ACCT604 Managerial Accounting
Assessment Task 1 - Individual Assignment 1
Due date: Week 6 (7th September, Friday, 5pm.).
Length and/or format: Approximately 1,500 words.
How to submit: A copy of the assignment must be uploaded onto LEO through Turnitin system.
Please save your file as: “student name ACCT604 Assignment 1”.
Instructions for this task
All assignments must be handed in on the due date. Late assignments will be penalised. Assignments submitted after the due will incur a 10% penalty of the maximum marks available for that assignment. Assignments received more than three calendar days after the due date will not be allocated a mark.
Due dates will be strictly adhered to and extensions will be granted only in cases of extreme circumstances. A student may apply to the NLiC for an extension to the submission date of an assignment. Requests for extension must be made on the appropriate form on or before the due date for submission, and must demonstrate exceptional circumstances which warrant the granting of an extension.
? Be typed using 1.5 lines spacing left justified.
? Use Ariel or Times New Roman font size 12.
? Display a 2.5 cm margin on all sides. ? Include a page number on each page.
Pristine Limited (PL) manufactures and sells fireproof safes and document containers of various shapes and sizes for home use, including safes made to Australian/New Zealand Industry standard AS/NZS 3809. The division now makes 50 different products but these fit into the two main product groups of 35 metal safes and 15 more recently developed plastic safes.
Table 1 shows last quarter’s income statement by product group.
Table 1—Quarter 1 income statement by product group
Metal safes Plastic safes Total
$ $ $ $ $ $
Sales revenues 296900 246800 543700
Direct materials 21500 20680 42180
Process and support costs 231770 170280 402050
Total costs 253270 190960 444230
Net income 43630 55840 99470
Profit margin 14.7% 22.6% 18.3%
The managing director, Christine Smith, is concerned because the net margin on metal safes has fallen below the company’s target of 20 per cent and because company profits have been falling despite overall sales growth and increased capacity utilisation. Metal safes is the high volume product group but sales fell by 5 per cent last quarter. Plastic safes sell at much lower volumes, but the sales of plastic safes increased by 15 per cent last quarter, despite recent price increases and their apparently high margins. The marketing director, Colin Drake, tries to explain the trends as follows:
The margins on metal safes are being squeezed because of ridiculously low prices set by the competition. However, the increased sales of high margin plastic safes should compensate for this. I therefore propose to concentrate marketing resources on plastic safes.
However, Christine highlights that despite selling more plastic safes overall profitability is falling. She questions the reliability of the present costing system, which has remained very traditional despite PL having become a much more complex business in recent years. PL’s process and support costs are currently absorbed on the basis of total process hours using a single overhead absorption rate of $23.65 per process hour. Christine argues that although raw materials are cheaper, overall production of plastic safes is quite complex and she questions whether the simplistic costing system is missing something. She requests an investigation into improved costing procedures using an activity-based costing model.
It is established that there are five main activities undertaken by PL. Table 2 shows details of these activities, their cost drivers and their estimated costs per quarter.
Activity ata on key activities
Cost driver Estimated costs
Insulation process Insulation process hours $ 180700
Assembly process Assembly process hours 69600
Quality control Number of inspections 80080
Materials management Number of requisitions 47800
Selling and administration Number of sales orders 23870
Total process and support costs 402050
Table 3 shows last quarter’s actual activity rates.
Activity ivity rates for the
Metal safes last quarter
Plastic safes Total
Insulation process hours 7000 6000 13000
Assembly hours 2800 1200 4000
Total process hours 9800 7200 17000
Number of inspections 40 100 140
Number of requisitions 300 700 1000
Number of sales orders 30 47 77
The assembly process for plastic safes is quite complex and there has recently been a high level of rejects. This has resulted in the need for increased quality control activities. Plastic safes generally comprise more components than metal safes, causing more material movements. The plastic safe product group is still new and PL’s customer base is characterised by a large number of customers each ordering small volumes.
1) Explain TWO general problems associated with Pristine Limited’s traditional costing system.
2) Highlight FOUR indicators that the current costing system is outdated and flawed. (8 marks)
3) Calculate the activity cost rates to be used in the desired activity-based costing system.
4) Prepare a revised income statement by product group tracing process and support costs to product groups using activity-based costing methodology. (15 marks)
5) Briefly explain the differences in product costs and net profit margins between the two
alternative costing systems. (6 marks)
6) Prepare a report to the managing director, stating the benefits, costs and issues of adopting the activity- based costing system to Pristine Limited. (8 marks)
7) You are asked for suggestions about increasing profitability for a customer of Pristine Limited that purchases low-margin products and requires costly services. Prepare a brief paragraph suggesting methods to improve profitability for this customer. (4 marks)