case study: accounting for managers by haris awang

MBA 6053. Accounting for Managers. Asia Metropolitan University. A. HARIS AWANG. 2016. 1

Accounting for Managers

A. HARIS AWANG

A. HARIS AWANG MBA2016-04-1001 MBA 6053 Accounting for Managers

Case Study

Submitted to: Ms. Khairunisa Daud,

Faculty of Business,Asia Metropolitan University

22nd Oct, 2016

ASIA METROPOLITAN UNIVERSITY

Accounting for Managers (MBA 6053)

Table of Contents

CASE STUDY 1 (10%)...................................................................................................................1

A).................................................................................................................................................1

B).................................................................................................................................................4

C).................................................................................................................................................6

CASE STUDY 2 (10%)...................................................................................................................8

CASE STUDY 3 (10%).................................................................................................................12

CASE STUDY 4 (10%).................................................................................................................15

MBA 6053. Accounting for Managers. Asia Metropolitan University. A. HARIS AWANG. 2016. i

CASE STUDY 1 (10%)

A)

Refer to the following business decisions and provide your insight using the cost behavior

analysis:

a. Suppose you are a managing firm with full time staff. Larger firms in the industry have

begun to outsource tasks to India in order to reduce cost. You estimate that you may have to lay

off some of your staff if you outsource some of the tasks. What are the things to consider in

deciding whether or not to outsource tasks to India as well? (2 Marks)

ANSWER: Outsourcing has always been about cutting costs in order to achieve higher profits.

The things to consider in making the decision are:

Variable Costs: Variable costs are those that respond directly and proportionately to changes in

activity level or volume such as labor wages, usage of electricity, gas, water, or

telecommunication, raw materials, sales commissions, inventory, packaging supplies, and

shipping costs. The reduction of variables cost can contribute to the reduction of the total cost,

thus improving profits.

Fixed Costs: Fixed costs are those that do not fluctuate with changes in production level or sales

volume such as rent, insurance, fees, subscriptions, equipment leases, loans, depreciation,

management salaries, and advertising.

Break Even: A break-even analysis determines how many units to be sold or how much in sales

required in order to break even i.e. zero profit. This helps in understanding if the outsourcing

takes longer or faster to reach the break-even point.

In understanding the cost behavior, it is also important to understand the overall cost structure of

the firm and how each cost responds to the fluctuation of level or sales volume. While business

decisions can be either easy or complex, making an informed decision will mitigate the adverse

effects and risks faced by the company. Timely decision making is crucial to avoid loss of

business opportunities.MBA 6053. Accounting for Managers. Asia Metropolitan University. A. HARIS AWANG. 2016. 1

b. If Malaysia Airlines wish to make a profit when it reduces all domestic fares by 30%, what

reduction in costs or increase in passengers will be required? (2 Marks)

ANSWER: A reduction of domestic fares by 30% will increase the number of passengers

following the law of demand. An increase in passengers results in an increase in variable costs as

variables costs are a cost component that responds to the increase or decrease in the level or

volume. While the economies of scale takes effect due to the lower fixed cost per passenger, to

be profitable, Malaysia Airlines has to do cost cutting on variable costs such as contract crew

salaries, crew allowances, fuel, on board meals, ticket printing, baggage handling, maintenance,

catering costs, landing fees and overnight expenses. While costs such as fuel is fixed by the

market, Malaysian Airlines can look into cost cutting by flying shorter routes thus reducing fuel

consumption or by flying with more fuel-efficient aircrafts. Another factor that also helps in the

profitability is the loading of the aircrafts. At higher loading (% of passenger over maximum

capacity), the fixed cost per passenger is also reduced.

To summarize, Malaysian Airlines have to cut its variable costs and increase passenger loading

to absorb the fixed costs. Other fixed costs such as airport fees, hangar rental, loans can also be

renegotiated for better rates.

c. If Ford Motors meets worker demands for higher wages, what action to be taken in order to

maintain the current profit level? (2 Marks)

ANSWER: If other variables are held constant, increasing wages will hurt profitability. In order

to compensate, Ford Motors needs to increase the productivity of its workforce. An increase in

productivity means that each worker will have to produce more output within a given time than

before. If previously, they produced 10 cars a day, now they have to produce 12 cars a day, for

example.

Another way is to have cost cutting measures implemented throughout Ford Motors. These

include lay-offs, number of hours cut, reduction of raw material costs, reduction of indirect

materials, renegotiation of lease agreement, or even outsourcing. This will have better chances at

reducing the total cost through the reduction of variable and fixed costs.


d. A company implement a program to modernize its plant facilities through purchasing

significant equipment which has reduced the work force by 50%. Explain what will be the effect

on the cost of producing one ton of steel? (2 Marks)

ANSWER: The reduction of the work force implies to the reduction in variable costs. In this

case, the reduction of labor by 50% is attributed to the loss of variable cost related to labor. On

the other hand, the equipment purchased has also resulted in an additional fixed cost. This cost

must be absorbed by the production volume. Producing just one ton of steel may not be

economical as the volume is very small to absorb the newly acquired equipment fixed cost.

Assuming that the equipment cost is RM1,000,000, the fixed cost related to the equipment is

RM1,000,000 to produce 1 ton of steel. As the volume increases to 1,000 tons, the fixed cost per

ton is reduced to RM1,000,000/1,000 = RM1,000. The fixed cost per ton keeps decreasing as the

volume gets higher. So, in the long run, the company is profitable.

e. What happens if a company increases its advertising expenses but cannot increase its prices

because of competitive pressure? (2 Marks)

ANSWER: Assuming that the increase in advertising expenses has resulted in an increase in

sales, the company can be profitable since advertising expenses are fixed costs which in the long

run can be covered by the sales volume they generate. Only effective advertisements can

generate profits. Ineffective advertisements that yield lower than expected sales, may turn out to

be a loss for the company. Moreover, an increase in sales will also result in an increase in

variable costs such as more raw materials and more manpower need to be used. If the company

cannot increase its prices due to market pressure, only the reduction in variable costs and the

increase in sales volume can save the company from incurring losses.


B)

Read the following article and answer the related question below:

SKILLED LABOR IS TRULY ESSENTIAL

The recession that started in 2008 had devastating implications for employment. But one surprise was that for some manufacturers, the number of jobs lost was actually lower than the previous recessions. One of the main explanations for this was that between 2000 and 2008, many factories adopted lean manufacturing practices. The lean practice focus only on the value-added activity by reducing other costs. This meant that production relied less on large numbers of low-skilled workers, and more on machines and a few highly skilled workers. As a result of this approach, a single employee was supporting far more dollars in sales. Also, because the employees are highly skilled, employers are reluctant to lose them. Instead of lay-offs, many manufacturers have resorted to cutting employees hours.

Source: Timothy Aeppel and Justin Lahart “Lean Factories Find it Hard to Cut Jobs Even in a Slump, “Wall Street Journal Online, March 9, 2009

From your understanding of the cost behavior, how would you characterize the cost related to

the situation and why it had not caused major job lost despite the recession? (8 Marks)

ANSWER: In relating to this situation, when a factory adopts lean manufacturing practices, it is

also converting some variable costs into fixed costs.

Replacing low-skilled workers with sophisticated equipment requires fewer, highly trained set of

skilled workers to operate the increasingly sophisticated equipment. This is where non-value

added activities are reduced to the minimum following the lean manufacturing concept. In the

process of doing so, variables costs (low-skilled workers) are being converted into fixed costs

(equipment).

The cost behavior of high-skilled workers eventually move towards becoming fixed costs. This is

characterized by their salaries along with other benefits and compensations as fixed. However

there’s also a mix with variable costs as part of their income e.g. overtime, claims or allowances.

When the factory is facing a hard time, it may also cut on the hours work. The act of cutting

hours is similar to reducing variable costs by cutting the number of workers. Somehow, cutting MBA 6053. Accounting for Managers. Asia Metropolitan University. A. HARIS AWANG. 2016. 4

hours is not a long-term solution as workers may find it difficult to meet their financial

obligations i.e. to pay bills, loans, etc. But in a lean manufacturing environment, the cutting of

low-skilled workers is close to becoming impossible as there’s very little to cut.

There are several advantages offered by lean manufacturing that can benefit companies such as

low inventories, less wastage, highly skilled workers, higher productivity, high sales value per

worker, and so on. However, lean manufacturing has its set-back especially during recession.

While it may benefit high-skilled workers as they are not easily replaceable or downsized, it also

can have a disadvantage to manufacturer as it has less variable costs to cut when time is bad.

And likewise, from the management accounting perspective, a company that has high fixed costs

(high skilled workers) may find itself running at a loss when the production is low as each piece

of product has to absorb the fixed costs.

On why the recession has not caused a major job lost, it is because lean manufacturing has

reduced the workforce to highly skilled workers who are very much needed at every process or

in other words they not easily replaced. In the past, manufacturing was typically “batch” process

where many workers were doing identical low-skill tasks. These tasks are easily transferred,

trained or replaced during downturns. Under lean manufacturing, manufacturers are reluctant to

replace skilled workers considering the amount of money and time they have spent on training.

Manufacturers will hold on to these workers for as long as they can hoping for an economic

recovery.


C)

The general manager of Smarties Sdn Bhd is required to prepare estimation for the machine-

related costs. The costs incurred include the maintenance cost. Below are data regarding the

maintenance cost and the machine hour utilized for first six months of the year 2016:

Month Machine hour utilized (hour) Maintenance cost (RM)January 32,000 66,340February 37,000 71,000March 30,000 64,200April 40,000 72,343May 47,000 77,090June 55,000 80,450

Based on the above information, you are required to use the High-Low method to determine the

followings:

i. Variable cost per unit (V)

V = Change in cost ÷ Change in activity

=( RM80,450 - RM64,200 )

(55,000 - 30,000 )

=RM16,25025,000

= RM0 . 65 / hr

ii. Fixed costs

(Using either the high cost or low cost)

Y = F + V(X)

RM64,200 = F + RM0.65(30,000)

= F + RM19,500

F = RM64,200 – RM19,500


= RM44,700

iii. Cost formula

Y = RM0.65X + RM44,700

iv. Maintenance cost incurred if 45,500 machine hours are utilized in July.

Y = RM0.65(45,500) + RM44,700

= RM74,275


CASE STUDY 2 (10%)

Aneka Industries developed the following income statement using a contribution margin

approach.

The projected income statement was based on sales of 100,000 units. Aneka has the capacity to

produce 120,000 units during the year.

Required:

a. Determine the break-even point in units and sales RM. (6 marks)

ANEKA INDUSTRIESPROJECTED INCOME STATEMENT

FOR THE CURRENT YEAR ENDING DECEMBER 31Ratio Per Unit

Sales RM750,000 100% RM7.50

Less variables costs:Variable manufacturing costs RM280,000Variable selling costs 120,000

Total variable costs 400,000 53.33%Contribution margin RM350,000 46.67% RM3.50

Less fixed costs:Fixed manufacturing costs RM130,000Fixed selling and administrative costs 80,000

Total fixed costs 210,000Operating income RM140,000

ANSWER:

Contribution Margin Ratio, CMR =Contribution Margin per unit

Sales Price per unit

= RM3.50/RM7.50 = 0.4666667

Break-even point in sales, X = FC/CMR

X = RM210,000/0.4666667 = RM450,000


Breakeven point in units, Q = X/Sale Price per unit

Q = RM450,000/RM7.5 = 60,000 units

b. If the company would like to achieve its target profit of RM315,000, how many units and

sales RM that would require? (6 marks)

ANSWER:

Sales, X = Variable expenses + Fixed expenses + Profits

X = 0.533333X + RM210,000 + RM315,000

X - 0.533333X = RM210,000 + RM315,000

0.4666667X = RM525,000

X = RM525,000/0.4666667

= RM1,125,000

Units require, Q = Sales/Unit Price

= RM1,125,000/RM7.5

= 150,000 units

c. The sales manager believes the company could increase sales by 8,000 units if advertising

expenditures were increased by RM22,000. Determine the effect on income if the company

increases advertising expenditures. (4 marks)

ANSWER:

Sales = RM7.5 x 8,000= RM60,000

VC = 0.53333 x RM60,000= RM32,000

Contribution Margin = Sales – VC= RM60,000 – RM32,000= RM28,000


Profit or income = RM60,000 – (RM32,000 + RM22,000)= RM6,000

The advertising effect of RM22,000 is an additional income of RM6,000.

d. What is the maximum amount the company could pay for advertising if the advertising

would increase sales by 8,000 units? (4 marks)

ANSWER: If RM22,000 of advertisement increase sales by 8,000 then,

Advertisement per unit = RM22,000/8,000 = RM2.75

Aneka has maximum capacity of 120,000.

Additional units = 120,000 – 100,000 = 20,000

Max. advertising amount = 20,000 x RM2.75 = RM55,000

e. The management is considering a plan to increase the quality of its jersey by using better

quality materials. The effects of this plan are as follows:

Increase in variable cost per unit by 10% (53.33% to 63.33%) Decrease in total monthly fixed cost by RM7,500

If the above plan is implemented, what is the effect on break-even point in unit and RM? (6

marks)

ANSWER:

VC has gone up by 10% from 0.53333X to 0.63333X

FC has reduced by RM7,500 from RM210,000 to RM202,500

Sales, X = 0.63333X + RM202,500 + 0

X – 0.63333X = RM202,500

0.3666667X = RM202,500

X = RM202,500/0.3666667X

= RM552,272.73 is the break-even sales


Q = RM552,272.73/RM7.5

= 73,636 is the break-even units

f. Based on your answers in (e) above, should the management implement the plan? Discuss.

(4 marks)

ANSWER:

The new implementation should be compared to the previous outcome based on the profitability,

the break-even point and also market analysis before the management can decide.

Before After

Sales RM750,000 RM750,000

Total variable Costs RM400,000 RM440,000

Contribution margin RM350,000 RM310,000

Total fixed costs RM210,000 RM202,500

Operating income (Profit) RM140,000 RM107,500

Unit Price RM7.50 RM7.50

Sales units 100,000 100,000

Break-even units 60,000 73,636

Break-even sales RM450,000 RM552,273

Profit per unit RM1.40 RM1.08

In terms of profit for every unit sold, it decreases from RM1.40/unit to RM1.08/unit because of

the decrease in total profit or income from RM140,000 to RM107,500. This is not a good result.

As for break-even, it will take higher sales units at 73,636 which means longer than before

(60,000) and that is also not a good result.

From the demand perspective, the market has to be tested whether the increase in quality will

also increase in the demand. For now, the management decision should be not to implement the

plan due to lower outcome in profit and longer break-even point.


However, for better profit, the management may consider raising the price. But how the market

responds to the price increase has to be tested taking into consideration the competition from

other sellers as well as market sentiment.

CASE STUDY 3 (10%)

Carlsen Company manufactured 6,000 units of a component part that is used in its product and

incurred the following costs:

Direct materials RM70,000Direct labor RM30,000Variable manufacturing overhead RM20,000Fixed manufacturing overhead RM40,000TOTAL RM160,000

Another company has offered to sell the same component part to the company for RM24.00 per

unit. The fixed manufacturing overhead consists mainly of depreciation on the equipment used to

manufacture the part and would not be reduced if the component part was purchased from

outside firm. If the component part is purchased from outside firm, Carlsen Company has the

opportunity to use factory equipment to produce another product which is estimated to have

contribution margin of RM30,000.

Instruction:

a. Prepare an incremental analysis report for Carlsen Company (6 marks)

ANSWER:

The purchase price is calculated as RM24 x 6,000 = RM144,000

Make (RM) Buy (RM) Outcome (RM)Direct materials 70,000 - 70,000

Direct labor 30,000 - 30,000

Variable manufacturing overhead 20,000 - 20,000

Fixed manufacturing overhead 40,000 40,000 -

Purchase price - 144,000 (144,000)


Opportunity cost 30,000 - 30,000

Total cost 190,000 184,000 6,000

b. Based on your answer from (a), should Carlsen Company make or buy its own component?

Explain your answer. (4 marks)

ANSWER: A savings of RM6,000 will be achieved if they purchased the component from

outside firm because they are forgoing the opportunity of making RM30,000 should they decide

to make the component. Hence, Carlsen Company should buy the component and free the

equipment so that it can be used to produce another product.

c. What other factors to be considered in make-or-buy decision? (5 marks)

ANSWER: While cost is an important consideration in making business decisions, several other

factors also have to be looked at.

- Effects on the community – The decision to close down production may result in loss of

jobs among the community.

- Effects on the environment – Is the supplier in conformance with environmental standards

set by authorities?

- Overall objective – The outsourcing of the job has be in alignment with owners’ or

shareholders’ mission and overall objectives.

- Financial - Financial capability has always been the denominator when it comes to

company’s expansion. Does the supplier have the financial strength or backing?

- In-house improvements - Has the company looked into improvements of the existing

operations? Programs like Kaizen, Production Innovation, Cost Down, and Total Quality

Control are some of the available tools that can have a substantial impact on productivity,

efficiency and cost under the current operations.


- Control - Can the company exercise control over the cost, quality and delivery of the

supplier?

- Past performance - Supplier’s past performance have to be checked. Have they been able

to fulfill orders from customers? Were there any issues pertaining to raw materials,

quality and delivery?

- Dependency - Outsourcing can also raise dependency on suppliers. Too much

dependency is also not good for the company.

- Technology copied - The risk of products being copied or infringed is always there.

Suppliers may end up becoming very good and later on overtake Carlsen Company.

- Other project - Probability of generating income from other project must also be

considered.

Business decisions can be either easy or complex. Making informed decisions should mitigate

the adverse effects and risks associated. Timely decision making is crucial to avoid loss of

business opportunities.


CASE STUDY 4 (10%)

Luhur Sdn. Bhd. manufactures a product called Smart. Below is the estimated information for

the month of April 2016:

Sales 91,000 units

Selling price RM12

Beginning inventory of Smart 21,800 units

Ending inventory of Smart 7,500 units

Each unit of Smart requires four units of direct material AA at the price of RM3.50 per unit. The

beginning inventory of direct material AA is 21,800 units. The company has decided that ending

inventory for direct material AA should be maintained at the level of 11,000 units at the end of

each month. Each unit of completed Smart requires 15 minutes of direct labor (0.25 hour) and

paid at the rate of RM40 per hour.

Based on the above information, you are required to:

a) Prepare the following operating budget:

i. Production budget for the month of April 2016; (5 marks)

ANSWER:

Luhur Sdn. Bhd.Production Budget (in units)

Product: SmartMonth: April 2016

Sales 91,000


Desired ending inventory 7,500Total needs 98,500Less: Beginning inventory 21,800Units to be produced 76,700Note: all figures are in units unless otherwise specified.

ii. Direct materials purchase budget for the month of April 2016; and (5 marks)

ANSWER:

Luhur Sdn. Bhd.Direct Materials Purchase Budget

Product: Smart. Direct materials: AAMonth: April 2016

Units to be produced 76,700Direct materials per unit x 4 Production needs 306,800Desired ending inventory 11,000Total needs 317,800Less: beginning inventory 21,800Direct materials to be purchased 296,000Cost per unit x RM3.50Total purchase cost RM1,036,000Note: all figures are in units unless otherwise specified.

iii. Direct labor budget for the month of April 2016. (5 marks)

ANSWER:

Luhur Sdn. Bhd.


Direct Labor BudgetProduct: Smart.

Month: April 2016Units to be produced 76,700Direct labor time per unit (hrs.) x 0.25Total hours needed 19,175Wage per hour x RM40Total direct labor cost RM767,000Note: all figures are in units unless otherwise specified.

b) Discuss how budget assists managers of an organization to make decisions. (5 marks)

ANSWER: Before a plan can be executed or realized, managers must be able to see how the

plan can impact company’s overall income by detailing down costs, desired inventory, labor,

production output, sales, overhead, etc. Budget serves in assisting managers by providing

guidelines before a plan is executed. It helps managers in deciding the best way to spend the

money.

As budget revolves around numbers and facts, it gives managers an indicator of limits for each

spending so managers do not end up over spending. Decisions made by managers will be based

on the limits of their budget.

Budget also provides a balanced view of the entire organization as each department manager’s

budget is a component of an overall budget. Higher management can use budget as performance

evaluation in order to meet the organization’s overall objectives.

With budget, managers can decide on whether an adjustment in strategy is required when

reviewing performance against budget. For example, if the targeted budget is not met, the

manager may want to decide whether to adjust other resources so the overall objectives can be

met.


Budget is also a quantitative expression of formalized goals that identifies the needs so managers

can make precise and timely decisions on allocation and control of resources. It also helps

managers to make comparison with past performances so decisions can be made whether to step

up or slow down.

Budget also assist managers as a motivational tool to provide direction to the workforce. It helps

managers determine the cost of production, the sales target and growth.

- END -


case study: accounting for managers by haris awang

Economy & Finance