EMBA MANAGERIAL ACCOUNTING ACC710- INDIVIDUAL ASSIGNMENT.

January 19, 2011

Table of Content a) Introduction b) Question P17- 29A- Analyzing Costs of Quality c) Decision Cases- Case 1 & 2, on Harris Systems

a) Introduction
This assignment is prepared as part of course work for Managerial Accounting- ACC720. This would be an individual assignment which would carry 15 marks for the completion of ACC720 course. The assignment consists of two sections, namely: Question P17-29A- Analyzing Costs of Quality, from page 966 from reference book & Decision cases- Case 1 & Case 2 on Harris Systems from page 970 from reference book

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EMBA MANAGERIAL ACCOUNTING ACC710- INDIVIDUAL ASSIGNMENT. January 19, 2011

b) Question P17- 29A- Analyzing Costs of Quality I. Calculate the predicted quality cost savings from the design engineering work.
Activity Predicted Reduction in Activity units Activity Cost Allocation rate per unit ($) Total reduction per activity ($)

Inspection of incoming materials

380

46

17,480.00

Inspection of finished goods

380

25

9,500.00

Number of defective units discovered in-house Number of defective units discovered by customers

1200

50

60,000.00

275

74

20,350.00

Lost sales to dissatisfied customers

175

101

17,675.00

Predicted quality cost savings from design engineering work

$125,005.00

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EMBA MANAGERIAL ACCOUNTING ACC710- INDIVIDUAL ASSIGNMENT. January 19, 2011

II.

Lori spent $102,000 on design engineering for the new skateboard. What is the net benefit of this preventive quality activity?
Net benefit from design engineering activity = Total Cost savings Total Investment (Spent) = = $ 125,005.00 $102,000.00 $ 23,005.00

III.

What major difficulty would Loris managers have in implementing this costs-of-quality approach? What alternative approach could they use to measure quality improvement?
Major difficulty for Loris manager in implementing this cost of-quality approach would be in measuring the quality cost. As well known quality costs as external failure costs are hard to measure. This would lead for the measurement to be based on many non financial information as number of customer complaints and volume of customer care phone calls. Activity Based Costing is the best costing method to measure quality improvement. Target Costing would also help as it focuses in redesigning the production process to further cut costs without compromising on the quality. Another alternative approach to measure quality improvement is by adopting Just in Time (JIT) Systems. Companies using JIT systems strive for high quality products by placing significant importance on quality to the suppliers. Total Quality Management (TQM) is another approach to provide customers with superior products and services as each business functions monitors respective activities to improve

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EMBA MANAGERIAL ACCOUNTING ACC710- INDIVIDUAL ASSIGNMENT. January 19, 2011 quality and eliminate defects & waste. This is applied in companies like Toyota and Dell, where they design and build quality into their products rather having to inspect and repair later.

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EMBA MANAGERIAL ACCOUNTING ACC710- INDIVIDUAL ASSIGNMENT. January 19, 2011

c) Decision Cases- Case 1 & 2, on Harris Systems I. Compute the product cost per unit for each job, using the original costing system (with two direct cost categories and a single overhead allocation rate)
Job A Job B

Direct Materials

220,000.00

30,000.00

Direct Labour

160,000.00

12,000.00

Overhead

8000 hr x $22 per hr

176,000.00 600 hr x $22 per hr

13,200.00

Total Production Cost No of Output units

556,000.00 100

55,200.00 10

Cost per unit

$556,000 / 100 units

5,560.00

$55200 / 10 units

5,520.00

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EMBA MANAGERIAL ACCOUNTING ACC710- INDIVIDUAL ASSIGNMENT. January 19, 2011

II.

Suppose Harris System adopts the ABC system. Compute the product cost per unit for each job using ABC.
Job A Job B

Direct Materials

220,000.00

30,000.00

Direct Labour

160,000.00

12,000.00

Materials handling

$0.85 x 15,000 parts

12,750.00

$0.85 x 2,000 parts

1,700.00

Machine setup

$500 x 6 setups

3,000.00

$500 x 4 setups

2,000.00

Assembling

$80 x 1,500 hr

120,000.00 $80 x 200 hr

16,000.00

Shipping

$1,500 x 1trip

1,500.00

$1,500 x 1trip

1,500.00

Total Production Cost No of Output units

517,250.00 100

63,200.00 10

Cost per unit

$517,250 / 100 units

5,172.50

$63200 / 10 units

6,320.00

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EMBA MANAGERIAL ACCOUNTING ACC710- INDIVIDUAL ASSIGNMENT. January 19, 2011

III.

Which costing system more accurately assigns to jobs the costs of the resources consumed to produce them? Explain.
Activity Based Costing (ABC) assigns costs of the resources consumed to produce them more accurately as ABC considers the resources each products actually uses. ABC also uses a separate allocation rate for each activity based on the activity itself. ABC is often the best method to compute the cost of manufacturing a product. Thus ABC guides businesses to set the selling prices of the products

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EMBA MANAGERIAL ACCOUNTING ACC710- INDIVIDUAL ASSIGNMENT. January 19, 2011

IV.

A dependable company has offered to produce both jobs for Harris for $5,400 per output unit. Harris may outsource (buy from the outside company) either Job A only, Job B only, or both jobs. Which course of action will Harriss managers take if they base their decision on (a) the original system? (b) ABC system costs? Which course of action will yield more income? Explain.
a) Decision based on original cost system would lead the company to outsource both Job A and Job B for the price of $5,400 each as it is more expensive to produce in house. The savings from outsourcing would be $17,200 as illustrated below

Job A

Job B

In House Cost Outsourced cost Savings per unit No of output Total savings

5,560.00 5,400.00 160.00 100.00 16,000.00

5,520.00 5,400.00 120.00 10.00 1,200.00 17,200.00

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EMBA MANAGERIAL ACCOUNTING ACC710- INDIVIDUAL ASSIGNMENT. January 19, 2011 b) Decision based on ABC system cost would lead Harris Systems to outsource Job B as it is more expensive to produce it in house and produce Job A in house as it is more expensive to outsource it. Total savings from outsourcing and doing in house is $ 31,950.00 as stated below

Job A

Job B

Outsourced cost In House Cost Savings No of output Total savings

5,400.00 5,172.50 227.50 100.00 22,750.00

In House Cost Outsourced cost Savings

6,320.00 5,400.00 920.00 10.00 9,200.00 31,950.00

c) The course of action based on the Calculations from ABC would yield more income as ABC costs are more accurate. ABC costing considers the resources each product actually use thus provide the accurate profit margin for each products. This provides better product costs for pricing and product mix decisions.

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EMBA MANAGERIAL ACCOUNTING ACC710- INDIVIDUAL ASSIGNMENT. January 19, 2011

V.

Compute the assembling cost savings per Job B-type server required to meet the $5,400 target cost. (Hint: Begin by calculating the direct materials, direct labor, and allocated activity costs per server.)

Before Value Engineering Job B Direct Materials Direct Labour Materials handling Machine setup Assembling Shipping Total Production Cost
$0.85 x 2,000 parts $500 x 4 setups $80 x 200 hr $1,500 x 1trip

After Value Engineering Job B

30,000.00 12,000.00 1,700.00 2,000.00 16,000.00 1,500.00 63,200.00

27,000.00 12,000.00

$0.85 x 2,000 parts $500 x 4 setups

1,700.00 2,000.00 X

$1,500 x 1trip

1,500.00 44,200 + X

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EMBA MANAGERIAL ACCOUNTING ACC710- INDIVIDUAL ASSIGNMENT. January 19, 2011

Target Production cost is $ 5,400 x 10 units output = $ 54,000 54,000 = 44,200 + X 54,000 - 44,200 = X 9,800 = X New Assembling Cost savings Required = Assembling time cost before value engineering - Assembling time cost after value engineering = 16,000 - 9,800 = 6,200.00

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