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TOPICS IN MANAGEMENT ACCOUNTING
AMIS 4310
CASE QUESTIONS
Seligram, Inc.: Electronic Testing Operations
1. What caused the existing system at ETO to fail?
2. Calculate the reported cost of the five components listed in Exhibit 6 using:
a. The existing system.
b. The system proposed by the accounting manager.
c. The system proposed by the consultant.
3. Which system is preferable? Why?
4. Would you recommend any changes to the system you prefer? Why?
5. Would you treat the new machine as a separate cost center or as a part of the main test room?
Please show calculations for the same.
Bridgeton Industries: Automotive Component & Fabrication Plant
1. The official overhead allocation rate used in the 1987 model year strategy study at the
Automotive Component and Fabrication Plant (ACF) was 435% of direct labor cost.
Calculate the overhead allocation rate using the 1987 model year budget. Why do you get
different numbers?
2. Calculate the overhead allocation rate for each of the model years 1988 through 1990. Are
the changes since 1987 in overhead allocation rates significant? Why have these changes
occurred?
3. Consider two products in the same product line:
Expected Selling Price
Standard Material Cost
Standard Labor Cost
Product 1
Product 2
$62
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$54
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Calculate the expected gross margins as a percentage of selling price on each product based
on the 1988 and 1990 model year budgets, assuming selling price remains constant and
material/labor costs do not change from standard.
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4. Are the product costs reported by the cost system appropriate for use in the strategic
analysis?
5. Assume that the selling prices, volumes, and material costs for the 1991 model year will not
change for fuel tanks and doors produced by the ACF of Bridgeton Industries. Assume also
that if manifolds are produced, their selling prices, volume, and material costs will not change
either.
a. Prepare an estimated model year budget for the ACF in 1991
(1) if no additional products are dropped.
(2) if the manifold product line is dropped.
Explain any additional assumptions you make in preparing your estimated model year
budgets.
b. What will be the overhead allocation rate under the two scenarios?
6. Would you outsource manifolds from the ACF in 1991? Why, or why not? What more
information would you want before reaching a final decision?
Destin Brass Products Co.
1. Use the Overhead Cost Activity Analysis in Exhibit 5 and other data on manufacturing costs
to estimate product costs for valves, pumps, and flow controllers.
2. Compare the estimated costs you calculate to existing standard unit costs (Exhibit 3) and the
revised unit costs (Exhibit 4). What causes the different product costing methods to produce
such different results?
3. What are the strategic implications of your analysis? Could the production process for flow
controllers be changed in such a way to allow Destin Brass Products to reduce the unit cost of
flow controllers? How would the change in the lot size for flow controller production affect
unit costs? Has Destin Brass Products adopted the most profitable distribution system in the
flow controller market? What actions would you recommend to managers at Destin Brass
Products Company?
4. Assume that the interest in a new basis for cost accounting at Destin Brass Products remains
high. Also, assume that prices of the products will not change. In the following month,
quantities produced and sold, activities, and costs were all at standard. How much higher or
lower would the net income reported under the activity-transaction-based system be than the
net income that will be reported under the present, more traditional system? Why?
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Dakota Office Products
1. Why was Dakota’s existing pricing system inadequate for its current operating environment?
2. Develop an activity-based cost system for Dakota Office Products (DOP) based on Year
2000 data. Calculate the activity cost-driver rate for each DOP activity in 2000.
3. Using your answer to Question 2, calculate the profitability of Customer A and Customer B.
4. What explains any difference in profitability between the two customers?
5. What are the limitations, if any, to the estimates of the profitability of the two customers?
6. Is there any additional information you would like to have to explain the relative profitability
of the two customers?
7. Assume that Dakota applies the analysis done in Question 3 to its entire customer base. How
could such information help the Dakota managers increase company profits?
8. Suppose that a major customer switched from placing all its orders manually to placing all its
orders over the internet site. How should this affect the activity cost driver rates calculated in
Question 2? How would the switch affect Dakota’s profitability?
Caribbean Internet Café
1. What managerial issues should David Grant consider before starting the Caribbean Internet
Café?
2. Define the fixed, variable and start-up costs in this case.
3. What is the contribution margin per customer?
4 How many customer visits will CIC need in order for the café to break-even in the first year?
5. How many customer visits will CIC need in order for the café to break-even in year two?
6. Should Grant proceed with the venture?
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Salem Telephone Company
1. “Revenue hours” represent the key activity that drives costs at Salem Data Services. Which
expenses in Exhibit 2 are variable with respect to revenue hours? Which expenses are fixed
with respect to revenue hours?
2. For each expense that is variable with respect to revenue hours, calculate the cost per
revenue hour.
3. Create a contribution margin income statement for Salem Data Services. Assume that intercompany usage is 205 hours. Assume commercial usage is at the March level.
4. Assuming the intracompany demand for service will average 205 hours per month, what
level of commercial revenue hours of computer use would be necessary to break even each
month. Since the intracompany demand is known to be 205 hours, the contribution from
these sales is assured to cover a portion of the fixed costs. Thus, to determine the level of
commercial revenue hours required to break even, the contribution from commercial sales
only needs to cover the fixed costs remaining after subtracting the fixed costs already
covered by the contribution from intracompany sales.
5. Estimate the effect on income of each of the options Flores has suggested if Wu estimates
them as follows:

Increasing the price to commercial customers to $1,000 per hour (this would reduce
external demand by 30%).

Reducing the price to commercial customers to $600 per hour (this would increase
external demand by 30%).

Increased promotion would increase revenue hours by up to 30%. Wu is unsure how
much promotion this would take. (How much could be spent and still leave Salem Data
Services with no reported loss each month if commercial hours were increased 30%?).
6. Based on your analysis above, is Salem Data Services really a problem to Salem Telephone
Company? What should Flores do about Salem Data Services?
7. Can you suggest changes in the accounting system that would result in more useful
information for Flores and Wu?
Superior Manufacturing Company
1. Based on the 2004 statement of profit and loss data (Exhibits 1 and 2), do you agree with
Waters’ decision to keep product 103?
2. On January 1, 2006, should the company reduce the price of product 101 from $24.50 to
$22.50 (after discounts)?
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3. Which one is Superior’s most profitable product?
4. What appears to have caused the return to profitable operations in the first six months of
2005? How useful was the data in Exhibit 4 for the purpose of this analysis?
5. Why is it important that Superior has an effective cost system? What is your overall
appraisal of the company’s cost system and its use in reports to management? List the
strengths and weaknesses of this system and its related reports for the purposes
management uses the system’s output. What recommendations, if any, would you make to
Waters regarding the company’s cost accounting system and its related reports?
Cafes Monte Bianco: Building a Profit Plan
1. Use a profit plan model to evaluate the attractiveness of switching all production to private
brand coffee. Estimate key accounting variables relating to profitability and cash flow for
this alternative.
2. Based on your analysis, what recommendations would you make to Giacomo Salvetti?
3. What assumptions did you make to complete your analysis? How critical are these
assumptions to your conclusions?
4. Prepare a list of additional assumptions that you would ask for to improve the quality of your
analysis.
5. Analyze the profitability of a mixed strategy where the company would sell Grade “A”
coffee with an advertising level of 7% and the rest of the production would be devoted to
private brand coffee. Estimate key accounting variables relating to profitability and cash
flow for this alternative.
Compagnie du Froid, S. A.
1. How would you explain the difference between the Italian region’s expected and actual
profit?
a) What was the impact of the change in sales volume?
b) What was the impact of the change in the prices charged for ice-cream and specialties?
c) What was the impact of the changes in the cost of raw materials, labor, and fixed costs?
d) How much of the changes in the cost of raw material and labor are due to changes in the
prices of the raw materials and wages of labor, and how much are due to manufacturing
efficiencies?
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2. How would you evaluate the performance of the manager of the Italian Region?
3. How would you evaluate the performance of the French and Spanish managers? How would
you account for the ice-cream transfer from France to Spain?
4. What problems is Jacques Trumen facing?
5. What would you recommend to him?
Polysar Limited
1. Prepare a presentation for the Polysar Board of directors to review the performance of the
NASA Rubber Division. Pay particular attention to questions that may be raised concerning
the accuracy and meaning of the volume variance.
2. What is the best sales and production strategy for EROW Division? NASA Division? Rubber
Group in total?
3. What changes, if any, would you recommend be made in the management accounting
performance system to improve the reporting and evaluation of the Rubber Group
performance?
The Super Project
1. What are the relevant cash flows for General Foods to use in evaluating the Super Project? In
particular, how should management deal with issues such as;
a) Test marketing expenses?
b) Overhead expenses?
c) Erosion of Jell-O contribution margin?
d) Allocation of charges for the use of excess agglomerator capacity?
2. How attractive is the investment as measured by various capital budgeting techniques (i.e.
accounting rate of return, payback period, internal rate of return, net present value)? How
useful are each of these measures of investment attractiveness? (Assume that General Foods
uses 10% as the discount rate to evaluate capital investments)
3. How attractive is the Super project in strategic and competitive terms? What potential risks
and benefits does General Foods incur by either accepting or rejecting the project?
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4. Should General Foods proceed with the Super project? Why, or why not?
Vyaderm Pharmaceuticals
1. Using data from the case Exhibit 8, calculate the following items:
a) 2000 EVA for the North American Dermatology Division.
b) 2000 EVA bonus payout for a manager earning $200,000, assuming that the
manager’s bonus is based 100% on the Division’s EVA?
c) 2001 EVA and estimated bonus payout for the same manager, assuming that
Vyaderm profits fall back to historical levels and the EVA improvement goal remains
constant.
2. Based on your analysis, what would you recommend to Mr. Vedrine?
.
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