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:

Product 1 Product 2

Expected Selling Price $62 $54

Standard Material Cost 16 27
Standard Labor Cost 6 3

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.

1
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?

2
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?

Salem Telephone Company

1. “Revenue hours” represent the key activity that drives costs at Salem Data Services. Which
expenses in Ex