Question

Question 1
BigD Limited is a manufacturer with a large variety of products. One of the most popular products is Product D. In many years, BigD estimates production cost of product D based on the traditional costing method in which the manufacturing overhead costs are allocated using direct labour cost as the single cost driver. Recently, top managers have been very concerned about declining profitability despite a healthy increase in sales volume of Product D. The declining profitability of Product D was not expected as the company has installed new machine and applied new automation technology to increase production efficiency.
As a new management accountant of the firm, you are required to evaluate the costing of Product D. Given that the company also incurs a substantial amount of manufacturing overhead, you have undertaken an Activity-based analysis. You have determined that the company’s total manufacturing overhead can be identified with the following activities:

Activity (activity driver)	Budgeted activity	Total quantity of activity drivers
Purchasing (number of purchase orders)	$1,042,200	1737
Material handling (number of setups)	$1,296,000	2700
Quality control (number of batches)	$259,200	1080
Processing time (number of processing hours)	$1,729,800	144150
Assembling time (number of assessbling hours)	$604,800	50400
Packaging time (number of packaging hours)	$468,000	39000

Direct labour cost of the company is estimated at $1,500,000 for the coming year.
Other production/sales information regarding one of its popular products is as follows:

Estimated production volume (units)	3000
Direct material cost (per unit)	$8.00
Direct labour cost (per unit)	$0.60
Number of purchase orders	5

Number of batches	4
Number of Setups (per batch)	4
Processing time (hour per 100 units)	1.5
Assembling time (hour per 100 units)	0.75
Packaging time (hour per 100 units)	0.5

Required:
a. Estimate the unit cost of Product D at the estimated production volume using both the traditional costing and the Activity-based costing (ABC) methods.
b. You are advised that selling price of Product D is based on the estimated product cost plus a fixed margin (around 40% of the production cost per unit). Given your estimation results in the requirement 1, is Product D over-costed or over-costed using the current costing method? If there is a cost distortion, is it significant and what would you like to recommend the company to do to improve the Product D’s profitability? Please keep in mind that changes in selling price may affect the customers’ behaviour substantially.
c. ‘Conventional costing will always distort product costs.’ Discuss the validity of this statement.

Question 2
You are required to prepare a proposal on the potential benefits and costs of implementing an Activity-based costing (ABC) system to determine customer profitability for a local bank, Kangaroo Commercial Bank Limited. The bank currently uses a traditional costing system. The clients of Kangaroo Commercial Bank are regional residents in North Australia. The banks considers extending its operation across some metropolitans, such Sydney and Melbourne, to serve the retail banking and investment demands of its clients.
Required:

a. ABC system requires a setting of operational activities and activity drivers. In identifying activity driver which mainly causes costs to be incurred at an activity level, what important factors should be considered? Explain to management why you consider these important.
b. Using at least two academic research articles to support your background research, write a minor report (in 500-600 words) to advise the management of Kangaroo Commercial Bank on the potential benefits and costs associated with implementing an ABC system.

Question 3
MaxiReturn Limited is a fintech company providing accounting solution and financial advice based on Artificial Intelligience technology. The company is one of the first Fintech pioneers in Australia. MaxiReturn has experienced steadily increased sales figures over the last ten years. The company size has also increased to 100 employees currently. Most of them are software engineers and accounting and financial professionals.
Adrian Daniels joined MaxiReturn approximately nine months ago as financial controller. His major duties include supervision of the company’s accounting team and preparation of the company’s financial statements. He has noticed that, in the past six months, the company’s sales have actually dropped. This unexpected downturn has resulted in cash shortages. In addition, MaxiReturn has had to postpone the introduction of a new accounting software because one of its business partner, PrintSolution Limited , has not yet delivered the instruction manuals for the new product.
Most of MaxiReturn’s printing documents are made by PrintSolution, a small printing company owned by Darren Abbott. Darren has dedicated a major portion of his printing capacity to MaxiReturn’s requirements, because its contracts represent approximately 50 per cent of PrintSolution’s business. Adrian has known Darren for many years, and it was Darren who first told Adrian that MaxiReturn needed a new financial controller.
While preparing the company’s most recent financial statements, Adrian became concerned about its ability to maintain timely payments to its suppliers. He estimated that payments to all suppliers, which were usually made within 45 days, were now exceeding 90 days. Benjamin is particularly concerned about payments to PrintSolution. He knows that MaxiReturn has recently placed a large order with PrintSoltuion for printing the new product instruction manuals, and that PrintSoltuion will soon be placing an order with its suppliers for the special paper needed for this new job. Adrian is considering telling Darren about the cash problems of MaxiReturn, although he is aware that a delay in the printing of the documentation would jeopardise his company’s new product.
Required:
In 500-600 words, describe Adrian Daniel’s ethical responsibilities in this situation. Support and analyse your answer with any standard or guidelines you consider relevant.

Answer 1

Solution:

Question 1: