E II

HARSHAD SAVANT

PHD01003 A 14/01/2021

MANAGEMENT ACCOUNTING (MA)

Professor AMRINDER SINGH

Declaration:
1. I have submitted faculty feedback 30 minutes prior to appearing in the End-Term Exam.
2. I have not copied the answer/matter in this answer booklet from my classmate, internet
and any other sources.

Signature of the Student

Case A – Waltham Motors Division

Q1. Using budget data, how many motors would have to be sold for Waltham Motors
Division to break even?

Ans -
Details Formula Amount
Total Sales $8,64,000.00
Total units $18,000.00
Total Fixed Cost $2,60,000.00
Total Variable Cost $5,12,800.00
Selling Price per unit Total Sales / Total Units $48.00
Variable Cost per unit Total Variable Cost / Total Units $28.49
Contribution Margin per unit Selling Price per unit – Variable Cost per unit $19.51
Break Even Point Total Fixed Cost / Contribution margin per unit 13325.74

Thus, Waltham Motors Division should sell 13,326 units of motors for break even

Q2. Using budget data, what was the total expected cost per unit if all manufacturing and
shipping overhead (both variable and fixed) was allocated to planned production? What
was the actual per unit cost of production and shipping?

Ans -
Type of Cost Budgeted cost Per Unit Actual cost for Per unit Under or
for 18000 units budget Cost 14000 units actual cost Over Budget
Direct material $1,08,000.00 $6.00 $85,400.00 $6.10 Over
Direct labour $2,88,000.00 $16.00 $2,46,000.00 $17.57 Over
Indirect labour $57,600.00 $3.20 $44,400.00 $3.17 Under
Idle time $14,400.00 $0.80 $14,200.00 $1.01 Over
Time to Clean up $10,800.00 $0.60 $10,000.00 $0.71 Over
Other supplies $5,200.00 $0.29 $4,000.00 $0.29 Exact
Variable $4,84,000.00 $26.89 $4,04,000.00 $28.86 Over
manufacturing costs
(A)
Shipping costs $28,800.00 $1.60 $28,000.00 $2.00 Over
Total Variable costs $5,12,800.00 $28.49 $4,32,000.00 $30.86 Over
(B)
Supervisor $57,600.00 $3.20 $58,800.00 $4.20 Over
Rent $20,000.00 $1.11 $20,000.00 $1.43 Over
Depreciation $60,000.00 $3.33 $60,000.00 $4.29 Over
Others $10,400.00 $0.58 $10,400.00 $0.74 Over
Total non-variable $1,48,000.00 $8.22 $1,49,200.00 $10.66 Over
manufacturing costs
(C)
Selling & admin $1,12,000.00 $6.22 $1,12,000.00 $8.00 Over
costs
Total non-variable $2,60,000.00 $14.44 $2,61,200.00 $18.66 Over
costs (D)
Total costs (B+D) $7,72,800.00 $42.93 $6,93,200.00 $49.51 Over

Thus, Expected Cost per unit will be $42.93 as against Actual cost per unit of $49.51
Actual Shipping Cost per unit is $2
Actual Production Cost per unit is
= Budgeted cost per unit - (selling and admin + variable shipping)
= $39.51
Thusm Actual Production Cost per unit is $39.51

Q3. Comment on the performance report and the plant accountant’s analysis of results.
How, if at all, would you suggest the performance report be changed before sending it on to
the division manager and Marco Corporation headquarters?

Ans -
According to the Plant Accountant’s analysis, the actual vs budgeted production costs are under
budget in most cases. This has been proved wrong from the table given in Q2 as all costs are
over budget except for indirect labour. Thus, Plant Accountant’s analysis is wrong and the actual
analysis should report crossing the budgeted costs for all the variables mentioned in Q2. This is
largely due to the fact that the Plant Accountant is using static budgeting method which does not
reflect the exact true costs of production if the number of units change.
Mistakes were done by accountant during preparing budget were as follows
1. He wanted to keep the budget to be as simple as possible and thus he bunched up many
costs together which leads to hiding of true actual costs.
2. For monthly budget, he assumed one twelfth of annual budget as it was largely assumed
that the production and sales were spread out evenly throughout the year
3. No mention or track of beginning and ending inventory
4. Actual material prices and direct labour costs are assumed static and their changes are not
reflected by justifying that the same difference was utilized somewhere else.

Thus, I would suggest the following changes in performance report before sending it further -
1. Adopt flexible budgeting method for finding true actual costs of production
2. Use per unit costs for calculation method to find if we are over or under budget instead of
static method.
3. All labour (except for supervision, selling and admin) should be treated as variable costs
that would change with number of units produced.
4. Instead of considering direct material costs as fixed, it can be considered as variable and
thus can be updated whenever it changes, this way we can find the true exact costs for per
unit of production.

Q4. Prepare your own analysis of the Waltham’s Division’s operations in May. Explain in
as much detail as possible why income differed from what you would have expected.

Ans -

Cost Type Static Actual Static Budget Flexible Flexible Budget

Budget Budget variances Budget Variance
Units 18000 14000 4000 14000 0
Sales $8,64,000.00 $6,86,000.00 $1,78,000.00 $6,72,000.00 $14,000.00
Direct material $1,08,000.00 $85,400.00 $22,600.00 $84,000.00 $1,400.00
Direct labour $2,88,000.00 $2,46,000.00 $42,000.00 $2,24,000.00 $22,000.00
Indirect labour $57,600.00 $44,400.00 $13,200.00 $44,800.00 -$400.00
Idle time $14,400.00 $14,200.00 $200.00 $11,200.00 $3,000.00
Time to Clean $10,800.00 $10,000.00 $800.00 $8,400.00 $1,600.00
up
Other supplies $5,200.00 $4,000.00 $1,200.00 $4,044.44 -$44.44
Variable $4,84,000.00 $4,04,000.00 $80,000.00 $3,76,444.44 $27,555.56
manufacturing
costs (A)
Shipping costs $28,800.00 $28,000.00 $800.00 $22,400.00 $5,600.00
Total Variable $5,12,800.00 $4,32,000.00 $80,800.00 $3,98,844.44 $33,155.56
costs (B)
Supervisor $57,600.00 $58,800.00 -$1,200.00 $57,600.00 $1,200.00
Rent $20,000.00 $20,000.00 $0.00 $20,000.00 $0.00
Depreciation $60,000.00 $60,000.00 $0.00 $60,000.00 $0.00
Others $10,400.00 $10,400.00 $0.00 $10,400.00 $0.00
Total non- $1,48,000.00 $1,49,200.00 -$1,200.00 $1,48,000.00 $1,200.00
variable
manufacturing
costs (C)
Selling & admin $1,12,000.00 $1,12,000.00 $0.00 $1,12,000.00 $0.00
costs
Total non- $2,60,000.00 $2,61,200.00 -$1,200.00 $2,60,000.00 $1,200.00
variable costs
(D)
Operating $91,200.00 -$7,200.00 $98,400.00 $13,156.00 $20,356.00
Income

From above table, we can see that the Plant Accountant made following mistakes while
calculation of Actual budgeting -
1. He increased supervision costs by $1200 while it should be fixed for no matter sale
volume increase or decrease.
2. He calculated direct material costs based on budgeted costs, whereas it should be 0.95
(that is 5% discount price) of the budgeted costs. So actual costs for direct materials
should come 0.95*84000 which is $79800. Also, he has calculated it to be 85400. The net
difference comes $5600.
3. Actual direct labour should be $224000 instead of $246000. The difference is $22000
4. Indirect labour should be $44800 instead of $44400 which is -400 more
5. Other supplies, considered variable should have -44.44 more
Case B – White Hill’s Children’s Museum

Q1. What is the impact on the Museum’s surplus of each of the options?

Ans -
In order to calculate Museum’s surplus, we need to understand each costs given in table. Thus,
we can see that the impact of actual cash outflow from D&E (and thus from Museum) is for the
materials purchased and variable overheads. This is due to the fact that direct labour and fixed
overheads are in-house (given in notes part of the case).

The actual outflow for Museum will be 7000 + 2000 = $ 9000 if the contract is given to D&E

But, if the contract is given to outside contractor, the cost will be $ 20000 which will be cash
outflow from the museum

Thus, net savings from Museum’s surplus will be 20000 – 9000 = $11000 if the contract is given
to D&E

Q2. Should Mr. Sampson intervene in this decision? Why or Why not?

Ans –
Mr Sampson, being the director has the authority to ask Ms Sweeney to take contract of Mr
Harp. But, as we are considering each department of museum as profit center, every part of
Museum will have choice to find best possible alternative to be profitable. In this case Mr
Sampson has to consider the profitability of Museum as a whole and not just individual
departments. Thus there are 2 scenarios

Scenario 1 – Mr Sampson intervenes and advises Ms Sweeney to take the contract for D&E.
Total outflow of Museum will be $9000 as seen in Q1.

Scenario 2 – Mr Sampson does not intervene and Ms Sweeney is allowed to take the contract
outside. Total outflow of Museum will be $20000 as seen in Q1. Thus, museum will suffer more
loss in this case. Also, by not employing in-house staff, the museum would anyhow need to pay
salaries to staff of D&E which is increased losses (not calculated as salaries are unknown)

Thus, Mr Sampson should intervene and try to find out a possible deal between Mr Harp and Ms
Sweeney that is competitive than Scenario 2 while ensuring that the museum doesn’t suffer much
cash outflow while at the same time both departments have adhered to the concept of profit
center.
Q3. If Mr. Sampson intervenes, what should he do? Please be specific: For example should
he tell Ms. Sweeney to purchase the work for the exhibit from Mr. Harp? If so at what
price?

Ans –
As mentioned in Q2, Mr Sampson should intervene and advice Ms Sweeney to consider Mr
Harp’s proposal. This can also be made more attractive to Ms Sweeney from Mr Harp by not
considering Fixed overheads and Direct Labour costs as they are staff of Museum and thus they
need not be paid separately. Thus the D&E can reduce the price from $27000 to $12000 while
keeping the markup price as profit. They can also consider putting Fixed costs which will take
the contract costs to $17000 which is still lower price than outside contractor.

Q4. If Mr. Sampson does not intervene, what do you think will happen? Is this good or bad
for the museum in the short term? In the long term?

Ans –
If Mr Sampson does not intervene, Ms Sweeney will not opt to give the contract to D&E and
thus the contract will be given to outside contractor. This would result in cash outflow of $20000
for the museum for contract alone. There will be additional cost of paying staff for D&E
assuming that they don’t get any additional contract during this period. Thus, in the short term
there will be immediate cash outflow of $20000 from the museum. While in the long term, if we
assume that the D&E is unable to secure any outside contract during Ms Sweeney’s project
completion face, the museum will face additional costs of paying its employees as salaries. Thus,
the museum's profitability will get affected in short term as well as long term if the contract goes
outside without intervention of Mr Sampson.

Q5. What other advice would you give Mr. Sampson? Ms. Sweeney? Mr. Harp?

Ans -
I would advice Mr Sampson the following
1. Link the performance of profit center of each department of museum directly to
museum’s overall profitability. That ways each department would have their goals and
objectives aligned to the museum’s objectives. This will also avoid any confusion and
clashes between departments.
2. Advice all managers to give preference to internal team for any projects. This will reduce
cost outflows.
3. Managers who are bidding for projects should have a separate strategy for internal
projects and they should not consider other departments in the same way they consider
for outside contracts.
I would advice Ms Sweeney the following
1. Consider the costs of implementing any project not just directly but also the indirect
implications and their impacts.
2. Find out outside costs to implement project and try to negotiate with internal department
either for similar or lower costs.

I would advice Mr Harp the following

1. Try to give discounts for internal projects and at the same time offer competitive prices.
By doing so, Mr Harp can learn the true costs of implementation that is offered by
competitors and also know exact costs that can be calculated.
2. By quoting 20000 instead of 270000, the competitor was clearly underpricing its costs
but they would only do the contract if they don’t suffer any losses. Thus, Mr Harp needs
to understand how the competitor could quote such lower price without suffering losses
and still be competitive.
3. Mr Harp should also consider the direct costs and markup price as optional when he is
preparing quotations for internal projects.