Recently John has been concerned that his company may be wasting too much money on unnecessary costs,so he decided to hire someone to analyse his company’s numbers and do some management accounting. Here quested his general manager, Paul, to hire someone who can fulfil this management accounting task.For doing some management accounting analyses, Paul hired George the Plumber. George is a licensed plumber. Also, George is Paul’s brother-in-law and had been looking for a full-time job for a while. Paul has explained to the owner of Fridges-R-Fun that George understands a lot about pipes, so he was pretty sure he would exceed on his role.
Please state one of the ethical standards, as provided by the Institute of Management Accountants (IMA)Statement of Ethical Professional Practice, which is being jeopardized by Paul hiring George the Plumber and justify why this standard is being jeopardized. (There might be more than one ethical standard being jeopardized but only one is required for this question).
John is proud of his ‘learning as you go approach’. Since his early days in the industry, John enjoys reworking
on fridges for fixing problems. Often Fridges-R-Fun products display problems on the welding between heat exchanging pipes and the compressor. Also, it is not uncommon having customers requesting repairs or
replacements due to problems with their fridges during the 5 years warranty.
John and Paul are concerned that Fridges-R-Fun is wasting too much money. So, Paul has hired Ringo for doing some management accounting. (George the Plumber did not last a month in the job). Ringo is a qualified management accountant and is keen to use his knowledge to assist Fridges-R-Fun.
Ringo reviewed the quality costs activities (Year 1) and noted that Fridges-R-Fun has been spending too much money on warranties. With the support of both John and Paul, Ringo decided to implement the following changes:
• Develop a new system for streamlining the assembly line.
• Provide technical support to suppliers for minimizing the chances of receiving faulty material.
• Field testing of fridges at customers’ sites.
• Inspection of fridges on assembling line.
The amounts spent on quality costs are listed on Table 1:
Table 1 – Quality Costs
Activity Year 1 Year 2 Year 3
Systems development $ $ 200 $ 100
Technical support to suppliers of compressors $ $ 150 $ 150
Technical support to suppliers of pipes $ $ 100 $ 100
Field testing at customers’ sites $ $ 250 $ 250
Inspection on assembling line $ $ 500 $ 500
Rework on assembling line $ 500 $ 100 $
Warranty repairs of fridges $ 700 $ 600 $ 500
Warranty replacements of fridges $ 1,500 $ 1,300 $ 1,100
Total quality costs $ 2,700 $ 3,200 $ 2,700
a) Classify the 8 activities among the four types of quality costs.
b) Using the information provided in Table 1, explain the relationship between the four types of quality
costs and what has changed throughout the years.
When the quality costs for Year 3 were ready, John was disappointed with the outcome. The total quality costs have increased in Year 2 and finally, in Year 3 the company was back to square zero, spending $ 2,700 in quality costs. Paul was supportive of Ringo’s decisions and argued that quality is a long-term investment as it takes time to reap its benefits.
a) Explain John and Paul’s differing points of view of quality costs.
b) Explain what is expected to happen in Year 4 if (i) Fridges-R-Fun keeps following Ringo’s decision and
if (ii) Fridges-R-Fun cancels the activities Ringo has implemented.
Ringo is working on the expenses of delivering fridges to customers. Expenses for six months are compiled in Table 2.
Table 2 – Delivery Expense
Month Fridges delivered Delivery expense
January 450 $ 4,600
February 280 $ 3,000
March 400 $ 4,100
April 550 $ 5,700
May 500 $ 5,000
June 450 $ 4,700
Total 2,630 $ 27,100
a) Using the high-low method and the information provided in Table 2,
estimate the variable and the fixed portions of the delivery expense
b) After reviewing Ringo’s estimated delivery expenses using the high-low method, Paul has noted that the estimated expenses do not exactly match the actual expenses for all months in Table 2. Why is this happening?
Ringo has implemented a job-order costing system for Fridges-R-Fun using predetermined overhead rates. For this part, the focus is on two different processes in Fridges-R-Fun, namely, welding the pipes to the compressor and assembling the fridges. The predetermined overhead rate for welding is based on machine-hours and the predetermined overhead rate for assembly is based on direct labour-hours.
Ringo has compiled the following estimates for Year 1:
Table 3 – Estimates for Year 1
Estimates Welding Assembly
Direct labour-hours 3,600 7,200
Machine-hours 6,000 600
Fixed manufacturing overhead cost $ 288,000 $ 64,800
Variable manufacturing overhead per machine-hour $ 2.00 $ –
Variable manufacturing overhead per direct labour-hour $ – $ 1.00
The plan is to use the implemented job-order costing system for the following job:
Table 4 – Job
Job Welding Assembly
Direct labour-hours 25 80
Machine-hours 40 5
Direct materials $ 500 $ 200
Direct labour cost $ 300 $ 800
Based on this specific job, answer the following questions:
a) Calculate the predetermined overhead rates used for welding and assembly.
b) Calculate the total overhead cost applied to this specific job.
c) Calculate the total manufacturing cost recorded for this specific job.
d) Considering that this specific job contains 100 units, calculate the unit product cost.
e) Considering the industry benchmark for the overhead for assembly is 75% of direct labour cost, identify whether this specific job has an overhead for assembly lower or higher than a job using the industry benchmark. Briefly explain what could cause a difference between this specific job and the industry benchmark for the assembly overhead cost.
Question 6 After the changes implemented on the costs of quality presented in Question 2, Ringo wants to implement value-based pricing for Fridges-R-Fun products. As a consequence, the price of fridges would become customised to different customers based on criteria such as geographic location. Currently, Fridges-R-Fun uses cost-plus pricing for setting the prices of its products, as discussed by Dholakia (2018).
a) List and explain three limitations of using cost-plus pricing, as discussed by Dholakia (2018). (6 marks)
b) Explain how value-based pricing would benefit from the costs of quality changes implemented by
Ringo, as discussed in Question 2.
Ringo is reviewing the predetermined overhead rate used to estimate the welding overhead cost Year 1. The estimated total welding overhead cost is $ 300,000 and the estimated level of activity is 6,000 machine-hours. By the end of the year, Fridges-R-Fun incurred actual total manufacturing overhead cost for welding of $320,000 and 5,800 total machine hours.
a) Determine the amount of underapplied or overapplied manufacturing overhead for Year 1.
b) What is the implication of having large overapplied or underapplied overhead to the management planning and product costing?