management accounting assignment for Point Piper

Question

Task: How assess and report Point Pipier financial performance and report the finding using management accounting assignment techniques

Answer

Introduction
This management accounting assignment will assess Point Piper financial performance. Point Piper is a manufacturing company which sells child safety seats for more than 10 years. The issue raised in this assignment is whether the new plant which the company is considering will be the right strategic decision for Point Piper or not. Here, to analyse this issue, the different aspects of the company's financial performance related to the strategic decisions and other aspects will be calculated and discussed. In the end, the conclusion report will be made in which it is recommended on whether to construct the new plant or not by the business. Some of the aspects of the business which will be calculated and discussed are the impact of this strategic decision on contribution margin, breakeven point, cash budget and some other aspects.

Themanagement accounting assignmentcase study
The management accounting assignmentcase study aims to analyse the strategic decision to open a new plant and expand the production lines and give recommendations on whether this strategic decision should be accepted.

1. Calculation of CM ratio, Break-even point and operating leverage
a. The CM ratio and the break-even point in seats
The Contribution Margin Ratio is
=(300,000/30,000)/25
=10/25
=0.4

The breakeven point in seats is
=210,000/(300,000/30,000)
=21000 seats
The CM ratio is 0.4, and the breakeven point in seats is 21000 seats.

b. The degree of operating leverage at last year’s sales level
The degree of operating leverage at last year’s sales level is given below.
=(Net Operating Income/Sales)
=90,000/750,000
=0.12

The degree of operating leverage at last year’s sales level is 0.12.

2. Calculation of the new CM ratio and break-even point in seats if the company estimates that variable expenses will increase by $3 per seat next year
The new Contribution Margin Ratio is
=((300,000/30,000)-3)/25
=7/25
=0.28

The new breakeven point in seats is
=210,000/((300,000/30,000)-3)
=210000/7
=30000 seats
The new CM ratio is 0.28, and the new breakeven point in seats is 30000 seats if the variable expense increases by $3 per seat.

3. Referring to the management accounting assignmentdata in (2) above, the calculation of how many seats will have to be sold next year to earn the same net operating income, $90,000, as last year, considering the expected change The number of many seats will have to be sold next year to earn the same net operating income, $90,000, as last year, considering the expected change is
=(210,000+90000)/((300,000/30,000)-3)
=300,000/7
=42857 seats, approximately

The number of seats will have to be sold next year to earn the same net operating income, $90,000, as last year, considering the expected change is 42857 seats.

4. Referringagain to the data in (2) above, the calculation of what selling price per seat must it charge next year to cover the increased labour costs if Point Piper wants to maintain the same CM ratio as last year

Let the new required selling price per seat to be x
The selling price per unit which Point Piper is needed to maintain the same CM ratio as last year to cover the increased labour costs is calculated from the following equation
Or, 0.40 =((300,000/30,000)-3)/x
Or, 0.40=7/x
Or, x =7/0.4
Or, x =17.5

The selling price per seat must it charge next year to cover the increased labour costs if Point Piper wants to maintain the same CM ratio as last year is $17.5.

5. Referring to the management accounting assignmentoriginal data, the calculation of the company’s new CM ratio and the new break-even point in seats if the new plant would slash variable expenses per seat by 40%

The new Contribution Margin Ratio if the new plant would slash variable expenses per seat by 40% is
=((Sales-(Variable expenses*60%))/Number of Seats)/Selling Price Per Unit
=((750,000-(450,000*60%))/30,000)/25
=0.64
The new breakeven point in seats if the new plant would slash variable expenses per seat by 40% is
=(210,000*2)/((750,000-(450,000*60%))/30,000)
=26250 seats

The new Contribution Margin Ratio if the new plant would slash variable expenses per seat by 40% is 0.64, and the new breakeven point in seats if the new plant would slash variable expenses per seat by 40% is 26250 seats.

6. Referring to the data in (5) above, the calculation of the following a. Calculation of how many seats will have to be sold next year to earn the same net operating income, $90,000, as last year if the new plant is built

The number of seats will have to be sold next year to earn the same net operating income, $90,000, as last year; if the new plant is built is =((420,000+90000)/.64)/25 =31875seats

The number of seats will have to be sold next year to earn the same net operating income, $90,000, as last year if the new plant is built is 31875 seats.

b. Preparation of a contribution format income statement and calculate the degree of operating leverage assuming the new plant is built and that next year the company manufactures and sells 30,000 seats (the same number as sold last year)

Contribution Format Income Statement

The degree of operating leverage assuming the new plant is built and that next year the company manufactures and sells 30,000 seats (the same number as sold last year) is
=60,000/750,000
=0.08

The degree of operating leverage assuming the new plant is built and that next year the company manufactures and sells 30,000 seats (the same number as sold last year) is 0.08.

c. Whether the learner have been in favour of constructing the new plant and discussing of all reasons for it
If the learner is a member of the top management, then the learner would be in favourconstructing the new plant. This is being stated as this expansion will reduce its liquidity risk by choosing this expansion as the break-even point of the business will declined to 26250 seats from 30000 seats due to this expansion plan in the next year. So, the learner is in the favour of the constructing the new plant as per the management accounting assignment findings.

7. Calculation of the product margins under the company’s traditional costing system

Workings
The estimated management accounting assignmentmanufacturing Overhead of protector is
=(1980,000*(2*20,000))/120,000
=$66000

The estimated manufacturing Overhead of booster is
=(1980,000*(1*80,000))/120,000
=$132000

The product margins for the protector and Booster seats under the company’s traditional costing system are $220,000 and $1400000, respectively.

8. Calculation of the product margins for the protector and booster seats under the activity-based costing system

The supporting direct labour costs of the protector is
=(783600*40000)/120,000
=$261200
The supporting direct labour costs of the booster is
=(783600*80000)/120,000
=$522400
The Batch setups costs of the protector are
=(495000*200)/300
=$330,000
The Batch setups costs of the booster are
=(495000*100)/300
=$165,000
The product sustaining costs of the protector is
=(602400*1)/2
=$301200

The product sustaining costs of the booster is
=(602400*1)/2
=$301200
The other costs of the protector are
=99000/2
=$49500

The other costs of boostersare
=99000/2
=$49500

The product margins for the protector and booster seats under the activity-based costing system are -$61900 and $1,681,900, respectively.

9. Using the answers for management accounting assignmentquestions 7 and 8 above, preparation of a quantitative comparison of the traditional and activity-based cost assignments and discussion of the differences between the traditional and activity-based cost systems

The direct materials are the same under both traditional and activity based cost systems. However, it can be seen that the manufacturing overhead which is assigned to the two product lines of Point Piper is significantly different. For example, the manufacturing overhead is $281900 higher under the ABC system for protector compared to the traditional costing system, whereas the manufacturing overhead of Booster is $281900 lower under the ABC system compared to the traditional costing system. The difference between the traditional and Activity-Based costing system is that under the traditional costing system, all manufacturing overhead costs are assigned based on one type of cost driver, which is generally direct labour hour, whereas the ABC system assigns different manufacturing costs according to the costs driver, which is directly linked to that type of manufacturing overhead (Altawati et al., 2018).

10. Calculation of the expected cash collections
In April, May and June, the cash collection is $210,000, $316,000 and $339000, respectively. The total cash collection in three months is $865,000.

Workings
The cash collected from April Sales in April is
=(30%*300,000)
=$90,000
The cash collected from April Sales in May is
=(60%*300,000)
=$180,000
The cash collected from April Sales in June is
=(8%*300,000)
=$24,000

The cash collected from May sales in May is
=(30%*400,000)
=$120,000
The cash collected from May Sales in June is
=(60%*400,000)
=$240,000
The cash collected from June sales in June is
=(30%*250,000)
=$75,000

11. Preparation of a cash budget
Cash Budget for three month period

12. Explanation if the company needs a minimum cash balance of $20,000 to start each month, can the loan be repaid as planned
No, suppose the company needed to keep a minimum cash balance of $20,000 to start each month. In that case, the loan cannot be repaid by Point Piper as planned in June as it can be seen that if the loan is repaid with its due interest in June, the estimated closing cash balance of the company will decline to $18,800, which will be insufficient opening cash balance to start the business operation in July. Therefore, this indicates that the company will be unable to repay its total loan with its due interest in June to keep the required minimum cash balance of $20,000. As per the management accounting assignment calculations, the company will at least need to delay its interest payment of the loan to keep the minimum cash balance requirement.

13. Calculation of the following variances for June
a. Materials price and quantity variances
The material price variance for June is
=(5-4.95)*49200
=$2460

The material quantity variance for June is
=((15000*3)-49200)*5
=-$21000

The material price variance is $2460, and the material quantity variance is -$21000.
b. Labour rate and efficiency variances
The labour rate variance for June is
=(16-17)*11800
=-$11800
The labour efficiency variance for June is
=((0.8*15000)-11800)*16
=$3200

The labour rate variance is -$11800, and the labour efficiency variance is $3200.

c. Variable overhead spending and efficiency variances
The variable overhead spending for June is
=(3*5900)-18290
=-$590
The variable overhead efficiency variance for June is =((0.4*15000)-5900)*3
=$300

The variable overhead spending variance is $590, and the variable overhead efficiency variance is $300.

14. Summarising the variances calculated in (13)
The material price variance result calculated in part (13) is favourable. The amount of net overall favourable variance under this measure is $2460, and the impact of this favourable variance is that the direct material cost of the business recorded in the income statement of the business will be $2460 lower than what is expected. The following management accounting assignment observations are likely to impact on the company’s income statement by reducing the direct material cost to $243540 from 246000
=Expected direct material cost used- material price variance amount
=(5*49200)-2460
=$243540

The material quantity variance is unfavourable as this indicates that the direct material which is used by company is higher than what was expected. The impact of this unfavourable variance is that higher quantity of direct materials considered in the calculation of direct material under cost of goods sold of the company under its income statement. The following is the calculation of the impact which shows the amount increased in direct material cost recorded in the income statement.
=(49200-45000)*4.5
=$18900

The labour price variance shown an unfavourable variance of $11800 which indicates higher labour rate is paid to labourers and the impact of this variance is increase in direct labour cost of Point Piper in the income statement. The following is the calculation of the amount by which the direct labour cost increased in the income statement of the company
=(17-16)*11800
=$11800

The labour efficiency variance is unfavourable of $3200 which impact the income statement as lower labour hour is considered for calculation of direct labour cost than expected. Therefore, the reduction of the direct labour cost recorded in the income statement due to this lower labour hour is given below.
=((0.8*15000)-11800)*17
=$3400

The variable overhead spending variance is unfavourable, which impacts the income statement by increasing the variable costs than what should have been incurred under the actual variable overhead hours used in its operation. The calculation of the increase in variable overhead costs in the income statement is given below. =18290-(3*5900)
=$590

The variable overhead efficiency variance is favourable as the quantity of variable overhead hours considered is lower than expected. Therefore, the impact of this variance on the income statement will be positive as lower variable overhead hours will be considered in the variable overhead costs of Point Piper, and the amount by which the variable overhead cost will decline is calculated below.
=((0.4*15000)-5900)*(18290/5900)
=$310

15. The two most significant variances calculated in (13) above and an Explanation of the possible causes of these variances
The first most significant variance calculated in part (13) of this management accounting assignment is the material quantity variance for June. Under this variance, an unfavourable $21000 deviation from the expected direct material use is identified. One possible reason for this variance isthe higher wastage of direct material than expected, leading to higher direct material use. The second significant variance is labour rate variance which has shown an unfavourable variation of -$11800, and this is identified to be a significant variance as this indicates the labour is paid ata higher rate than expected. One of the possible reasons for this variance is that higher quality of labourers was used in its operation, leading to lower labour hours required to produce its required production unit but increased the labour costs as higher labour rate is paid to the high quality of labourer.

16. Conclusion report
16.1 Introduction
In this report, it will be assessed whether the strategic decision of Point Piper to open the new plant and expand the business is a good decision or not for the business. Based on the assessment, it will be concluded whether this strategic decision should be approved or not.

16.2 General assessment of the strategic decision to open the new plant and expand the business
First of all, it has been assessed that if breakeven point and CM ratio of Point Piper are likely to decline in the next year due to an increase in the variable cost per seat if the new plant is not constructed. However, if the new plant is constructed, then the variable cost will decline by 40%, but the fixed cost will double due to the cost associated with acquiring the new plant under this strategic decision. However, this change in the business's cost structure under the new expansion plan will reduce the breakeven point of the business, and the contribution margin ratio of the business will improve under this expansion. This is being stated as the breakeven point in terms of seats will decline to 26250 seats after this expansion plan from 30000 seats which is expected to be the breakeven point of the business if the new plant is not acquired(Adeniyi Alao, 2019). Also, the contribution margin ratio of Point Piper for the next year can be improved to 0.64 from 0.28 through this expansion. All these indicate that the expansion plan of the business should be expected. However, one of the issues with this expansion plan is loan repayment which the business has to undertake to help finance the acquiring the new plant under this expansion plan, as it can be seen that Point Piper will not be able to repay its loan and interest which will be due with it as per plan. This is being stated that the company needs to keep a minimum cash balance of $20000 at the beginning of each month. However, if the loan principal of $30000 with its interest amount of $12000 is paid in June, then the beginning cash balance for July will decline to $18800, which is not feasible for the cash management of the business. Therefore, the current financing plan for Point Piper, which it has decided to finance its expansion plan, is not feasible for the business. Therefore, the company will need to reconstruct the loan structure related to this expansion plan before going ahead with this strategic decision of opening a new plant.

16.3 Conclusion
Therefore, it is concluded on this management accounting assignment that Point Piper needed to go ahead with this strategic decision of opening a new plant and expanding its product line. However, it needed to reconstruct its loan repayment structure related to this expansion plan before implementing this management accounting assignmentstrategic plan.

Conclusion
It is assessed on this management accounting assignment that Point Piper should open the new plant for expansion of the business but change its loan repayment structure.

References
Adeniyi Alao, A. A. (2019). Leverage and liquidity management.management accounting assignment Altawati, N. O. M. T., Kim-Soon, N., Ahmad, A. R., &Elmabrok, A. A. (2018). A review of traditional cost system versus activity based costing approaches. Advanced science letters, management accounting assignment24(6), 4688-4694.