Microsoft Word - IA.doc 1 INDIVIDUAL COURSEWORK 50% OF MODULE MARK SUBMISSION DEADLINE:...

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Microsoft Word - IA.doc
1

INDIVIDUAL COURSEWORK

50% OF MODULE MARK

SUBMISSION DEADLINE: NOVEMBER 2ND, 2021

PART A: BRIXTON INDUSTRIES PLC

Brixton Industries PLC is a UK large company with two divisions: Bingley Products and Shipley
Confectioneries. The Chief Executive (CEO) is concerned about some problems in these two divisions
elating to profitability and performance measurement system. He believes a reappraisal of the
usiness could resolve the problems cu
ently faced by the company.

Bingley Products

Bingley Products produces three products: Widgets, Gadgets and Helios. The Helios product was
introduced three years ago, and since then sales volume has been increasing tremendously to the
extent that it was catching up with the other products that the company started producing ten years
ago. Furthermore, Helios profits have also been good for a new product. However, business on the
other two products (Widgets and Gadgets) has been difficult. Specifically, profits have fallen even
though the sales volumes of these two products have remained steady since the introduction of the
Helios product. The board of directors is very wo
ied about this, especially regarding the Widgets
product which the board has always believed to be the company’s ‘cash cow’. The CEO feels that the
traditional absorption costing systems used were the main cause of these difficulties. Consequently,
the board of the company has decided that a fundamental reappraisal of the business is now
necessary if the company is to continue in business in the long run.

You have been appointed a management accounting consultant by the management of Brixton
Industries PLC to advise them on the reappraising the business. The following budget information
elating to the next year has been provided to you as a start.

Widgets Gadgets Helios

Sales and production (units) 50,000 40,000 30,000
Selling price (£ per unit XXXXXXXXXX XXXXXXXXXX73
Direct labour and materials (£ per unit XXXXXXXXXX XXXXXXXXXX
Machine hours per unit in machining dept XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
Direct labour hours per unit in assembly dept XXXXXXXXXX XXXXXXXXXX

Overheads allocated and apportioned to production departments, including service cost centres, were
to be recovered in product costs as follows:
• Machining department at £1.20 per machine hour
• Assembly department at £0.825 per direct labour hour.

Having examined all the information provided to you by the company, you have determined that the
overheads could be analysed into cost pools and cost drivers as detailed in the table below.

2
Cost pool Cost Cost Driver Quantity
£

Machining services 357,000 Machine hours 420,000
Assembly services 318,000 Direct labour hours 530,000
Set-ups costs XXXXXXXXXX,000 Set-ups XXXXXXXXXX
Order processing 156,000 Customer orders 32,000
Purchasing XXXXXXXXXX,000 Supplier Orders 11,200

You have also gathered the following estimates for the period to use in your reappraisal work:

Widgets Gadgets Helios

Number of set-ups XXXXXXXXXX XXXXXXXXXX
Customer orders 8, XXXXXXXXXX,000 16,000
Supplier orders 3, XXXXXXXXXX,000 4,200

Required:

(a)
(i) Prepare and present a profitability analysis statement of each product using both the
traditional absorption costing system and activity-based costing system (show all
calculations clearly).
(12marks)

(ii) Comment on the results in (i) above and explain clearly the differences between product
profitability using absorption costing and activity-based costing.
(2 marks)

(b) In relation to the company’s fundamental reappraisal of its business,

(i) Discuss how helpful the information you have prepared in (a) is for this purpose and how
it might be revised or expanded so that it is of more assistance.
XXXXXXXXXXmarks)

(ii) Advise what other information is needed in order to make a more informed judgement.
XXXXXXXXXXmarks)

(c) Would variable costing help in better understanding the business performance of the company?
Explain why/why not.
(5 marks)

The Output
A report of up to 1500 words, plus modest appendices.

3

PART B: Royal Resort and Casino

Royal Resort and Casino (RRC), a publicly traded company, caters to affluent customers seeking plush
su
oundings, high-quality food and entertainment, and all the “glitz” associated with the best resorts
and casinos. RRC consists of three divisions: hotel, gaming, and entertainment. The hotel division
manages the reservation system and lodging operations. Gaming consists of operations, security, and
junkets. Junkets offers complimentary air fare and lodging and entertainment at RRC for customers
known to wager large sums. The entertainment division consists of restaurants, lounges, catering, and
shows. It books lounge shows and top-name entertainment in the theater. Although many of those
people attending the shows and eating in the restaurants stay at RRC, customers staying at other
hotels and casinos in the area also frequent RRC`s shows, restaurants, and gaming operations. The
following table disaggregates RRC`s total EVA of $12 million into an EVA for each division:
ROYAL RESORT AND CASINO
EVA by Division
(Millions $)

Entertainment Hotel Gaming Total
Adjusted accounting profits
$
5
$
10
$
30
$
45
Invested Capital $ 40 $ 120 $ 60 $ 220
Weighted-average cost of capital 15% 15% 15% 15%

EVA $ (1) $ (8) $ 21 $ 12

Based on an analysis of similar companies, it is determined that each division has the same weighted–
average cost of capital of 15 percent.
Across town from RRC is a city block with three separate businesses: Big Horseshoe Slots & Casino,
Nell`s Lounge and Grill, and Sunnyside Motel. These businesses serve a less affluent clientele.
Required:
a. Why does RRC operate as a single firm, whereas Big Horseshoe Slots, Nell`s Lounge and Grill,
and Sunnyside Motel operate as three separate firms? (2 marks)
. Describe some of the interdependencies that are likely to exist across RRC`s three divisions.
XXXXXXXXXXmarks)
c. Describe some (at least 5) of the internal administrative devices, accounting-based measures,
and/or organizational structures that senior managers at RRC can use to control the
interdependencies that you described in part (b XXXXXXXXXXmarks)
d. Critically evaluate each of the “solutions” you proposed in part (c.) (8 marks)

ia-management-accounting-ou01ezff.pdf

Abhishek · Accepted Answer

A report (1500 words). 
Solution 1.a:
(Summary Tables).
 i: 
	Particulars
	Widgets 
	Gadgets
	Helios
	Total
	Sales (Volume)
	50,000
	40,000
	30,000
	
	Selling price per unit
	$45
	$95
	$73
	
	Sales ($)
	$2,250,000
	$3,800,000
	$2,190,000
	$8,240,000
	Less Prime Cost ( Volume *cost per unit)
	($1,600,000)
	($3,360,000)
	($1,950,000)
	($6,910,000)
	
	$650,000
	$440,000
	$240,000
	$1,130,000
	Less : Machine Dept. Cost (Machine hrs * Machine hr rate  * No. of units)
	$120,000
	$240,000
	$144,000
	$504,000
	Less : Assembly Dept. cost (Labor hours * labor hrs rate * No. of units)
	$288,750
	$99,000
	$49,500
	$437,250
	Profit 
	$241,250
	$101,000
	$46,500
	$388,750
	
	
	
	
	
Profitability statement using Activity Based Costing:
First, we need to ascertain the activity rates.
Activity Rate: Cost Pool / Cost Driver
Machining Services = $357,000 / 20,000 = $0.85 per machine hour.
Assembly Services = $318,000 / 530,000 = $0.60 per direct labor hour.
Set-up costs = $26,000 / 520 = $50 per set-up
Order Processing = $156,000 / 32, 000 = $4.875 per customer order 
Purchasing = $84,000 / 11,200 = $7.5 per supplies order
Profitability Statement:
	Particulars
	Widgets 
	Gadgets
	Helios
	Total
	Sales (Volume)
	50,000
	40,000
	30,000
	
	Selling price per unit
	$45
	$95
	$73
	
	Sales ($)
	$2,250,000
	$3,800,000
	$2,190,000
	$8,240,000
	Less Prime Cost ( Volume *cost per unit)
	($1,600,000)
	($3,360,000)
	($1,950,000)
	($6,910,000)
	
	$650,000
	$440,000
	$240,000
	$1,130,000
	Less : Machine Dept. Cost (Machine hrs per unit  * Machine hr rate  * No. of units)
	$85,000 
	$170,000
	$102,000
	$357,000
	Less : Assembly Dept. cost (Labor hours per unit  * labor hrs rate * No. of units)
	$210,000 
	$72,000
	$36,000
	$318,000
	Less : set-up cost (No. of set-up * Rate per set-up ]
	$6,000
	$10,000
	$10,000
	$26,000
	Less : Order Processing Cost 
	$39,000
	$39,000
	$78,000
	$156,000
	Less Purchasing Cost ( No.of supplier order * rate of supplier order)
	$22,500
	$30,000
	$31,500
	$84,000
	Profit 
	$287,500
	$119,000
	($17,500)
	$480,000
ii)
 You can identify the differences between the product profitability calculated under both the costing methods. We certainly have a total higher profit under activity-based costing than under traditional absorption costing system, but under traditional absorption costing system, the Helios product is profitable but fairly under activity-based costing it is in the loss for $17,500. In the traditional costing system, the profit for the product Widgets is $241,250 while it is $287,500 under the activity-based costing method, there is a difference of almost $40,000. Furthermore, in the case of gadgets, the profit ascertained under activity-based costing is more than the profit ascertained under the traditional costing method. 
 
The reason can be identified that the allocation of the overhead expenses made this profitability difference between both the methods. Also, the feelings of the CEO was right that the traditional costing method is the reason that the cash cow like Widgets has shown falling the profits despite the sales remaining steady. For gadgets, due to inappropriate overhead cost allocation, the traditional costing shows a lower profit than it should be. The activity-based costing system shows the fairer picture of the profitability for all three products because it allocated the overhead expenses as per the activity performed by the departments for each product. 
 
 Therefore, activity-based costing clears the picture about the profitability of each product, the cash cow like widgets was surviving due to charging the overhead expenses related to the activities of Helios product. All the three products and in total has different profitability. The reason behind these differences can be identified as the overhead inputs or overhead cost elements considered. In other words, the overhead cost allocation to different products and cost service centres are the reason behind these differences in the profitability of all three products. The activity-based costing method shows that Helios product is not in profit, but loss and the overall profit for the business is better than the traditional costing system due to the correct profitability of the other two products. 
 
 
b) 
i:
For the company's fundamental reappraisal of the business, the information which should be there: 
· Cost information of all the projects of the company.
· Current year and recent year financial data
· Contingent assets and contingent liabilities of the company
· Cost sheet of the company prepared under the different methods of costing. 
 It can be identified that information presented through the profitability statement for all three products under both the costing methods is helpful. It is quite helpful because you can easily trace the differences between the profitability and identify the most influential rate or cost to a specific product. It also assists that in which product or activity the cost should be managed or minimized. 
However, it might be revised or expanded by using the standard costing method so that the budgeted cost and quantity can be compared with the actual results of the business's operations. By using the standard costing method, the variances for each type of cost incurred to the business can be ascertained and also, the control actions can be taken to control the cost for each activity.
 
ii) 
  The other information needed to make the more informed judgment is the information regarding the firm's production capacity because, with the production capacity limit,

Microsoft Word - IA.doc 1 INDIVIDUAL COURSEWORK 50% OF MODULE MARK SUBMISSION DEADLINE: NOVEMBER 2ND, 2021 PART A: BRIXTON INDUSTRIES PLC Brixton Industries PLC is a UK large company with two...

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