ACCOUNTING FOR MANAGERIAL DECISION MAKING

Case 1

WeRConsultants offers three professional services to its clients:
(1) managementconsultancy,

(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 Professional labour Numbers of Professionallabour Salary per person per year Total salary
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 indi
vidual professional services:
Management
consultancy
Corporate
Training
Outbound
Program
Total
Square metre of
building space
occupied by each
service
600 1,200 500 2,300
Number of clients
per year
30 70 60 160
Number of
subcontract
services per year
50 100 300 450
d. Professional labour allocations to
individual prof
essional services:
Management
consultancy
Corporate
training
Outbound
program
Consultants 5 – –
Team leaders 2 3 3
Trainers 2 7 3
3
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
(4.5 marks)
DingedIn manufactures Sweaters and Jump
ers. The company’s product line
projected income statement follows:
Total Din
g
edIn’s
Sweaters
Din
g
edIn’s
Jumpers
Sales revenue $840,000 $620,000 $220,000
Cost of Goods Sol
d
Variable 203,000 128,000 75,000
Fixe
d
300,000
202,000
98.000
Total Cost of Goods Sol
d
503,000
330,000
173,000
Gross profit 337,000 290,000 47,000
Marketin
g
and administrative expenses
Variable 150,000 78,000 72,000
Fixe
d
115,000
88,000
27,000
Total marketin
g
and administrative expenses 265,000
166,000
99,000
Operating income (loss) $ 72,000
$124,000
$ (52,000
)
Management is considering to disconti
nue 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 opini
on about whether or not the DingedIn’s
Jumpers product line should be dropped.

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