ACCOUNTING FOR MANAGERIAL DECISION MAKING

ACCOUNTING FOR MANAGERIAL DECISION MAKINGCase 1 ;

WeRConsultants offers three professional services to its clients: (1) management
consultancy, (2) corporate training, and (3) outbound program.

Ruby Rahme, the chief accountant of the company, wants to apply the Activity-
Based Costing (ABC) system to determine the cost of each service. She obtains
the following cost information for 2014 as follows:

a. Professional labour annual salaries:
Type of Numbers of Salary per Total salary
Professional Professional person per year
labour labour per year
Consultants 5 $ 120,000 $ 600,000
Team Leaders 8 75,000 600,000
Trainers 12 40,000 480,000
b. All other 2014 annual costs are support costs, and categorised into four
activity costs, as follows:
Supplies $ 45,000
Building rent and maintenance 80,500
Administrative costs to manage clients 240,000
Subcontract services 90,000
$ 455,500
c. Consumption of supplies depends on the number of clients per year.
Other information about individual professional services:
Management Corporate Outbound Total
consultancy Training Program
Square metre of 600 1,200 500 2,300
building space
occupied by each
service
Number of clients 30 70 60 160
per year
Number of 50 100 300 450
subcontract
services per year
d. Professional labour allocations to individual professional services:
Management Corporate Outbound
consultancy training program
Consultants 5 – –
Team leaders 2 3 3
Trainers 2 7 3
2
Required:

a. Using the Activity-Based Costing data presented above, choose the most
appropriate cost driver for each activity pool, and compute the cost-driver
rate for each activity. (3 marks)

b. Compute the annual cost of each professional service for 2014. (7.5 marks)
Case 2

DingedIn manufactures Sweaters and Jumpers. The company’s product line
projected income statement follows:
Total DingedIn’s DingedIn’s
Sweaters Jumpers
Sales revenue $840,000 $620,000 $220,000
Cost of Goods Sold
Variable 203,000 128,000 75,000
Fixed 300,000 202,000 98.000
Total Cost of Goods Sold 503,000 330,000 173,000
Gross profit 337,000 290,000 47,000
Marketing and administrative expenses
Variable 150,000 78,000 72,000
Fixed 115,000 88,000 27,000
Total marketing and administrative expenses 265,000 166,000 99,000
Operating income (loss) $ 72,000 $124,000 $ (52,000)
Management is considering to discontinue the DingedIn’s Jumpers product line.
Management accountants for the company estimate that dropping the DingedIn’s
Jumpers line will decrease total fixed Cost of Goods Sold by $45,000 and total
fixed marketing and administrative expenses by $9,500.
Required:

Prepare an analysis supporting your opinion about whether or not the DingedIn’s
Jumpers product line should be dropped.

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