DEPARTMENT OF
ACCOUNTING AND
CORPORATE
GOVERNANCE
Faculty of Business
and Economics
ACCG200/613 | Case Study |
Session 1, 2019
CASE STUDY PRESENTATION (10%)
Case Study
Case Study Presentation (10%)
Case Study Presentation (10%)
Students are required to analyse the case and present their answers in a group presentation
in the week 8 tutorial. The duration of the group presentation should be a maximum of
10 minutes. At the tutor’s discretion, students will be assigned to a group of 3 or 4 students
in the week 3 tutorial. No individual presentation is allowed. Each student within the group
must participate and deliver the presentation. Each student should speak for a minimum
of 2 minutes. Students are required to submit their PowerPoint slides (A maximum of 8
slides per group) to their tutors via email at least one day before their presentation due
date.
The case study presentation will be graded based on both the students' ability to answer the
questions and their presentation skills. Feedback on the case study presentation will be
provided to students in the form of a feedback sheet upon the completion of marking.
Students within the same group will be assessed individually based on the groups submitted
slides and their individual presentation. A mark of ZERO will be awarded for absence or
non-presentation. There is no make-up or supplementary presentations in this unit. Any
group member or group leaving the tutorial early (after they have presented) will be
awarded a mark of ZERO.
2
Case Study
Case Study Presentation (10%)
Tracy Corporation
The Tracy Corporation has a machining facility specialising in jobs for the aircraft-components market.
Tracy’s previous simple job-costing system had two direct-cost categories (direct materials and direct labour)
and a single indirect-cost pool (manufacturing overhead, allocated using direct labour-hours). The indirect
cost-allocation rate of the simple system for 2019 would have been $115 per direct manufacturing labourhour. However, the firm has come under increasing price pressure from other competitors and has been losing
market share over the past three years.
The CEO of Tracy Corporation, Tracy Clarkson, was concerned about the business performance and had a chat
with the CFO, Leonard Bryner.
Tracy Clarkson: Leonard, why can’t we compete with these other companies? Are we really that inefficient?
Leonard Bryner: As I raised this in our last executive meeting, it is due to an outdated costing system. It
was apparent that our current system is distorting product costs. I will compile some
data to show you what I mean…
Leonard gathered the basic information needed to implement an activity-based costing system in the
following table. Specifically, the two direct-cost categories were retained. Leonard decided to replace the
single indirect-cost pool with five indirect- cost pools. The cost pools represent five activity areas at the plant,
each with its own supervisor and budget responsibility. Pertinent data are as follows:
Activity Area
Activity Driver
Activity Rate
Materials handling
Parts
$ 0.40
Lathe work
Lathe turns
0.20
Milling
Machine-hours
20.00
Grinding
Parts
Testing
Units tested
0.80
15.00
Two representative jobs processed under the ABC system at the plan in the most recent period had the
following characteristics:
Direct material cost per job
Direct manufacturing labour cost per job
Number of direct manufacturing labour-hours per job
Parts per job
Lathe turns per job
Machine-hours per job
Units per job (all units are tested)
Job 410
Job 411
$9,700
$59,900
$750
$11,250
25
375
500
2,000
20,000
60,000
150
1,050
10
200
3
Case Study
Case Study Presentation (10%)
Before Leonard could report back to Tracy. He received a phone call from his friend, Charlie Davis, certified
management accountant, the firm’s plant manager.
Charlie: Leonard, I’ve gotten wind of your new product cost analysis. There’s no way the costs
anywhere near what your numbers say. I just don’t believe it.
Leonard: Charlie, as you know, our firm has been losing market share over the past three years. We have been
losing more and more bids. At first, I thought that other firms were undercutting simply to gain
business, but after examining some of the public financial reports, I believe that they are making a
reasonable rate of return. I now believe that our costs and costing methods are at fault.
Charlie: I can’t agree with that. We have good control over our costs. Like most firms in our industry, we use
a normal job costing system. I really don’t see any significant waste in the plant.
Leonard: After talking with some other controllers at a recent industrial convention, I’m not so sure that waste
by itself is the issue. They talked about activity-based management, activity-based costing and
continuous improvement. They used ‘activity drivers’ to assign overhead. They claimed that these
new procedures can help to produce more efficiency in manufacturing, better control of overhead
and more accurate product costing. A big deal was made of eliminating activities that added no value.
Our bids are too high because these other firms have found ways to decrease their overhead costs
and to increase the accuracy of their product costing.
Charlie: I doubt it. For one thing, I don’t see how we can increase product costing accuracy. So many of our
costs are indirect costs. Furthermore, everyone uses some measures of production activity to assign
overhead costs. I imagine that what they are calling ‘activity drivers’ is just some new buzzword for
measures of production volume. Fads in costing come and go. I wouldn’t worry about it. I’ll bet that
our problems with decreasing sales are temporary. You might recall that we experienced a similar
problem about 12 years ago- it was two years before it straightened out…
Source: Horngren, C. Datar, S. Foster, G. Rajan, M. and Ittner, C. 2008. Cost Accounting. Pearson: New Jersey.
Required
1. Using the information provided by Leonard
a) Calculate the manufacturing cost per unit for each job under the previous simple job
costing system.
b) Calculate the manufacturing cost per unit for each job under the activity-based costing
system.
c) Compare the per-unit cost figures for Jobs 410 and 411 calculated in requirements a) and b) Why
do the simple and the activity-based costing systems differ in the manufacturing cost
per unit for each job?
d) How might Tracy Corporation use information from its ABC system to better manage it
business?
2. Discuss the ethical issues involved
a) Do you agree or disagree with Charlie Davis and the advice that he gave Lenard Bryner?
Explain.
b) Do you think that Charlie was well informed-that he was aware of the accounting implications of
ABC and that he knew that was meant by activity drivers? Should he have been well informed? Was
there anything wrong or unethical in the behaviour that Charlie displayed? Which of the principles
set out in the Code of Ethics for Professional Accountants have been violated?
c) What are Leonard’s ethical obligations? What should Leonard do?
4
Case Study
Case Study Presentation (10%)
ACCG200/613 Group Presentation Marking Rubrics
Category
Group-based
(15 points)
Individual-based
(15 points)
Scoring Criteria
Total
Points
Information from relevant/appropriate sources is
analysed using relevant/appropriate theories, concepts,
and/or techniques to develop a clear and comprehensive
analysis of the problem.
6
Potential solutions are identified and evaluated with
reference to relevant and appropriate contextual factors
leading to the recommendation of a feasible and
appropriate solution.
6
Length of presentation is within the assigned time limits.
3
Speaker maintains good eye contact with the audience and
is appropriately animated (e.g., gestures, moving around,
etc.).
5
Speaker uses a clear, audible voice and delivery is poised,
controlled, and smooth.
5
Visual aids are well prepared, informative, effective, and
not distracting.
5
Total points
Score
30
Final marks out of 10% weightings
Comments:
5
Input data
Job 410
Direct material cost per job
Direct manufacturing labour cost per job
Number of direct manufacturing labour-hours per job
Parts per job
Lathe turns per job
Machine-hours per job
Units per job (all units are tested)
$9,700
$750
25
500
20,000
150
10
Job 411
$59,900
$11,250
375
2,000
60,000
1,050
200
Overhead allocation rate
$115
1a) Calculate the manufacturing cost per unit for each job under the previous simple job
costing system.
Job 410
Direct material cost per job
Direct manufacturing labour cost per job
manufacturing overhead
Total Manufacturing cost
Number of Units tested
Cost per unit
$9,700
$750
$2,875
$13,325
10
$1,332.50
Job 411
$59,900
$11,250
$43,125
$114,275
200
$571.38
b)Calculate the manufacturing cost per unit for each job under the activity-based costing
system
Input data
Activity Area
Activity Driver
Activity Rate
Materials handling
Parts
$0.40
Lathe work
Lathe turns
0.2
Milling
Machine-hours
20
Grinding
Parts
0.8
Testing
Units tested
15
Job 410
Direct material cost per job
Direct manufacturing labour cost per job
Total variable cost
Materials handling
Lathe work
Milling
Grinding
Testing
manufacturing overhead
Total Manufacturing cost
$9,700
$750
$10,450
$200.00
$4,000.00
$3,000.00
$400.00
$150.00
$7,750.00
$18,200.00
Job 411
$59,900
$11,250
$71,150
$800.00
$12,000.00
$21,000.00
$1,600.00
$3,000.00
$38,400.00
$109,550.00
Number of Units tested
Cost per unit
10
$1,820.00
200
$547.75
c) Compare the per-unit cost figures for Jobs 410 and 411 calculated in requirements a) and b)
Why do the simple and the activity-based costing systems differ in the manufacturing cost per
unit for each job?
Cost per unit for Jobs 410 under ABC costing system is higher than the cost per unit calculated under simple costing
Cost per unit for Jobs 411 under ABC costing system is less than the cost per unit calculated under simple costing sys
The costs per unit vary because under simple costing system, manufacturing overhead is based on direct manufacturin
while under the ABC costing system, the overhead costs is traced to the activities and is based on the cost driver of ea
d) How might Tracy Corporation use information from its ABC system to better manage it
business
Tracy corporation can use ABC system to focus on the activities that add value to the product and eliminate the cost t
Tracy corporation can use ABC system to plan on the modification of its products or manufacturing of unique produc
PART 2
a) Do you agree or disagree with Charlie Davis and the advice that he gave Lenard Bryner?
Explain.
No, I do not agree because Tracy corporation can use ABC system to increase product costing accuracy
by tracing the costs to their activities. The business will be able to determine the activities that add
value to the products and the activities that do not
b) ethical issues
Charlie was not well informed of the accounting benefits of ABC, therefore he needs to be well informed about
the process of ABC system. He needs to know that ABC uses cost drivers to determine the overhead rate
Cost drivers are what cause the cost activities, and if an activity is not adding value to the firm then
Charlie did not display a good behavior when giving out the advices, he was not well informed of ABC costing syste
thereby giving a wrong advice to the business. Charlie violated the principle of Professional Competence and Due Ca
He lacked the continuing duty to maintain professional knowledge and skill at the level required to ensure that the em
competent professional services based on current developments in practice, and techniques
c) What are Leonard’s ethical obligations? What should Leonard do?
Leonard obligation is to ensure that he delivers accurate and reliable information to the employer, and provide an acc
Leonard should replace the current costing system (Simple) with ABC costing system because ABC will improve the
per direct manufacturing labour-hour
ct and eliminate the cost that do not add value to the product
ployer, and provide an accurate data for decision making.
use ABC will improve the company's product cost efficiency.
• ABC is losing a significant market share
• The loss is attributed to high operational costs
• Charlie, the plant manager can’t recognize the
uncontrollable costs
• Charlie was not well-informed
• Most of the company’s costs were not indirect
costs,
• ABC utilizes an unsustainable cost management
model
• ABC is utilizing cost drivers to determine
overhead rates
• The company is losing bids due to the high cost
structure
• ‘Activity drivers’ effectively control costs
• Activity drivers create efficiency, effectiveness,
and accuracy
• Activity drivers rid unprofitable activities and
lower operational costs
• Charlie was not well-informed about the new
activity drivers model
• He called it “new buzzword” for production volume
• Lack of knowledge led to loss of business
• Charlie should have been well-informed
• The company relied on his expertise to make
sound decisions
• The principle of Professional Competence and Due
Care was violated
• A professional should be current and
knowledgeable in area of expertise
• Current knowledge equal to competent advise
• Charlie’s behavior led to loss of business
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