# Economics Assignment Question Solution

Question A: - Activity based costing

1 Calculate the material handling rate that would have been used by Eloise Smith’s predecessor at East Coast Marine.

Material handling rate = Budgeted material / total component

Government contract is of \$2,006,000

Commercial product is of \$874,000

Total budgeted material = \$2,006,000 + \$874,000 = \$2,880,000 (Stefano & Maria do Carmo, 2014)

Total component get calculated as below such as: -

 Particulars Amount (in \$ '000) Payroll \$180 Employee on-cost \$36 Telephone Expenses \$38 Material & Supplies \$6 Depreciation \$6 Other Utilities \$22 Total \$288

Material handling rate = \$2,880,000 / \$288,000 = 10%

Material handling rate = 10%(Stefano & Maria do Carmo, 2014)

2 Calculate the revised material handling costs to be allocated on a per purchase order basis.

Calculation of revised material handling costs is as follows such as: -

 Particulars Amount (in \$ '000) Payroll \$180 Employee on-cost \$36 Telephone Expenses \$38 Material & Supplies \$6 Depreciation \$6 Other Utilities \$22 Total \$288

Revised material handling cost is calculated as \$288,000.(Linassi, et. al., 2016)

3 Discuss why purchase orders might be a more reliable cost driver than the dollar amount of direct material.

For the given scenario activity based method is followed. This method implies that all the indirect cost related to departmental elements get allocated among different departments. With this effect the cost of material handling allocated among different departments. It is termed as reliable cost drivers for the purpose of allocating purchase order. For allocation purpose purchase order is considered as base because it is related to different departments (Fathi & Elham Sadat, 2015).

4 Calculate the difference due to the change to the new method of allocating material handling costs to government contracts.

Earlier, value of contracts material (government contracts or commercial contracts or both) is followed for the purpose of allocated material handling cost that results into unequal distribution. Now, activity based costing is utilised for allocating cost and it follows the base of ordered purchase order. Below is the calculation that shows the difference among allocation by following different methods such as: -

 Traditional method Activity based costing method Total cost of material handling department is \$288,000 Allocation base = \$2,006,000 / \$874,000 = 2.30:1 Allocation made in 2.30:1 ratio so that \$288,000 * 2.30/3.30 = 200,727 Total cost of material handling department is \$288,000 Cost Allocation = \$288,000 * 80,000 / 242,000 = 95,206

(Pazarceviren & Dede, 2015)

Difference among the two allocation methods is

= \$200,727 - \$95,206 = \$105,521

5 Prepare a forecast of the cumulative dollar impact over a three-year period (based on the coming year plus 2 more years) of Eloise Smith’s recommended change for allocating Material Handling Department costs to the Government Contracts Unit. Round all calculations to the nearest whole number.

 Particulars Coming year ('000) Year 1 ('000) Year 2 ('000) Payroll 180 180 180 Employee on-cost 36 36 36 Telephone 38 38 38 Other utilities 22 22 22 Material and supplies (6 + 2.5%) 6.15 (6.150+ 2.5%)  6.304 (6.304+ 2.5%)  6.462 Depreciation 6 6 6 Total 288 288.304 288.462

[Note: - All components remain same except material and supplies] (Schulze, et. al., 2012)

Estimated purchase order for three years get calculated below such as: -

 Particulars Year 1 Year 2 Year 3 Calculation Results Calculation Results Calculation Results Revised purchase orders 242,000 + 5% 254,100 254,100 + 5% 266,805 266,805 + 5% 280,145 Revised Government Contract @ 33% 254,100 * 33% 83,853 266,805 * 33% 88,045 280,145 * 33% 92,448

(Schulze, et. al., 2012)

6 Referring to the standards of ethical conduct for accountants described in Chapter 1:

(a) Discuss why Eloise Smith has an ethical conflict.

Ethical conflict is such situation where individual get confused between personal and professional roles and responsibilities and due to confusion individual is not able to make effective decisions and if they do so then it may show their personal benefit in it.

The reason behind rising ethical conflict: -Smith is appointed as new accounts manager at ECM ltd. and her duty is to handle cost associated with government contracts. During cost allocation she get influenced with the benefits rendered by the activity based costing. Following this costing method is beneficial for their organisation but her department is not get benefited with it instead of it they get lower remuneration. This create a ethical conflict situation for her as whether she recommend the method for cost allocation or not (Popovic & Vasilic, 2014).

(b) Identify several steps that Smith could take to resolve the ethical conflict.

For solving the raised ethical conflict following steps get followed such as:

 Steps Description Step 1 Smith consult the team handling code of ethics that helps in resolving the dilemma situation. Step 2 Smith will also make adequate discussion with their management in context to her ethical dilemma. Step 3 Smith also share this situation with colleagues in order to get suggestions as per their experience.

These three steps helps in solving the ethical dilemma is effective manner.

Question B: - Pricing & Possible plant closure

1. What unit selling price should management select for each of the Clean & Bright compounds for the remaining six months of the year to maximise profit? Support your selection with appropriate calculations.

Standard compound calculation is as follows: -

 Standard Compound Prices (in\$) Sales volume Calculations Amount 18 120,000 18* 120,000 21,60,000 20 100,000 20* 100,000 20,00,000 21 90,000 21* 90,000 18,90,000 22 80,000 22* 80,000 17,60,000 23 50,000 23* 50,000 11,50,000

(Bunn, et. al., 2015)

Commercial compound calculation is as follows: -

 Commercial Compound Prices(in\$) Sales volume Calculations Amount 25 175,000 25* 175,000 43,75,000 27 140,000 27* 140,000 37,80,000 30 100,000 30* 100,000 30,00,000 32 55,000 32* 55,000 17,60,000 35 35,000 35* 35,000 12,25,000

(Bunn, et. al., 2015)

Sales unit according to standard compound: -

 Sales Units Price (in \$) Calculations Amount (in \$) 120,000 18 18* 120,000 2,160,000 100,000 20 20* 100,000 2,000,000 90,000 21 21* 90,000 1,890,000 80,000 22 22* 80,000 1,760,000 50,000 23 23* 50,000 1,150,000

(Langfield-Smith, et. al., 2015)

Sales unit according to commercial compound: -

 Sales Units Price (in \$) Calculations Amount (in \$) 175,000 25 25* 175,000 4,375,000 140,000 27 27* 140,000 3,780,000 100,000 30 30* 100,000 3,000,000 55,000 32 32* 55,000 1,760,000 35,000 35 35* 35,000 1,225,000

(Langfield-Smith, et. al., 2015)

In a year standard as well as commercial compound normally produce 200,000 boxes (given). To earn more profits it is required to produce more boxes and as per this revised production target is as follows: -

Standard compound will produce 250,000 boxes whereas,

Commercial compound will produce 350,000 boxes.

According to the scenario, a batch of 100,000 units get produced in first half of year and remaining in the second half of year. As per the new quantity they need to produce 150,000 boxes for standard compound and 250,000 boxes for commercial compound (Weetman, 2013).

The analysis over the calculation it is observed that they earn margin of maximum profit by producing 120,000 boxes for standard compound and 175,000 boxes for commercial compound (Weetman, 2013).

2. Independently of your answer to requirement 1, assume that the optimum alternatives for the last six months were as follows: a selling price of \$23 and volume of 50 000 boxes for the standard compound, and a selling price of \$35 and volume of 35 000 boxes for the commercial compound.

(a) Should management consider closing down the plant's operations until January 1 of the next year in order to minimise its losses? Support your answer with appropriate calculations.

Profit maximisation is the basic goal of every organisation and for improving the share of their profits on regular basis they need to make regular improvements. For shutting down business unit various factors taken into consideration. In costing terminology to measure the shut down process they make use of variable cost and sales revenues. In calculation fixed cost is not considered as it attain fixed nature. Shut down point is different from the breakeven point because breakeven point is such situation where organisation earn adequate share of revenues and recover their incurred cost (Bhimani, 2012). Below is the statement of comprehensive income such as: -

Standard compound calculations: -

 Particulars Calculation Amount ('000) Sales revenue (50,000 units x \$23) \$1,150 Variable cost (50,000 units x \$16) (\$800) Contribution (\$1,150 - \$800) \$350 Fixed cost (\$200) Profit (\$350 - \$200) \$150

(Bhimani, 2012)

Commercial compound calculations: -

 Particulars Calculations Amount ('000) Sales revenue (35,000 units x \$35) \$1,225 Variable cost (35,000 units x \$21) (\$735) Contribution (\$1,225 - \$735) \$490 Fixed cost (\$175) Profit (\$490 - \$175) \$315

(Bhimani, 2012)

The above made calculations shows that they earn adequate level of profits even after deducting variable as well as fixed costs from their earned revenues. As per the earned revenues it is clearly observed that there is no need of shutting down business operations.

(b) Identify and discuss the strategic factors that should be considered in deciding whether the Fremantle plant should be closed down during the last six months of the current year.

For closing down the business different factors need to be considered related to their past six months and these factors get discussed below such as: -

First of all they need to exclude the fixed cost from their decision making as it get charged at the end of year (Mukherjee, et. al., 2016).

Secondly, sales revenues and debts collection need to be considered or take care for half year. Thirdly, they need to evaluate all variable cost in decision making as whether they are able to recover these costs or not. If not then they proceed to shut down their business operations (Mukherjee, et. al., 2016).

Question C: - Budgeting

1 Will HLW's new membership plan and fee structure improve its ability to plan its cash receipts? Explain your answer.

There is new membership plan is introduced by HLW from October. In new membership plan there are few changes are made in fee structure such as members need to pay their membership fees in advance. This change make removal of the existing payment plan. As per the existing plan they charge hourly fees against the use of their court. New plan requires effective cash management that help them in managing cash receipts against their fee received and render adequate level of support for available cash management and make reduction in administration cost. New plan also benefitted the top level management as they get whole payment in once and with the help of it they make effective decisions related to utilisation of received fees. It become easy for them to make decisions as they have funds in their hand. Implementation of new plan there is effective enhancement is noted down in HLW's ability in context to managing their cash and other activities related to cash receipts (McVay, 2015).

2 Estimate the effect on sales revenue resulting from the planned change in fee structure for the next financial year, which starts 1 October and ends on 30 September. State any assumptions that you need to make.

Calculation of earned revenue with the use of old membership fee collection such as: -

Receipts from membership fees: -

 Particulars Calculations Amount ('000) Individual 500 * 45 22.5 Student 500 * 30 150 Family 1000 * 100 100 Total - 137.50

(Tsofa, et. al., 2015)

Receipts from court fees: -

 Particulars Calculations Amount ('000) Prime time (2000 *90%) 181 days * 4 Hrs @ 12 86.4 Non-prime time (2000 *50%) 181 days * 7 Hrs @ 8 56 Off season (2000 *30%) 184 days * 6 Hrs @ 6 21.6 Total 164

The total receipts from two different fees receipts is \$301,500 (\$137,500 + \$ 164,000) (Tsofa, et. al., 2015)

Calculation of receipts after implementing new plan is as follows such as: -

Receipts from membership fees: -

New members = 1,400 members (2,000 * 70%)

Under campaign: -

 Particulars Calculation Amount in \$ Family 700 * 450 * 45% 141,750 Individual 700 * 250 * 45% 78,750 Total 220,500

(Tsofa, et. al., 2015)

Receipts in case of no campaign: -

 Particulars Calculation Amount in \$ Family (700 -315) * 500 192,500 Individual (700 -315) * 300 115,500 Total 308,000

(Tsofa, et. al., 2015)

Total receipts as per new implemented plan: -

 Particulars Amount Under campaign \$220,500 Under no campaign \$308,000 Total receipts \$528,500

(Tsofa, et. al., 2015)

As per new plan implementation there are few assumptions are made such as: -

 Particulars Percentage Prime time occupancy 90% Non-prime time occupancy 50% Off-season occupancy 30%

(Tsofa, et. al., 2015)

Conclusion: - The change in fees collection plan or new membership plan put effective and positive impact over their processing as it results into increase in revenue as it shows incremental value as \$227,000 (Tsofa, et. al., 2015).

3 Hawthorn Leisure Works should evaluate the new membership plan and fee structure completely before it decides to adopt or reject it.

(a) Identify the key factors that HLW should consider in its evaluation.

For evaluation key factors get identified by HLW are as follows such as: -

HLW management identify cost reduction in administration after implementing new membership plan because after it they need not to prepare regular record related to revenue collection against the use of court, etc. by their members. Initially after implementing new plan management face issues in getting advance fees payments from their members against their membership. The onetime advance payment impact adversely as there is fall is noted down in the total number of members. There are various benefits also rendered by new membership plan as it introduce some free services for their members (Lidia, 2014).

(b) Explain what type of financial analyses HLW should prepare in order to make a complete evaluation.

To make complete evaluation of their new membership plan they make financial analysis such as: -

For evaluating liquid funds management calculate liquidity ratio as it helps in making optimum utilisation of liquid funds. They also prepare cash flow statement that helps in managing and controlling their available liquid funds. They make adequate balance between their cash flows (inflows and outflows). They also prepare cash budgets for estimating the cash flows.

Management of HLW also prepare flexible budget that helps in attaining the set desired outcomes and by following these budgets operational level get effective level of support (Lidia, 2014).

4 Explain how HLW's cash management practices may differ from the present if the new membership plan and fee structure are adopted.

There are few changes are made in the cash management practices of HLW's such as: -

On the basis of new membership plan there is change in the revenue recovery period from their respective members. As per new plan members have to make advance fees payments against services which they get in the remaining year. The new membership policy emphasis over one time preparation of cash budget because they collect revenues for one time. Effective cash management is required for successful execution of new membership plan. Effective cash management make inclusion of preparing cash flow statement as it management become capable to control and manage activities related to cash and cash equivalents (Guerrero-Baena, et. al., 2013).

Conclusion

In the end it get concluded that activity based costing method considered as reliable method of cost allocation among different departments. Management need to consider the sales and volume analysis in their pricing policy. They need to focus over such factor that helps in maximising profits. To manage the flow of cash and make optimum utilisation of in hand cash organisation prepare the cash flow statement. They also utilise it for increasing the level of profits.

References

• Bhimani, A. 2012, Introduction to management accounting,Financial Times Prentice Hall, Harlow.
• Bunn, D., Koc, V. & Sapio, A. 2015, "Resource externalities and the persistence of heterogeneous pricing behavior in an energy commodity market", Energy Economics, vol. 48, pp. 265-275.
• Fathi, Z. & Elham Sadat Mousavi Dozdahiri 2015, "A survey of activity-based costing in hotel industry",Management Science Letters, vol. 5, no. 9, pp. 855-860.
• Guerrero-Baena, M.D., Gómez-Limón, J.A. & Fruet Cardozo, J.V. 2013, "The capital budgeting process: A methodological approach based on financial and intellectual value creation", Intangible Capital, vol. 9, no. 4.
• Langfield-Smith, K., Thorne, H., Smith, D.A. & Hilton, R.W. 2015, Management accounting: information for creating and managing value, 7e [] edn, McGraw-Hill Education, North Ryde, N.S.W.
• Lidia, T.G. 2014, "Difficulties of the Budgeting Process and Factors Leading to the Decision to Implement this Management Tool", Procedia Economics and Finance, vol. 15, pp. 466-473.
• Linassi, R., Alberton, A. & Marinho, S.V. 2016, "Menu engineering and activity-based costing: An improved method of menu planning", International Journal of Contemporary Hospitality Management, vol. 28, no. 7, pp. 1417-1440.
• McVay, G.J. 2015, "The effects of compensation scheme, source credibility, and receiver involvement on the organizational budgeting process", Academy of Accounting and Financial Studies Journal, vol. 19, no. 3, pp. 217.
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