Management Accounting with a Strategic Perspective Assignment-
Scenario -
You are a management accountant at Mirror Tools Limited (Mirror Tools) and report to Marshall Singh, who is the chief financial officer. Mirror Tools manufactures 20 different types of power tools.
Marshall has asked you to examine the use of Activity Based Costing (ABC) to gain a better understanding into the costs of the company's products. He has asked you to carry out a pilot study on three products from the hand-held tools division.
The following products have been selected for the pilot study: Rotary hammer.
Finishing grinder.
Cordless drill.
Marshall has advised you that he has some concerns about the existing allocation of costs. His concerns are:
1. In analysing the data collected, Marshall notes that the company's traditional costing system allocates manufacturing overheads to products on the basis of direct labour hours. The company also treats selling and administrative overheads as a lump sum, below the manufacturing margin line. Marshall is concerned because:
a) He suspects many of the overhead costs are not directly related to labour hours and that there are other relevant cost drivers.
b) He also suspects that some products require more selling and administrative overheads than others.
2. Marshall is also concerned that the combined effects of these distortions are leading to an inaccurate picture of the profitability of individual products.
To prepare for the pilot study, you have gathered the following information from the company's financial and manufacturing systems.
Required:
1. Calculate the profitability of the three products in the pilot study, using the traditional method of cost allocation. (Show workings).
2. Calculate the profitability of the three products using ABC. (Show workings).
3. Prepare a briefing note to Marshall that summarises how the ABC information may be used to improve managerial decision-making (activity-based management (ABM)). (300-500 words, fully referenced).
4. Identify and explain key practical issues that may be faced by Mirror Tools in implementing ABC for all of its products. (300-500 words, fully referenced).
Q1 and Q2: Calculation with workings, Q3 and Q4: 400 words each/