activity Based Costing provides a clear, accurate and informative product costs that lead the home theatre division of Ballarat Electrics Ltd to more reliable and accurate profitability measurement for the company and to better-informed strategic decisions in case of pricing a product line, customer market, and capital expenditures.

2. In case of activity-driving costs ABC provides more accurate measurements which helps the home theatre division of Ballarat Electrics Ltd to enhance their product and production process valued by making better product design decisions, better controlling costs, and better fostering of various value-enhancement projects. 3. ABC helps managers providing with easier access to accurate costs for making strategic decisions and Ballarat Electronics Ltd can get benefits from this. Limitations: Activity Based Costing has a great variety of benefits though it is not away from some limitations. So Ballarat Electrics Ltd should keep a strategic eye on this system. 1. Allocations of the activity: Though activity data are quiet available, some costs require allocations to departments and products based on arbitrary volume measures as finding a right activity that causes the event of the costs which may not be practical. We can say, for example, facility sustaining costs such as cleaning the factory or managing the production process. In the case of Ballarat Electrics Ltd we see Ms Hong is not satisfied with the selection of activity driver too cause missing activity driver will cause different result. 2. Missing the costs: Another limitation of ABC is that there are some costs that are omitted from the analysis. Activities that cause such costs may include research and development, advertising, marketing, warranty claims and product engineering etc where traditionally marketing and admistrative costs have not been included as per GAAP financial reporting requirements what they be included in period costs. So these types of missing can lead the home theatre division of Ballarat Electrics Ltd a misleading conclusion about its cost. 3. Time and expenses consumed: This system is very expensive to develop, enhance and finally implement. Moreover, it is time consuming. For an innovative accounting system or management, it normally takes more than a year to develop and implement an ABC system successfully. So the home theatre division of Ballarat Electrics Ltd should think further whether they are able to manage this. So we think the benefits of using ABC will out weight the cost or limitation of implementing this system. Finally, the recommendation is the home theatre division of Ballarat Electrics Ltd can use ABC with a little caution. (Jawahar Lal, 2005) Part C: Ethics case studies BYP7-6 (a) If a division is reporting losses, does that necessarily mean that it should be closed? If a division is reporting losses it does not necessary that the division should be closed. A division may show loss for various reasons. So, before closing the operation of the division the directors of the company should thoroughly investigate the activities of the division. They should find out the

appropriate reasons behind the loss. If the reason is such that it cannot be overcome then the director may go for closing but if the problem can be solved and it is possible to make profit from the division then they should go for it. (b) Was the reallocation of fixed costs across divisions unethical? Yes, the reallocation of fixed costs across the divisions was unethical. Usually it is possible and sometimes necessary to reallocate fixed costs across the divisions depending on the economic condition and necessity of the divisions. But in this case the allocation was done with an intention to deteriorate the performance of a division falsely and also by forcing the accounts officer. So, in this case the reallocation was unethical. (c) What should Robert do? Instead of unethically reallocating the fixed assets, Robert should try to find out ways to improve the position of the company, and of course if plumbing supplies division was not good for the business he should explain it to the board members with sufficient information and should suggests a way of how to improve the condition of the division or to close the division. He should act like a leader and make decision which was good both for the company and its employees. BYP9-6 a) What are the consequences of telling the president of your gross miscalculation?

Informing the president about the miscalculation may have several consequences. The most favarouble consequence may be embarrassed by the president and the worst may be losing of job or degradation. b) What are the consequences of not telling the president of your gross miscalculation?

If the miscalculation is not disclosed to the president then he will continue to provide his speeches with the wrong information but eventually the miscalculation will be discovered when the projection will not be met in the future and then I have to defend the gross miscalculation which will make things worst. c) What are the ethical considerations to you and the president in this situation? For me the most ethical considerations would be to accept my error and inform the president about the error with possible reasons for the miscalculation and should provide him with the corrected version of the projection. Delivering presentation with corrected projection to the rest of the parties would be the most ethical considerations for the president as well as he should apologize for the misrepresentations in the previous speeches and should send all the participants the corrected version of the projection.

Reference: Jawahar Lal (2005), Cost Accounting (3rd edn), Tata McGraw-Hill Publishing Compay Limited, New Delhi.