Management Accounting Assignment Brief

Question 1

A government department is required by government policy to establish a strategic plan and to develop methods for measuring the performance of the strategic initiatives. In other words, it must implement a strategic-based responsibility accounting system. One possibility that is being explored for satisfying this mandate is the use of the Balanced Scorecard. This strategic management approach has been successfully used u the private sector. However, in governmental settings, outcomes are based on mission success rather than financial success. This fundamental difference creates a number of interesting questions:

• Can the Balanced Scorecard be adapted to fit a governmental setting?
• If so, how would it be adapted (i.e. what are the changes)?
• Are there any successful applications of the Balanced Scorecard in state or local government agencies in Australiaor New Zealand?
• What are examples of core measures and lead indicators?
• What are the desired characteristics of measures in the government sector?
• What are the limitations or weaknesses of this approach for this setting?

Required: Search the Internet to obtain information that will allow you to answer the above questions.

Question 2

Pearson Manufacturing s engaged in the production of chemicals for industrial use. One factory specialist in the production of chemicals used in the copper industry, two compounds are produced: çomp0und X-12 and compound S-15. Compound X-12 was originally developed by Pearson’s chemists and played a key role in copper extraction from low-grade ore. The patent for X-12 has expired and competition in this market has intensified dramatically. Compound X-12 produced the highest volume of activity and for many years was the only chemical compound produced by the factory. Five years ago. S-15 was added. Compound S-15 is more difficult to manufacturer and requires special handling and set-ups. For the first three years after the addition of the new product, profits increased. In the last two years. however the factory has faced intense competition and its sales of X-12 have dropped. In fact, the factory showed a small loss in the most recent reporting period. The factory manager is convinced that competing producers have been guilty of selling X-12 below the cost to produce it—perhaps with the objective of expanding the e-market share. The following conversation between Diane Woolridge, factory manager, and Rick Dixon, divisional marketing manager, reflects the concerns of the division about the future of the factory and its products,

                                                                          

                                                                                                            

• Rick: You know. Diane, the divisional manager is very concerned about the factory’s trend. He indicated that in this budgetary environment, we cannot afford to many factories that don’t show a profit. We shut one down must last month because it couldn’t handle the competition.
• Diane: Rick, our compound X-12 has a reputation for quality and value—we have a very pure product. It has been a mainstay (or years. I don’t understand what’s happening.
• Rick: I lust received a call from one of our major customers concerning X-12. He said that a sales representative from another firm had offered the chemical at $10 per kilogram —about SB less than what we ask. It’s ha-d to compete with a price like that. Perhaps the factory Is simply obsolete.
• Diane: No. I don’t agree. We have good technology. I think that we are efficient. And it’s costing a little more than $10 to produce X-12; I don’t see how these companies can afford to sell it so cheaply. I’m not convinced that we should meet the price. Perhaps we should emphasis producing and selling more of S-15. Our margin is high on this product, and we have virtually no competition for it. We just recently raised the price per kilogram and our customers didn’t blink an eye.
• Rick: You may be right. I think we can increase the price even more and not lose business. I called a few customers to see how they would react to a 25% increase in price, and they all said that they would S15 purchase the same quantity as before.
• Deane: It sounds promising. However, before we make a major commitment to S-15, 1 think we had better explore other possible explanations. The market potential is much less than that for X-12. I want to know how our production costs compare with our competitors costs. Perhaps we could be more efficient and find a way to earn our normal return on X-12. Besides, my production people hate producing S-15. It’s very difficult to produce.

After meeting with flick, Diane requested an investigation of the production costs and comparative efficiency. Independent consultants were hired. After a three-month assessment, the consulting group provided the following information on the factory’s production activities and costs associated with the two products:

	X-12	S-15
Production (kilograms)	1,000,000	2,00,000
SeIIing price	$15.93	$12.00
Overheads per unit	$6.41	$2.89
Prime cost per kilogram	$4.27	$3.13
Number of production runs	100	200
Receiving orders	400	1000
Machine hours	125000	60,000
Direct labour hours	250,000	22,500
Engineering hours	5,000	5,000
Materials handling (number of moves)	500	400

The consulting our recommended switching the overhead assignment to activity-based approach. It maintained that activity-based costing assignment is more accurate d will provide better information for decision making. To facilitate this recommendation the factory’s activities were grouped into homogeneous sets based on common processes, activity levels and consumption ratios, The costs of hose pooled acuities follow:

Overhead pool:
Set-up costs                          $240,000
Machine costs                       1,750,000
Receiving costs                     2,100,000
Engineering costs                   2,200,000
Materials 4iandling costs         900,000
Total                                      $71 90,000

Required

1. Verify the overhead cost per unit reported by the consulting group using direct labour hours to assign overheads. Calculate the per-unit gross margin for each product.
2. Recalculate the unit cost of each product using activity-based costing. Calculate the per-unit gross margin for each product.
3. Should the company switch its emphasis from the high-volume product to the low-volume product? Comment on the validity of the factory manager’s concern that competitors are selling below the cost of producing Compound X-12.
4. Explain the apparent lack of competition for S-15. Comment also on the willingness of customers to accept a 25% increase, in price for this compound.
5. Describe what actions you would take based on the information provided by the activity-based Unit Costs.