ACCOUNTING FOR MANAGERIAL DECISION MAKING

ACCOUNTING FOR MANAGERIAL DECISION MAKING Case 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.