1. Introduction
This module is arrange as a handbook for Kelas Unggulan students that take part the
problem based learning (PBL) system for Managerial Accounting subject. Materials of this
module referred to the syllabi and textbook adopted in accounting department at Faculty of
economics – Trisakti University.
In general, accounting can be divided into two main areas: financial accounting and
management accounting. They differ in their objectives, the nature of inputs, the type of
processes used to transform inputs into outputs and main users.
Financial accounting is primarily concerned with presenting financial statements for
external users such as investor, creditors, government agencies, and others. These financial
statements could be used for investment decisions, stewardship, monitoring, and
regulatory measures.
Management accounting mainly produces information for internal users, such as
managers, top executives and workers. Thus, management accounting could also be called
as internal accounting and financial accounting as external accounting. Specifically,
management accounting identifies, collects, measures, classifies, and reports information
that is useful for planning, controlling and decision making.
The business environment now has needed to be innovative and relevant in
management accounting practices. New management accounting practices has developed
such as activity based management, transfer pricing, balanced score card, just in time and
many more. This module mixed classic theories with the new theories. For example, when
discussing about budgeting, there will have two approaches: classic approach and activity
based approach. To make performance evaluation in the decentralized firm, there are two
approaches, i.e return on investment (ROI) and Economic Value Added (EVA).
Even new theories in management accounting has been used in practices but classic
theories still proves useful and practices in business environment. Many business practices
still find classic approaches useful for planning, performance evaluation and control
purposes. That’s why, this module contains classic management accounting theories that
students must know well such as budgeting, standard cost, direct costing and cost volume
profit analysis.
All topics covered in this module must be delivered in PBL approach. Every student will
deal with study tasks and make discussion with their peer to find the solutions. In order to
get knowledge about management accounting practices in a real world, students should do
field study in a company to learn about its management accounting and filly make a report
in a group about what they’ve gained. Every group must make presentations in front of the
class at the end of the semester.
2. Objectives
This subject has main objectives to make the students to be able to:
a. Prepare functional and Activity-Based Budgeting.
b. Use standard costing as a managerial control tool.
c. Evaluate performance using activity and strategic based responsibility accounting.
d. Evaluate performance using Return On Investment and Economic Value Added.
e. Prepare segmented reporting using Absorption Costing and Variable Costing method.
f. Analysis relationship of cost volume profit in a managerial planning.
3.Structures and Organization
3.1 Introduction
This module has one theme, Management Accounting. The sub-themes will be
functional and activity based budgeting, standard costing, balanced scorecard, performance
evaluation, segmented reporting and cost volume profit analysis.
These sub-themes will be dealt within several educational activities. There are three
main educational activities:
 PBL sessions.
 Interactive Lectures.
 Module Assignment
 Assistance
 Final Examination.
The overview for these activities can be found on the following pages.
3.2 PBL
Problem Based Learning is the method that will deliver the knowledge to the students. There
are two main activities that should be followed by all the students:
a. Active participation in discussion of the tasks.
b. Prepare report of the tasks.
3.3 Interactive Lectures.
To start the new topics, lecturer will firstly explain and describe the theories about the topics
and give examples of topics. Students are required to be active and critical all class hour day
long. This time will be useful to PBL to make some discussions and tasks. The time table of the
lectures as follows:
Week 01
: Introduction
Week 02
: Profit Planning
Task 01
: Master Budget and pro forma Income statement and Balance sheet
Task 02
: Cash budget
Week 03
: Beyond Budgeting
Week 04
: Standard Costing : A managerial control Tool
Task 03
: Materials and Labor : Variance analysis
Task 04
: FOH variance : Variance analysis
Week 05
: Standard Costing : a Managerial control Tool
Task 05
: Materials and labor variances: Journal entries
Task 06
: FOH variance : Journal entries
Week 06
: Performance Evaluation and Decentralization
Task 07
: Return on investment
Week 06
: Quiz 1 (Operating Budget, Cash budget & Standard Costing)
Week 07
: Performance Evaluation and Decentralization (Review)
Task 08
: Residual Income
Task 09
:Economic Value Added
Week 08
: Transfer pricing in the decentralize firm
Task 10
:Transfer pricing – Market price
Task 11
: Transfer pricing – Cost-based transfer prices, negotiated transfer prices
Week 09
: Transfer pricing in the decentralized firms
Task 12
: Transfer pricing – Negotiated transfer prices
Week 10
: Cost Volume Profit Analysis: A Managerial Planning
Task 13
: CVP – Single Product
Task 14
: CVP – Multiple products
Week 11
: Review
Week 12
: Quiz 2
Week 13
: Report Presentation (Module Assignment)
Week 14
: Final test
Text Books:
-
Hansen and Mowen, “Cornerstone of Managerial Accounting”, South Western Cengage
Learning, 5th edition , 2014.
Horngren, CT., George F. and Srikand MD.”Cost Accounting: A managerial emphasis”,
Prentice Hall International, 14 edition, 2012.
3.4 Module Assignment
Students are required to do field study and learn about management accounting practices in
real world. Field study will be done in group. Every group should the different topic but still in
the sub theme that already learned in class. It should start at the middle of the semester. There
will be supporting lecture to help students with problems that may occur during making this
project. Project report deadline is in week 13. Every report will be presented in front of the
class to get review from the lecture and peer group.
3.5 Evaluations
At the end of the semester, students will have evaluation through final examination. This
examination will be held parallel with the regular class and with the same material.
3.
Assessment
The assessment of students attending the class of Management Accounting consist of six parts:
a. Interactive lecture class participation
: 30%
b. Quiz
: 15%
c. Report assignment
: 10%
d. Module assignment
: 20%
e. Final test
: 25%
4.1 Criteria for Participation
The participation assessment is continuous mode. During most of the scheduled classroom
activities, the students should demonstrate that they are well prepared and actively
participated. During the problem-based learning sessions and interactive lectures, the teaching
staff will assess the knowledge skills and professional attitude of the students related to the
learning process and the group process.
In PBL class and interactive lecture class, the students need to fulfill the following requirements:
-
Present
In time
Well prepared for the report phase.
4.2 Quiz
Quiz will be held twice, first in week 6th, and the second one in week 12th. It will consist of two
to three short exercises or a number of theoretical questions. The combination of one exercise
and some theoretical questions is also possible.
4.3 Report assignment
Every week after discussion of one topic, teaching staff will give home work from the module to
the students. The students should give report of the home work in the next week.
4.4 module assignment
Students in group should conduct field study and this activity will be assessed through the
report and the presentation in front of the class.
4.5 final examination
The final examination will be held in week 14th. It will consist of three problems and several
theoretical questions. The total scores of the final examination will be distributed 80% to the
problems and remaining to the theoretical questions.
Task 1
Optima Company is a high-technology organization that produces a mass-storage system. The
design of Optima’s system is unique and represents a breakthrough in the industry. The units
Optima produces combine positive features of both floppy and hard disks. The company is
completing its fifth year of operations and is preparing to build its master budget for the coming
year (2008). The budget will detail each quarter’s activity and the activity for the year in the
total. The master budget will be based on the following information:
a. Fourth-quarter sales for 2013 are 55,000 units.
b. Unit sales by quarter (for 2014) are projected as follows:
First quarter
Second quarter
Third quarter
Fourth quarter
65,000
70,000
75,000
90,000
The selling price is $400 per unit. All sales are credit sales. Optima collects 85 percent of all
sales within the quarter in which they are realized; the other 15 percent are collected in the
following quarter. There are no bad debts.
c. There is no beginning inventory of finished goods. Optima is planning the following ending
finished goods inventories for each quarter:
First quarter
Second quarter
Third quarter
Fourth quarter
13,000 units
15,000
20,000
10,000
d. Each mass-storage unit uses five hours of direct labor and three units of direct materials.
Laborers are paid $10 per hour, and one unit of direct materials costs $80.
e. There are 65,700 units of direct materials in beginning inventory as of January 1, 2014. At
the end of each quarter, Optima plans to have 30 percent of the direct materials neede for
next quarter’s unit sales. Optima will end the year with the same level of direct materials
found in this year’s beginning inventory.
f. Optima buys direct materials on account. Half of the purchases are paid for in the quarter of
acquisition, and the remaining half are paid for in the following quarter. Wages and salaries
are paid on the 15th and 30th of each month.
g. Fixed overhead totals $1 million each quarter. Of this total, $350,000 represents depreciation.
All other fixed expenses are paid for in cash in the quarter incurred. The fixed overhead rate
is computed by dividing the year’s total fixed overhead by the year’s expected actual units
produced.
h. Variable overhead is budgeted at $6 per direct labor hour. All variable overhead expenses are
paid for in the quarter incurred.
i. Fixed selling and administrative expenses total $250,000 per quarter, including $50,000
depreciation.
j. Variable selling and administrative expenses are budgeted at $10 per unit sold. All selling
and administrative expenses are paid for in the quarter incurred.
k. The balance sheet as of December 31, 2013, is as follows:
Assets
Cash
Direct materials inventory
Accounts receivable
Plant and equipment
Total assets
$
250,000
5,256,000
3,300,000
33,500,000
$42,306,000
Liabilities and Stockholders’ Equity
Accounts payable
$ 7,248,000*
Capital stock
27,000,000
Retained earnings
8,058,000
Total liabilities and stockholders’ equity
$ 42,306,000
*For purchase of direct material only.
l. Optima will pay quarterly dividends of $300,000. At the end of the fourth quarter, $2 million
of equipment will be purchased.
Required
Prepare a master budget for Optima Company for each quarter of 2008 and for the year in total.
The following component budgets must be included:
a. Sales budget
b. Production budget
c. Direct materials purchases budget
d. Direct labor budget
e. Overhead budget
f. Selling and administrative expenses budget
g. Ending finished goods inventory budget
h. Cost of goods sold budget
i. Cash budget
j. Pro forma income statement (using absorption costing and ignoring income taxes)
Pro forma balance sheet
Task 2
Dr.Sinta S.KG is a successful dentist but is experiencing recurring financial difficulties. For
example, Dr.Sinta owns his building, which she leased to the professional corporation that
housed her dental practices (she owns all shares in the corporation). After the corporation’s
failure to pay payroll taxes for the past six months, however, the Kantor Pelayanan Pajak – KPP
is threatening to impound the business and sell its assets. Also , the corporation has had
difficulty paying its suppliers, owing one of them over $200,000 plus interest. In the past,
Dr.Sinta had borrowed money on the equity in either her personal residence or her office
building, but she has grown weary of these recurring problems and has hired a local business
consultant for advice.
According to the consultant, the financial difficulties facing Dr.Sinta have been caused
by the absence of proper planning and control. Budgetary control is sorely needed. The
following financial information is available for a typical month:
Revenues
Average Fee
Quantity
Fillings
$50
90
Crowns
$300
19
Root canals
$170
8
Bridges
$500
7
Extractions
$45
30
Cleaning
$25
108
X-Rays
$15
150
Costs
Salaries:
Two dental assistants
$1,900
Receptionist/bookkeeper
$1,500
Hygienist
$1,800
Public relations (Mr.Sinta)
$1,000
Personal salary
$6,500
Total salaries
$12,700
Benefits
$1,344
Buildings lease
$1,500
Dental supplies
$1,200
Janitorial
$300
Utilities
$400
Phone
$150
Office supplies
$100
Lab fees
$5,000
Loan payments
$570
Interest payments
$500
Miscellaneous
$500
Depreciation
$700
Total costs
$24,964
Benefits include Dr.Sinta’s share of social security and a health insurance premium for all
employees. Although all revenues billed in a month are not collected, the cash flowing into the
business is approximately equal to the month’s billing s because of collection from prior
months. The office is open Monday through Thursday from 9.00 A.M to 4.00 P.M. and on Friday
from 9.00 A.M to 12.30 P.M. A total of 32 hours are worked each week. Additional hours could
be worked , but Dr. Sinta is reluctant to do so because of other personal endeavors that she
enjoys.
Dr Sinta has noted that the two dental assistants and the receptionist are not fully utilized. She
estimates that they are busy about 65 to 70 percent of the time. Dr.Sinta’s husband spends
about five hours each week on a monthly newsletter that is sent to all patients; he also
maintains a birthday list and send cards to the patients on their birthdays.
Dr.Sinta recently attended an informational seminar designed to teach dentists how to increase
their revenue. An idea from that seminar persuaded Sinta to invest in promotion and public
relations (the newsletter and the birthday list).
Required:
1. Prepare a monthly cash budget for Dr.Sinta.
2. Using the cash budget prepared in requirement 1 and the information given in the case,
recommend actions to solve Dr Sinta’s financial problems. Prepare a cash budget that
reflects these recommendations and demonstrates to Dr.Sinta that problems can be
corrected. Do you think that Dr.Sinta will accept your recommendations? Do any the
behavioral principles discussed in the topic have a role in this type of setting? Explain.
Task 3
As part of its cost control program, Hepler Company uses a standard costing system for all
manufactured items. The standard cost for each item is established at the beginning of the fiscal
year, and the standards are not revised until the beginning of the next fiscal year. Changes in
costs, caused during the year by changes in material or labor inputs or by changes in the
manufacturing process, are recognized as they occur by the inclusion of planned variances in
Hepler’s
monthly
operating
budgets.
Following is the labor standard that was established for one of Hepler’s products
effective June 1, 2008, the beginning of the fiscal year:
Assembler A labor ( 5 hrs. @ $10)
Assembler B labor ( 3 hrs. @ $11)
Machinist labor ( 2 hrs. @ $15)
Standard cost per 100 units
$50
$33
$30
$113
The standard was based on the labor being performed by a team consisting of five
persons with assembler A skills, three persons with assembler B skills, and two persons with
machinists skills; this team represents the most efficient use of the company’s skilled employees.
The standard also assumed that the quality of materials that had been used in prior years would
be
available
for
the
coming
year.
For the first seven months of the fiscal year, actual manufacturing costs at Hepler have
been within the standards established. However, the company has received a significant increase
in orders, and there is an insufficient number of skilled workers to meet the increased production.
Therefore, beginning in January; the production teams will consist of eight persons with
asssembler A skills, one person with assembler B skills, and one person with machinist skills.
The reorganized teams will work more slowly than the normal teams; as a result, only 80 units
will be produced in the same time period in which 100 units would normally be produced. Faulty
work has never been a cause for units to be rejected in the final inspection process, and it is not
expected
to
be
a
cause
for
rejection
with
the
reorganized
teams.
Furthermore, Hepler has been notified by its material supplier that lower-quality
materials will be supllied beginning January 1. Normally, one unit of materials is required for
each good unit produced, and no units are lost due to defective material. Hepler estimates that 10
percent of the units manufactured after January 1 will be rejected in the final inspection process
due to defective material.
Required
1. Determine the number of units of lower-quality material that Hepler Company must enter
into production in order to produce 54,000 good finished units.
2. How many hours of each class of labor must be used to manufacture 54,000 good
finished units ?
3. Determine the amount that should be included in Hepler’s January operating budget for
the planned labor variance caused by the reorganization of the labor teams and the lowerquality material.
Task 4
Sabroso Chips was established in 1938 by Paul and Nancy Golding (Nancy sold her piano to
help raise capital to start the business. Paul assumed responsilbity for buying potatoes and selling
chips to local grocers; Nancy assumed responsibility for production. Since Nancy was already
known for her delicious, thin potato chips, the business prospered.
Over the past 70 years, the company has established distribution channels in 11 western states,
with production facilities in Utah,New Mexico, and Colorado. In 1980, Paul and Nancy Golding
both died and their son, Edward, took control of the business. By 2008, the company was facing
stiff competition from national snack-food companies. Edward was advised that the company’s
plants needed to gain better control over production costs. To assist in achieving this objective,
he hired a consultant to install a standard costing system. To help the consultant in establishing
the necessary standards, Edward sent her the following memo:
To
: Diana Craig, CMA
FROM
: EDWARD GOLDING, PRESIDENT, SABROSO CHIPS.
SUBJECT
: DESCRIPTION AND DATA RELATING TO THE PRODUCTION OF OUR PLAIN
POTATO CHIPS.
DATE
: SEPTEMBER 28,2008
The manufacturing process for potato chips begins when the potatoes are placed into a large
vast in which they are automatically washed. After washing, the potatoes flow directly to an
automatic peeler. The peeled potatoes then pass by inspectors who manually cut out deep eyes
or other blemishes. After inspection, the potatoes are automatically sliced and dropped into
the cooking oil. The frying process is closely monitored by an employee. After they are cooked,
the chips pass under a salting device and then pass by more inspectors, who sort out the
unacceptable finished chips (those that are discolored or too small). The chips then continue on
the conveyor belt to a bagging machine that bags them in one-pound bags. After bagging, the
bags are placed in a box and shipped. Each box holds 15 bags.
The raw potato pieces (eyes and blemishes), peelings, and rejected finished chips are sold to
animal-feed producers for $0.16 per pound. The company uses this revenue to reduce the cost
of potatoes; we would like this reflected in the price standard relating to potatoes.
Sabroso Chips puchases high-quality potatoes at a cost of $0.245 per pound. Each potato
averages 4.25 ounces. Under efficient operating conditions, it takes four potatoes to produce
one 16-ounce bag of plain chips. Although we label bags as containing 16 ounces, we actually
place 16,3 ounces in each bag. We plan to continue this policy to ensure customer satisfaction.
In addition to potatoes, other materials include the cooking oil, salt, bags and boxes. Cooking
oil cost $0.04 per ounce and we use 3.3 ounces of oil per bag of chips. The cost of salt is so
small that we add it to overhead. Bags cost $0.11 each and boxes $0.52.
Out plant produces 8.8 million bags of chips per year. A recent engineering study revealed that
we would need the following direct labor hours to produce this quantity if our plant operates at
peak efficiency.
Raw potato inspection
3,200
Finished chip inspection
12,000
Frying monitor
6,300
Boxing
16,600
Machine operators
6,300
I’m not sure that we can achieve the level of efficiency advocated by the study. In my opinion,
the plant is operating efficiently for the level of output indicated if the hours allowed are about
10 percent higher.
The hourly labor rates agreed upon with the union are:
Raw potato inspectors
$15.20
Finished chip inspectors
$10.30
Frying monitor
$14.00
Boxing
$11.00
Machine operators
$13.00
Overhead is applied on the basis of direct labor dollars. We have found that variable overhead
averages about 116 percent of our direct labor cost. Our fixed overhead is budgeted at
$1,135,216 for the coming year.
Required:
1. Discuss the benefits of a standard costing system for Sabroso Chips.
2. Discuss the president’s concern about using the results of the engineering study to set
the labor standards. What standard would you recommend?
3. Develop a standard cost sheet for Saboros Chips’ plain potato chips.
4. Suppose that the level of production was 8.8 million bags of potato chips for the year as
planned. If 9.5 million pounds of potatoes were used, compute the materials usage
variance for potatoes.
Task 5
Port Co Products is a divisionalized furniture manufacturer. The divisions are autonomous
segments, with each being responsible for its own sales, costs of operations, working capital
management, and equipment acquisitions. Each division serves a different market in the
furniture industry. Because the markets and products of the division are so different, there
have never been any transfers between divisions.
The Commercial Division manufactures equipment and furniture that is purchased by the
restaurant industry. The division plan to introduce a new line of counter and chair units that
feature a cushioned seat for the counter chairs. John Kline, the divisional manager, has
discussed the manufacture of the cushioned seat with Russ Fiegel of the Office Division. They
both believe a cushioned seat currently made by the Office Division for use on its deluxe office
stool could be modified for use on the new counter chair. Consequently, John asked Russ for a
price for 100 unit lots of the cushioned seat. The following conversation took place about the
price to be charged for the cushioned seats.
Russ: John, we can make the necessary modifications to the cushioned seat easily. The
materials used in your seat are slightly different and should cost about 10 percent more than
those used in our deluxe office stool. However, the labor time (0.5 DLH) should be the same
because of the seat fabrication operation basically is the same. I would price the seat at our
regular rate – full cost plus 30 percent markup.
John: That’s higher than I expected, Russ. I was thinking that a good price would be your
variable manufacturing costs. After all, your capacity costs will be incurred regardless of this
job.
Russ: John, I’m at capacity. By making the cushion seats for you, I’ll have to cut my production
deluxe office stools. Of course, I can increase my production of economy office stool.
Fortunately, I can switch my labor force between these two models of stools without any loss
of efficiency. As you know, overtime is not a feasible alternative in our community. I’d like to
sell it to you at variable cost, but I have excess demand for both products. I don’t mind changing
my product mix to the economy model if I get a good return on the seats I make for you. Here
are my standard costs for the two stools and a schedule of my manufacturing overhead.
Office Division
Standard Costs and Prices
Deluxe
Economy
Office Stool
office stool
Materials, framing
$8.15
$9.76
Cushioned seat, padding
$2.40
-
Vinyl
$4.00
-
Model seats (purchased)
$-
$6
Direct labor :
1.5 DLH @$7.5
$11.25
0.8 DLH @$7.50
$6
Manufacturing overhead
1.5 DLH@12.80
$6
0.8 DLH @$12.80
$19.20
Total standard costs
$45.00
$32.00
Selling price (30% markup)
$58.50
$41.60
Office Division
Manufacturing Overhead Budget
Overhead
Item
Nature
Amount
Supplies
variable-at current market prices
$420,000
Indirect labor
variable
$375,000
Supervision
non variable
$250,000
Power
use varies with activity; rates are fixed
$180,000
Heat and light
non variable – light is fixed regardless of
Production while heat/air conditioning
Varies with fuel charges
$140,000
Property taxes
And insurance
Non variable-any charge in amounts/rates
Is independent of production
$200,000
Depreciation
Fixed dollar total
$1,700,000
Employee benefits
20% of supervision, direct and indirect labor
$575,000
Total overhead
`
$3,840,000
Capacity in DLH
300,000
Overhead rate/DLH
$12.80
John: I guess I see your point, Russ, but I don’t want to price myself out of the market. Maybe
we should talk to corporate management to see if it can give us any guidance.
Required:
1. John Kline and Russ Fiegel did ask PoertCo’s corporate management for guidance on an
appropriate transfer price. Corporate management suggested that they consider using a
transfer price based upon variable manufacturing cost plus opportunity cost. Calculate a
transfer price for the cushioned seat based upon variable manufacturing cost plus
opportunity cost.
2. Which alternative transfer pricing system – full cost, variable manufacturing cost, or
variable manufacturing cost plus opportunity cost – would be best as the underlying
concept for an intracompany transfer price policy? Explain your answer.
Task 6
The maternity wing of the city hospital has two types of patients: normal and cesarean. The
standard quantities of labor and materials per delivery for 2013 are:
Normal
Cesarean
Direct materials (lbs)
9.0
21
Nursing labor (hrs)
2.5
5
The standard price paid per pound of direct materials is $10. The standard rate for labor is $16.
Overhead is applied on the basis of direct labor hours. The variable overhead rate for maternity
is $30 per hour, and the fixed overhead rate is $40 per hour.
Actual operating data for 2013 are as follows:
a. Deliveries produced : normal, 4,000 ; cesarean, 8,000.
b. Direct materials purchased and used: 200,000 pounds at $9.50 – 35,000 for normal
maternity patients and 165,000 for the cesarean patients; no beginning or ending raw
materials inventories.
c. Nursing labor: 50,700 hours – 10,200 hours for normal patients and 40,500 hours for the
cesarean; total cost of labor $580,350.
Required:
1. Prepare a standard cost sheet showing the unit cost per delivery for each type of
patient.
2. Compute the material price and usage variances for each type of patient.
3. Compute the labor rate and efficiency variances for each type of patient.
4. Assume that you know only the total direct materials used for both products and the
total direct labor hours used for both products. Can you compute the total materials
usage and labor efficiency variances? Explain.
5. Standard costing concepts have been applied in the health-care industry. For example,
diagnostic-related groups (DRGs) are used for prospective payments for Medicare
patients. Select a search engine (such as Yahoo! Or Google), and conduct a search to see
what information you can obtain about DRGs. You might try “Medicare DRGs” as a
possible search topic. Write a memo that answers the following questions:
a.
b.
c.
d.
What is a DRG?
How are DRGs established?
How many DRGs are used?
How does the DRG concept relate to standard costing concepts discussed in the
chapter? Can hospitals used DRGs to control their costs? Explain.
Task 7
Tapa Products is a division of West Jakarta Inc. During the coming year, it expects to earn
income of $310,000 based on sales $3.45 million. Without any new investments, the division
will have average operating assets of $3 million. The division is considering a capital investment
project – adding knitting machines to produces gaiters- that requires an additional investment
of $600,000 and increases net income by $57,500 (sales would increase by $575,000). If made,
the investment would increase beginning operating assets by $600,000 and ending operating
assets by $400,000. Assume that the actual cost of capital for the company is 7% (note: round
all answers to four decimal places).
Required:
1. Compute the ROI for the division without the investment.
2. Compute the margin and turnover ratios without the investment. Show that the product
of the margin and turnover ratios equals the ROI compute in requirement 1.
3. Compute the ROI for the division with the new investment. Do you think the divisional
manager will approve the investment?
4. Compute the EVA of the division with and without the investment. Should the manager
decide to make the knitting machine investment?
Task 8
The manager of a division that produces add-on products for the automobile industry has just
been presented the opportunity to invest in two independent projects. The first is an air
conditioner for the back seats of vans and minivans. The second is a turbocharger. Without the
investments, the division will have average assets for the coming year of $28.9 million and
expected operating income of $4.335 million. The outlay required for each investment and the
expected operating incomes are as follows:
Airconditioner
Turbocharger
Outlays
$750,000
$540,000
Operating income
$90,000
$82,080
(Note : round all numbers to two decimal places)
Required:
1. Suppose that the company sets a minimum required rate of return equal to 14%.
Calculate the residual income for each of the following four alternatives:
a. The air conditioner investment is made.
b. The turbocharger investment is made.
c. Both investment are made.
d. Neither additional investment is made.
Which option will the manager choose based on residual income? Explain.
2. Suppose that the company sets a minimum required rate of return to 10%. Calculate the
residual income for each of the following for alternatives:
a. The air conditioner investment is made.
b. The turbocharger investment is made.
c. Both investments are made.
d. Neither additional investment is made.
Based on residual income, are the investments profitable? Why does your answer differ
from your answer in requirement 1? Explain.
Task 9
Dora Inc has decided to use EVA to evaluate its performance. Las year, Dora had after-tax
operating income of $700,000. Two sources of financing were used by the company: $6 million
of mortgage bonds paying 6% interest and $18 million in common stock, which was considered
to be relatively more risky than other stocks and had a risk premium of 8 percent. The rate on
long-term treasury bonds is 3 percent. Dora inc has $8,000,000 in operating assets and pays a
marginal tax rate of 25%.
Required:
1. Calculate the weighted average cost of capital for Dora Inc.
2. Calucalate EVA for Dora inc . Is Dora creating wealth or not? Explain.
Now suppose that Dora Inc is considering borrowing $4,000,000 in unsecured bonds at a rate of
9 percent. The money will be used to purchase additional operating assets of $2,000,000
(making total operating assets $10,000,000). This added investment will enable the company to
manufacture products that are budgeted to increase after-tax operating income by $160,000.
(total after-tax operating income will be $860,000).
Required:
3. Calculate the new weighted average cost of capital for Dora Inc.
4. Calculate the EVA for Dora Inc, including the new products. Is the new investment a
good idea? Explain.
Task 10
Great World Inc is a nursery products firm. It has three divisions that grow and sell plants : West
Jakarta, South Jakarta and central Jakarta. Recently, the South Jakarta Division of Great World
Inc acquired a plastics factory that manufactures green plastic pots. These pots can be sold
both externally and internally. Company policy permits each manager to decide whether to buy
or sell internally. Each divisional manager is evaluated on the basis of ROI and EVA.
The West Jakarta Division had bought its plastic pots in lots of 100 from a variety vendors. The
average price paid was $75 per box of 100 pots. However, the acquisition made Rosa, manager
of West Jakarta Division, wonder whether or not a more favorable price could be arranged. She
decided to approach Laura, manager of the South Jakarta Division, to see if she wanted to offer
a better price for an internal transfer. She suggested a transfer of 3,500 boxes at $70 per box.
Laura gathered the following information regarding the cost of a box of 100 pots:
Direct materials
$
35
Direct labor
$
8
Variable overhead
$
10
Fixed overhead *)
$
10
Total unit cost
$
63
*) fixed overhead is base on $200,000/20,000 boxes
Selling price
$
75
Production capacity
20,000 boxes
Required:
1. Suppose that the plastics factory is producing at capacity and can sell all that it produces
to outside customers. How should Laura respond to Rosa’s request for a lower transfer
price?
2. Now assume that the plastics factory is currently selling 16,000 boxes. What are the
minimum and maximum transfer prices? Should Laura consider the transfer at $70 per
box?
3. Suppose that Great World’s policy is that all transfer prices be set at full cost plus 20%.
Would transfer take place? Why or why not?
Task 11
Print Electronic Inc manufactures a variety of printers, scanners and fax machines in its two
divisions: the PSF Division and the Components Divisions. The component Divisions produces
electronic components that can be used by the PSF division. All the components this division
produces can be sold to outside customers. However, from beginning, nearly 90% of its output
has been used internally. The current policy requires that all internal transfers of components
be transferred at full cost.
Recently, Carol, the chief executive officer of Print Electronic Inc, decided to investigate the
transfer price policy. He was concerned that the current method of pricing internal transfers
might force decisions by divisional managers that would be suboptimal for the firm. As part of
his inquiry, he gathered some information concerning Component Y34, which is used by the PSF
Division in its production of a basic scanner, Model SC 67.
The PSF division sells 40,000 units of Model SC67 each year at a unit price of $42. Given current
market conditions, this is the maximum price that the division can charge for Model SC67. The
cost of manufacturing the scanner follows:
Component Y34
$6.50
Direct materials
$12.50
Direct labor
$3
Variable overhead
$1
Fixed overhead
$15
Total unit costs
$38
The scanner is produced efficiently, and no further reduction in manufacturing costs is possible.
The manager of the Components Division indicated that she could sell 40,000 units (the
division’s capacity for this part) of component Y34 to outside buyers at $12 per unit. The PSF
division could also buy the part for $12 from external suppliers. She supplied the following
details on the manufacturing cost of the components:
Direct materials
$2.50
Direct labor
$0.50
Variable overhead
$1.00
Fixed overhead
$2.50
Total unit costs
$6.50
Required:
1. Compute the firmwide contribution margin associated with Component Y34 and Model
SC 67. Also, compute the contribution margin earned by each division.
2. Suppose that Carol abolishes the current transfer price policy and gives divisions
autonomy in setting transfer prices. Can you predict what transfer prices the manager of
the component divisions will set? What should be the minimum transfer price for this
part? The maximum transfer price?
3. Given the new transfer pricing policy, predict how this will affect the production
decision of the PSF Division manager for Model SC67. How many units of component
Y34 will the manager of the PSF Division purchase, either internally or externally?
4. Given the new transfer price set by the Component Division and your answer to
requirement 3, how many units of Y34 will sold externally?
5. Given your answers to requirement 3 and 4, compute the firmwide contribution margin.
What has happened? Was Carol’s decision to grant additional decentralization good or
bad?
Task 11
Techno has two divisions: Auxiliary components and Audio Systems. Divisional managers are
encouraged to maximize ROI dand EVA. Managers are essentially free to determine whether
goods will be transferred internally and what will be the internal transfer prices. Headquaters
has directed that all internal prices be expressed on a full cost-plus basis. The markup in the full
cost pricing arrangement, however, is left to the discretion of the divisional managers. Recently,
the two divisional managers met to discuss a pricing agreement for a subwoofer that would be
sold with a personal computer system. Production of the subwoofers is at capacity. Subwoofers
can be sold for $31 to outside customers. The Audio systems Division can also buy the
subwoofer from external sources for the same price; however, the manager of this division is
hoping to obtain a price concession by buying internally. The full cost of manufacturing the
subwoofer is $20. If the manager of the Auxiliary Components Divisions sells the subwoofer
internally, $5 of selling and distribution costs can be avoided. The volume of business would be
250,000 units per year, which is well within the capacity of the producing divisions.
After some discussion, the two managers agreed on a full cost-plus pricing scheme that would
be reviewed annually. Any increase in the outside selling price would be added to the transfer
price by simply increasing the markup by an appropriate amount. Any major changes in the
factors that led to the agreement could initiate a new round of negotiation. Otherwise, the full
cost-plus arrangement would continue in force for subsequent years.
Required:
1. Calculate the minimum and maximum transfer prices
2. Assume that the transfer price agreed on between the two managers is halfway
between the minimum and maximum transfer prices. Calculate this transfer price. What
markup over full cost is implied by this transfer price?
3. Refer to requirement 2. Assume that in the following year, the outside price of
subwoofers increases to $32. What is the new full cost-plus transfer price?
4. Assume that 2 years after the initial agreement, the market for subwoofers has softened
considerably, causing excess capacity for the Auxiliary Components division. Would you
expect a renegotiation of the full cost plus pricing agreement for the coming year?
Explain.
Task 12
Jarum Inc , has a number of division including a furniture division and a hotel division. The Hotel
Division owns and operates a line of budget hotel located along major highways. Each year, the
Hotel Division purchases furniture for the hotel rooms. Currently, it purchases a basic dresser
from an outside supplier for $42. Clara, manager of the Furniture Division, has approached
Gondo Sri, manager of Hotel Division, about selling dressers to the Hotel Division. Clara
researched the dresser costs and determined the following costs:
Direct materials
$8
Direct labor
$4
Variable overhead
$3
Fixed overhead
$12
Total manufacturing costs
$27
Currently, the Furniture Division has capacity to produce 75,000 dressers but is only producing
60,000. The Hotel division need 10,000 dressers per year.
Required:
1. What is maximum transfer price? The minimum transfer prices? Should transfer price
occur?
2. Suppose Clara and Gondo Sri agree on a transfer price of $30. What is the benefits to
each division? What is the benefit to the company as a whole?
3. Suppose that the Furniture Division were operating at capacity. What would be the
maximum transfer price? The minimum transfer price? Should the transfer price take
place in this case? Why or why not?
Task 13
Cordova Company produces a variety of chemicals. One division makes reagents for
laboratories. The division’s projected income statement for the coming year is:
Sales 203,000 units @$70
$
14,210,000
Total variable cost
$
8,120,000
Contribution margin
$
6,090,000
Total fixed costs
$
4,945,500
Operating income
$
1,144,500
Required:
1. Compute the contribution margin per unit and calculate the break-even point in units .
calculate the contribution margin ratio and the break even sales revenue.
2. The divisional manager has decided to increase the advertising budget by $250.000. this
will increase sales revenues by $1 million. By how much will operating income increase
or decrease as a result of this action?
3. Suppose sales revenue exceed the estimated amount on the income statement by
$1,500,000. Without preparing a new income statement, by how much are profits
underestimated?
4. Compute the margin of safety on the original income statement?
5. Compute the degree of operating leverage based on the original income statement. If
sales revenue are 8% greater than expected, what Is the percentage increase in
operating income?
Task 14
Beat Company produces two types of audio players: Basic Audio and High end Audio. The
projected income for the coming year, segmented by product line, follows:
Basic Audio
High End Audio
Total
Sales
$3,000,000
$2,400,000
$5,400,000
Total variable cost
$1,000,000
$1,000,000
$2,000,000
Contribution margin
$2,000,000
$1,400,000
$3,400,000
Direct fixed costs
$778,000
$650,000
$1,428,000
Product/segment margin
$1,222,000
$750,000
$1,972,000
Common fixed cost
$198,900
Operating income
$1,773,100
The selling prices are $30 for Basic Audio and $60 for the high end Audio.
Required:
1. Compute the number of units of each product that must sold for Beat Company to break
even.
2. Assume that the markeing manager changes the sales mix of two products that the ratio
is five basic audio to three high end audio. Repeat requirement 1
3. Refer to the original data. Suppose that Beat Company can increase the sales of Basic
audio with increase advertising. The extra advertising would cost an additional
$195,000, and some of the potential purchasers of the basic Audio would switch to high
end audio. In total, sales of high end audio would increase by 12,000 units and sales of
basic audio would decrease by 5,000 units. Would Beat company be better off with this
strategy?
Module Assignment
Using annual report of manufacturing companies listed in Jakarta Stock Exchange (BEI), ,
compute, explain and make some evaluation about companies performance using Return on
investment, residual income and Economic value added. Refer your computation on past five
years.