ACF/ACC2200 Introduction to Management Accounting

NB: This document is to be read in conjunction with the instructions on the assignment contained in the Moodle site.

REQUIRED:

Each group is required to read the case and address the issues raised at the end of the case.  You are expected to conduct research relating to: competitive advantage/competitive strategy; activity-based costing (ABC) and activity-based management (ABM) and relate this back to the case study requirements when preparing your assignment. Your research sources can include practitioner articles, academic articles and also information from relevant websites found via Google, Google Scholar, and other search engines etc.  The assignment should be in REPORT format and NOT a collection of separate sections each written by individual students.  The report should include: cover page, executive summary, table of contents, introduction, discussion (with appropriate sub-headings), conclusion, bibliography and appendices.  Please ensure you include summary calculations in the body ofthe report and include detailed workings in appendices.  Also, it is important that all articles, books and weblinks used for the assignment are properly referenced throughout the assignment.  Hand written assignments are not acceptable.

Please remember to also include your tutorial time and assignment group number on the group assignment cover sheet. Only the team leader of each group should submit the assignment. The assignment represents 25% of your overall gradefor the subject.

DUE DATE: The assignment is due before 11:55pm Thursday 11th May 2023. Please submit a copy of the entire assignment (WORD document format) online through the link provided in the Assessments tab in Moodle, and follow the instructions.   The assignment will also be processed via Turnitin.

SPECIFICATIONS: The suggested word limit for the assignment report is strictly between 3,000-3,500 words including calculations, tables, figures, bibliography and appendices.   The submitted assignment report must be typed (12p font in Times New Roman).  The assignment must be adequately referenced, and a bibliography included.   Students should keep a copy of their assignment.

LATE SUBMISSIONS: There is a penalty for late submission of 10% of the marks allocated to the written report per calendar day late. Extensions will only be provided to students who receive approval from the Chief Examiner before the due date.

EQUITY: To preserve equity among students, teaching staff will not provide direct content assistance with assignments. If you have general questions regarding the assignment, please use the discussion forum in Moodle and a staff member will respond. Also, if you believe there is an issue with the assignment please contact the CE via email.

CASE DETAILS

Jennifer Price, the Production Manager and Paul Low the Marketing Manager both at P&B Natural Co were sitting in at an inhouse presentation on operations and strategy by Jo Hallow, General Manager of P& B Natural Co .   Here is an excerpt of what Jo said during the presentation: “Covid-19 has prompted many businesses to re-think their operations and cut costs. I was reading a business update and saw an article on Berksmen Ltd, a global manufacturer of a wide range of consumer goods. Did you know that the company has developed programs to save $1.90 million by streamlining processes and constituents used in its products and condensing these to a much smaller range? For example, Berksmen Ltd has streamlined the constituents used in its cleaning and laundry products and also reduced the twelve different specifications, for a common cleaning agent, to only one in dishwasher powder and liquid. These two actions alone have generated savings for Berksmen Ltd of over $982,000".

Jennifer and Paul left at the conclusion of the presentation, and continued to discuss the information of Berksmen Ltd. They went to Paul’s office PC and Googled the information on Berksmen Ltd that Jo Hallow had referred to during the presentation .  They found that Berksmen Ltd had reduced the number of items in a given brand line by18% over the last three years and the company was seeking to further this by 10%. For example, one the company's brands, MoistureCare initially had 15 items in its product line but these were reduced to 8 items.  Other brands such as SmoothCare and BotanicsPlus Range were also simplifying their product lines.

Paul printed this information and gave a copy to Jennifer who went back to her office to re-read it. Jennifer continued to muse over the information on Berksmen Ltd.  Despite the overwhelming objection of some of the production personnel who argued that the setup costs were significantly large, P&B Natural Co had introduced a small sized bottle of its hand sanitizer, Naturisan, last year in response to Covid- 19 along with the medium size and pump bottles.  Sales had not met expectations.  Jennifer decided to meet with the Naturisan team to discuss the costs associated with the three sizes of the hand sanitizer. At this meeting the management accountant, Peita Simi, who was also there, presented some costing information and other relevant data.  Refer to Figures 1, 2 and 3 below.

Figure 1: Budgeted Labour and Overhead Costs for 2023

Labour

Managers

Production Employees

Total Labour Costs

Depreciation

Adminstrative Overhead

Accounting & Finance

2,900,000

6,000,000

440,000

$

8,900,000

1,250,000

Administration Support

Buildings

Purchasing

Total Administrative Overhead Utilities

Research & Development

Insurance

IT & Engineering

Council Rates

Other

805,000

521,000

464,000

2,230,000

710,000

550,000

220,000

650,000

235,000

240,000

$ 14,985,000

Figure 2: Additional Annual Budgeted 2023 Data

Figure 3: Comparison of Labour & Overhead Costs per Bottle of Naturisan

P&B Natural Co

Greenmore

(Major Competitor)

Industry Average

Medium

$

Medium

Small

Equivalent

Jennifer  suggested that  P&B  Natural  Co  continue  producing the  small  and  pump  Naturisan  bottles  and suggested the company reduce or eliminate the output of the medium bottle given the unit cost data.  She pointed out that the unit costs, for both the small and pump bottles are less than the industry average and the small bottle unit cost is also less than that of Greenmore, P&B Natural Co's main competitor.  Whilst reviewing the  information, Jennifer  asked  Peita  how  the  labour  and  overhead  costs  had  been  allocated.     Peita explained  that  depreciation  was allocated based on machine hours; labour costs were allocated based on direct labour hours and the remaining costs were allocated based on production volume.    Jennifer was not very convinced that allocating the labour costs based on direct labour hours was ideal as 45 of P&B Natural Co's 155 employees are managers/supervisors.    Furthermore, the way the remaining employees categorized their time is questionable.   Jennifer exclaimed "I believe the labour hours do not capture set-up costs.   In addition, it appears arbitrary to allocate the remaining $4,835,000 based on production volume!  Isn't there a different way of allocating such costs?"

Peita suggested an Activity Based Costing (ABC) study could be undertaken to determine more accurately the costs of each of the different bottles of Naturisan .  She briefly explained the ABC concept to everyone at the team meeting.  Once the team members had a better understanding of ABC they all agreed that Peita and her team should pursue the ABC study and design a new costing approach based on ABC principles which would then be used to re-allocate the labour and overhead costs to the three different sizes of Naturisan.

After the meeting Peita and her team designed a questionnaire to help identify the activities undertaken by employees and to also identify cost drivers for the ABC task.   Once the questionnaire was finalised,  Peita administered it to the employees so they could provide her with information to use in the ABC analysis she and her team was undertaking.  The completed questionnaires were returned to her for analysis.

Peita  reviewed  the  information  in  the  completed  questionnaires.     The  employees  indicated  that  they engaged  in  up  to  thirty  five  different  activities  which  included  over  twenty  two  different  cost  driver possibilities. She knew that this would be difficult for the management accounting area to comprehend and it would also be impossible to communicate effectively to managers and other staff.  As a result of this, Peita re- administered  the  questionnaire  to  employees  after  reducing  the  number  of  potential  activities  on  the questionnaire to ten.

The questionnaire results indicated that the employees spent 96% of their total time on nine specific activities as follows:  They spent 4% of their time on quality inspections; 5% was spent on packing containers; 25% of their time on making and bottling Naturisan; 10% of their time was attributed to downtime/repairs (idle time) due to equipment breakdown; 15% was spent on setting up (or shutting down) equipment; 12% was spent on rework/recycling; 10 % of time was spent on breaks; 5% went towards attending team meetings and 10% of their time was spent on moving material.  The remaining 4% of total staff time was unaccounted for and was classified as time spent on "miscellaneous activities".

After conducting interviews and discussions with Jennifer, the production team, and also extracting as much information as possible from P&B Natural Co's existing management accounting system, Peita had to decide how to assign the non-labour costs to the activities identified above.   Both Peita and Jennifer agreed that due to the nature of the costs, all of the administrative overhead cost be assigned to the category of "miscellaneous activities", whilst IT and engineering costs and, research and development costs be assigned to making the products. Table 1 shows how all the costs should be assigned to activities as determined by Peita and Jennifer.

Table 1: Activity Based Costing Information for Assigning Activity Costs

After determining how the labour and overhead costs be assigned to the activities, the next step was to analyse the collected  information  and  identify potential activity drivers.    During the  interviews with the production team, Peita discovered that the production process was highly automated. After reviewing all the collected  information,  Peita and Jennifer decided that  breaks taken  by employees and also team meeting activities would have to depend on the number of production employees even though these employees were not truly unique to a product.  They also decided that production volume would be the most suitable activity driver to use for miscellaneous activities category.  Table 2 shows all the activity cost drivers that Peita and Jennifer identified relevant to the project.