Management Accounting: Notes, assignment questions and answers

Academic projects, Management (MBA) questions, assignments, case studies on Management Accounting.

Management accounting is focused on providing information to internal stakeholders such as managers and executives, to help them make informed decisions about the operation of a business. Unlike financial accounting, management accounting is usually forward-looking, with a focus on the future and provides more detailed information than financial accounting.

Costing is an important aspect of management accounting. Costing refers to the process of collecting, analyzing, and estimating the costs involved in producing goods or services. It involves methods such as cost accounting, job costing, process costing, standard costing, and activity-based costing, to determine the costs of production and the profitability of a product or service. The information obtained through costing is used by managers to make informed decisions about pricing, product mix, and cost reduction strategies.

Academic Questions on Management Accounting

Academic, management questions, assignments and projects on Management Accounting, Costing and related topics.

Question:

MerSoft Ltd (MSL) operates in the Tech sector in Singapore. The company, at the end of 2018, had a range of three apps (Chi, Psi, and Omega) that compete successfully in the local and international markets. MSL has a strong track record in developing software applications that run on all major computer, tablet, and mobile phone platforms.

At the beginning of 2020, MSL launched a new app ‘BidQuest’ that enables its users to win bidding contests on eBay and other auction websites. The total development investment in the ‘BidQuest’ app was $6,450,000.

MSL expected 2.5 million users to download the app during 2020, from which the company were expected to achieve sales turnover of $7,475,000 in this first year of operations. They budgeted, at the beginning of 2020, for operating and maintenance costs which they set at $2,240,000, of which $940,000 were fixed.

The budgeted variable costing statement for 2020 was as follows:

The actual annual sales during 2020 amounted to 2,400,000 downloads with operating and maintenance costs applicable to the ‘BidQuest’ app of $2,448,000, of which $1,200,000 were fixed costs. These actual fixed costs are expected to remain unchanged in the 2020 forecast period.

Each app is assigned a dedicated manager, a programmer, a social media marketeer, and two administration assistants. Each app team is remunerated through a combination of fixed salary and a group performance bonus. This bonus is calculated at 25% of profits that exceed budgeted profitability, based upon full cost.Head Office overheads are allocated to each of the apps based upon estimates at the commencement of each year. For 2020, the Head Office allocated overhead was $20 million. These Head Office allocated overhead costs are apportioned on the basis of the proportion of budgeted turnover, independent of turnover actually achieved by each app. BidQuest was allocated $1.5 million of these overhead costs. Fiona Tau, the manager for the BidQuest app, and the niece to the operations director, Harry Tau, recently had a meeting with Janice Wu (CIMA qualified management accountant) and has learned that the established app teams (Chi, Psi, and Omega) had made very good bonuses based upon excellent results in excess of the budget plan.

During the discussion, Fiona pressured Janice to transfer half of the BidQuest group’s overhead allocation to the three established teams, arguing that the BidQuest app was new to market and that it should, therefore, not attract the full cost allocation of overheads. Janice objected to the request citing her professional obligation to comply with ethical standards, and to conform to company policy. Shortly after the meeting with Fiona, Janice received a phone call from Harry insisting that she accommodate Fiona’s request and halve the allocation of overheads to the BidQuest app, arguing that it is only reasonable to treat the new app team more compassionately.

Required:

a) The company currently operates a cost +100% mark-up pricing strategy. Budgeted expectations set the price for the new BidQuest app at $2.99 per app download. Sales revenue was actually achieved despite lower volumes for the year. Prepare a variable cost statement for the actual results for 2020 showing both total cost and unit costs. From this determine the actual required selling price based upon actual full cost +100%.

b) In the context of the current competitive environment, critically discuss the merits of target costing as a pricing strategy using the information gained above.

Question:

Blyth Batteries Ltd (BBL) manufactures Lithium-Ion batteries (TR1X) for the automotive industry. In the coming year, the company plans to sell 200,000 TR1X 48-volt batteries, which is the maximum expected demand for this type of battery.

The variable cost and selling price data for the TR1X is as follows:

If BBL only manufactures TR1X, fixed overhead costs are predicted to be £124,000,000 in the coming year.

Having built a new plant to increase manufacturing capacity, BBL is planning on introducing new models of battery RM3Q and RM4P which will serve new markets. The management team, worried about the declining market, is considering expanding their operations by manufacturing two other types of batteries. These other products (RM3Q and RM4P) use the same materials but different types of labour to the current TR1X product range.

Fixed overhead costs are predicted to increase by £288,950,000 per year as a result of adding the two new products.
Material is expected to be in short supply because of Brexit and is predicted to be limited to 40,000,000 kg in the coming year.

Required: a. Calculate the breakeven point in number of units, and the profit or loss in £ assuming the company manufactures TR1X only. b. Prepare a production plan for all three products (in units) that makes the best use of the material available. c. Calculate the profit or loss that the company will make after adopting the production plan in (b) above. Present your results for (c) showing contribution from each product, contribution in total, and total fixed overhead costs. d. Since traditional costing income statements are required by law and GAAP for the construction of the financial statements for external reporting, explain why the management income statements should also be constructed according to variable costing principles

Question:

Makesmart Ltd is a company that manufactures coffee machines to sell directly to the public. While the coffee machines can come in different colours and features, they sell two main designs: the ‘Superior’, which filters coffee Italian style and the ‘Grande’ which, in addition to filtering coffee Italian style, has a steam spout for frothing milk.

The home market for both products is very competitive. In recent years, the demand for the Grande has been rising, and demand for the Superior has been falling.

Makesmart Ltd currently uses traditional absorption costing and cost-plus pricing. Prices are based on production cost plus 24% (approximately) in order to try to meet pricing pressures. The company needs to make a markup of 24% to satisfy the requirements of the shareholders as well.

Budgeted information for both coffee machines, using the absorption costing system, is as follows:

The board of directors has been investigating alternative costing systems to help in their need for competitiveness. The management accounting team have carried out in-depth analysis and have prepared the following data:

(a) Calculate the total cost per unit, and the profit per unit, for each product, using Activity Based Costing. You should assume that the directors would not immediately change the prices charged to customers. They would review prices after the marketing department has conducted further market research.

(b) Based upon the information now known from your calculations in (a) above and assuming that a cost + 24% markup would be applied to the revised ABCbased costing, calculate and discuss how Makesmart Ltd could compete where the competitions’ price for the Superior equivalent is £63.60 and the Grande equivalent sells for £124.50.

Makesmart Ltd is launching a new coffee pod that fits into their coffee machines. These pods are manufactured using innovative ecofriendly materials to make the coffee suitable for an overseas market where environmentally friendly products are in more demand than in the home market.
Discuss the most appropriate pricing strategy for the Superior and Grande coffee machines, as well as the ecofriendly coffee pods as they enter into the new international market.

You may want to consider the following pricing systems in your explanation:

• (i) Target costing and target pricing
• (ii) Penetration pricing
• (iii)Price skimming.

Question:

Part A:

Vaccines International (VI) manufactures vaccines for governments around the world. In the past few years, the company has been struggling to survive. It was involved in the development of a vaccine for the Ebola virus but did not get any orders because their competitors had beaten them to the market. VI’s price was also much higher than their competitors. With its brand image suffering and problems with current manufacturing processes, VI is considering how they will market their new innovative COVID-19 vaccine to governments around the world.

VI’s board of directors decided to employ a new operations director to solve the production problems and have appointed a renowned marketing company to help take the new vaccine to market.

James Anderson was employed as operations director at the beginning of May 2021 and he has discovered that the current manufacturing system is outdated, requiring a complete overhaul of the manufacturing plant to turn around the fortunes of the company.

Being a medical product that is distributed globally and administered to billions of people, quality is of cardinal importance to customers. Latest technological advancements have seen the development of mixing and packing machines capable of operating at very low temperatures and equipped with artificial intelligence to monitor and adjust the manufacturing process to meet the exacting standards required in the vaccine industry. Machines of this nature cost £500 million and can produce up to 2 million vaccine doses per month. One such machine is available and will be installed by the end of June 2021. The company has chosen to lease these machines over a 5-year period at a cost of £10,400,000 per month. The lease payments commence in the month of July 2021. Current demand in the marketplace indicates that a price of £25 per dose is achievable. The existing staff are highly trained and capable of operating these new machines after further training costing £75,000 in the month of July 2021. Payment for this training is to be made in the month of delivery of the training.

Once installed, the new machines will require ongoing set-up and maintenance costs of £550,000 per month which is outsourced to a specialist maintenance company. All VI employees are full-time employed on salaries and are included in the manufacturing overhead of £300,000 per month. These monthly costs are payable in the month of production. Production takes place in the month prior to the month of sale.

Material costs, including packaging, amount to £5.20 per dose and is purchased one month prior to production and paid for one month after purchase.Variable costs for delivery to clients are £45,500 per batch of 50,000 doses and are paid one month after the month of sale and delivery. The bank account for the project is expected to have a balance of £30,000,000 at the beginning of July 2021.

From September onwards, production is expected to remain at 1,800,000 doses per month for the remaining life of the lease of the machine. Customers pay one month after the month of sale.

Required:
(I) Prepare the cash budget for the COVID-19 vaccine project for the third quarter (July-September) of 2021.
(II) Assuming that the cash balance is insufficient to fund the project start-up working capital and that, by August there is a negative balance in the closing balance, what actions could Vaccines International take to remedy the situation? Identify three different actions that could see the cash balance for August turn positive.

Part B

The current operating profits of Vaccines International are £60 million and its invested capital is £600 million. If the new vaccine project is implemented, then on an annualised basis, VI’s profits are expected to increase by £8 million and the investment in the new project will require additional capital of £90 million. The investment is expected to a earn a return of around 9% over its entire life which is greater than the 7% minimum return the company expects from investments of this nature. Some of James’s annual performance bonus is currently based on maintaining or improving Return on Investment of the business.

Required:

• (I) Calculate the Return on Investment and Residual Income for Vaccines International for the coming year, assuming that James does not make the new investment.
• (II) Calculate the Return on Investment and Residual Income for Vaccines International for the coming year assuming that James does make the new investment.
• (III) (i) Using the information from the question and from your calculations in (a) and (b) above, briefly discuss the likelihood of James being willing to invest in the new project (ii) Suggest two ways in which the bonus scheme might be adjusted to ensure that James’s decision is in the best interests of the business.