Wednesday, December 11, 2019

Accounting for Managers IAS 36–Impairment

Question: Describe about the Accounting for Managers for IAS 36Impairment. Answer: 1: Existing sales Particulars Note Details Current Sales Existing Sales (A) Units Per annum 20,000 Estimated Sales (B) Units Beginning 3 months 6,000 Estimated Sales (C) Units Remaining Period 14,000 Sales per/unit (D) $ Beginning 3 months 130 Sales per/unit (E) $ Remaining Period 130 Variable manufacturing cost per/unit (F) $ Provided 50 Variable selling and administrative cost per/unit (G) $ Provided 30 Total sales (G) $ [(B) x (D) + (C) x (E)] 2600000 Total variable manufacturing cost (H) $ [(A) x (F)] 1000000 Total selling and administrative cost (I) $ [(A) x (G)] 600000 Contribution (J) $ [(G) - (H) - (I)] 1000000 Fixed manufacturing cost (K) $ Provided 4,00,000 Fixed selling and administrative cost/unit (L) $ Provided 3,00,000 Advertising and promotion cost (M) $ Provided 0 Profit $ [(J) - (K)- (L) - (M)] 3,00,000 As per Rossi Proposal Particulars Note Details Rossi Proposal Existing Sales (A) Units Per annum 20,000 Estimated Sales (B) Units Beginning 3 months 6,000 Estimated Sales (C) Units Remaining Period 14,000 Sales per/unit (D) ($) Beginning 3 months 140 Sales per/unit (E) Remaining Period 140 Variable manufacturing cost per/unit (F) Provided 50 Variable selling and administrative cost per/unit (G) Provided 30 Total sales (G) [(B) x (D) + (C) x (E)] 2800000 Total variable manufacturing cost (H) [(A) x (F)] 1000000 Total selling and administrative cost (I) [(A) x (G)] 600000 Contribution (J) [(G) - (H) - (I)] 1200000 Fixed manufacturing cost (K) Provided 4,00,000 Fixed selling and administrative cost/unit (L) Provided 3,00,000 Advertising and promotion cost (M) Provided 1,25,000 Profit [(J) - (K)- (L) - (M)] 3,75,000 In consideration to the above calculation it should be noted that if 20,000 units are produced and the variable cost standing derived from the manufacturing and selling overhead is $12,00,000. According to the Rossis proposal of increasing the price by $10 would ultimately, lead to higher sales is entirely dependent upon the administrative expenses. However, the advertising and sales promotion cost of 125,000 would ultimately lead to fall in the profitability. Advertising and promotion is considered as the additional marketing cost, which either can attract new customers or might affect the estimated net profitability. As per Tom Tune Proposal Particulars Note Details Tom Proposal Existing Sales (A) Units Per annum 25000 Estimated Sales (B) Units Beginning 3 months 6,000 Estimated Sales (C) Units Remaining Period 19,000 Sales per/unit (D) $ Beginning 3 months 130 Sales per/unit (E) $ Remaining Period 130 Variable manufacturing cost per/unit (F) $ Provided 55 Variable selling and administrative cost per/unit (G) $ Provided 30 Total sales (G) $ [(B) x (D) + (C) x (E)] 3250000 Total variable manufacturing cost (H) $ [(A) x (F)] 1375000 Total selling and administrative cost (I) $ [(A) x (G)] 750000 Contribution (J) $ [(G) - (H) - (I)] 1125000 Fixed manufacturing cost (K) $ Provided 4,00,000 Fixed selling and administrative cost/unit (L) $ Provided 3,00,000 Advertising and promotion cost (M) $ Provided 50,000 Profit $ [(J) - (K)- (L) - (M)] 3,75,000 According to the proposal proposed by Tom, he predicts an estimated sales of 25,000 units with overall variable manufacturing cost of $11,25,000. Tom proposal includes an advertising and promotional cost of $50,000 however, there does not exists any considerable amount of change in profit. The contribution margin is lower than the Rossis proposal however, lower advertising and sales promotion cost is beneficial for the proposed strategy as there is lower risk of failure out of loss. As per Mary Watson Proposal Particulars Note Details Mary Proposal Existing Sales (A) Units Per annum 24000 Estimated Sales (B) Units Beginning 3 months 10,000 Estimated Sales (C) Units Remaining Period 14,000 Sales per/unit (D) $ Beginning 3 months 120 Sales per/unit (E) $ Remaining Period 130 Variable manufacturing cost per/unit (F) $ Provided 50 Variable selling and administrative cost per/unit (G) $ Provided 30 Total sales (G) $ [(B) x (D) + (C) x (E)] 3020000 Total variable manufacturing cost (H) $ [(A) x (F)] 1200000 Total selling and administrative cost (I) $ [(A) x (G)] 720000 Contribution (J) $ [(G) - (H) - (I)] 1100000 Fixed manufacturing cost (K) $ Provided 4,00,000 Fixed selling and administrative cost/unit (L) $ Provided 3,00,000 Advertising and promotion cost (M) $ Provided 40,000 Profit $ [(J) - (K)- (L) - (M)] 3,60,000 Mary on the other hand would propose to undertake the promotion campaign where a rebate of $10 will be offered on all kinds of drills sold during. She further proposes a lower advertising and promotion cost of $40,000. She proposes estimated sales of 24,000 units per annum but undertaking the proposal it has been found that the net profit has fallen to $360,000 and such proposal does not seem to be profitable. To comment further on the three proposals offered it should be understood that the best-suited proposal is of Tom, which as the advertising cost is lower with net profit of 375,000. According to the proposal made by Tom, increasing the sales volume by 25% would be ideal for the business. 2: Activity Level Price Per Unit ($) 1,50,000 2,00,000 1,80,000 Direct Material 2.50 375000 500000 450000 Direct Labour 3.00 450000 600000 540000 Direct variable expenses 5.50 825000 1100000 990000 Variable Overhead: Variable Factory Overhead 1.50 225000 300000 270000 Variable selling and administrative cost 2.00 300000 400000 360000 Total cost or production 3.50 525000 700000 630000 Fixed Overhead: Fixed factory overhead 2.00 300000 400000 360000 Fixed selling and administrative cost 1.50 225000 300000 270000 Fixed Cost 3.50 525000 700000 630000 20% Mark Up 2.50 375000 500000 450000 Selling price 15.00 2250000 3000000 2700000 Additional bid by Tassie Company Particulars Details Price (in $) Total price for 40,000 units (A) (30,000 x 8.4) + (10,000 x 10.9) 361000 Average price for 40,000 units (A)/40,000 9.03 Cost such as salaries and depreciation can be included in the assets side of the balance sheet. It is worth mentioning that if a business firm operates on the accrual basis pay off its expenses prior to which it is incurred originally it can be shown in the form of assets under the asset side of the balance sheet for Prepaid Salaries or Prepaid Depreciation (Andersson and Wenzel 2014). As the expenditure are incurred once it is shifted to the profit and loss account in the form of expenditure. It is noticed in the majority of the business that the rate of depreciation creates an impact on the level of profitability and the amount of tax, which a business is willing to pay in one financial year. Depreciation is tax deducted expenditure with higher incidence of depreciation a business can reduce the tax bill in any financial year. Particulars Note Details Amount ($) Indirect/Overhead cost (A) $ Provided 98,400 Direct labour hours (B) Hours Provided 25,795 Overhead allocation rate $ (A)/(B) 3.81 Particulars Note Details Amount ($) Direct cost of material (A) $ (2,100 x 16.1) 33810 Direct cost of labour (B) $ (327,600/25,795) x 1400 17780.19 Indirect/overhead cost (C) S (1,400 x 3.81) 5334 Total cost of the special order S (A) + (B) + (C) 56924.19 Particulars Note Details Amount ($) Overhead cost (A) $ Provided 98,400 Machine hours (B) Hours Provided 9,840 Overhead allocation rate $ (A)/(B) 10 Particulars Note Details Amount ($) Direct cost of material (A) $ (2,100 x 16.1) 33810 Direct cost of labour (B) $ (327,600/25,795) x 1400 17780.19 Indirect/overhead cost (C) S (525 x 10) 5250 Total cost $ (A) + (B) + (C) 56840.19 Particulars Details Minimum price/trailer (in $) Labour hour rate 56,924.19/350 162.64 Machine hour rate 56,840.19/350 162.40 Activity based costing is referred as a costing methodology which helps in recognising the activities of an organisation by allocating the cost of each activity with the resources of the all the products and goods produced in accordance with the actual cost of production. On the other hand, the choice of an allocation method is entirely depended upon the group of overhead cost for a desired accuracy of the product cost information (Kaplan and Atkinson 2015). Such method when employed by a business entity can easily evaluate the cost of elements of entire product activities and services. Implementing the segmented cost of overhead pools and activity based costing can assist a business firm to identify the accurate cost of pricing a product and eliminate the product and service which are not profitable. Such pricing methods help a business organisation to reduce the production of goods and services, which are ineffective, and this will help in yielding a better production (Horngren et al. 2013). Such methods help a business to organise resources through which an activity pricing of each activity can be determined in terms of the resources employed. Thus such tool enables a business unit to understand the product and cost profitability on the basis of the production and performance. Reference list: Andersson, S. and Wenzel, F., 2014. Application of IAS 36Impairment of fixed assets-A qualitative study about the main challenges for companies regarding impairments. Balakrishnan, R., Labro, E. and Soderstrom, N.S., 2014. Cost structure and sticky costs.Journal of Management Accounting Research,26(2), pp.91-116. Carlsson, B., Meir, M., Rekstad, J., Prei, D. and Ramschak, T., 2016. Replacing traditional materials with polymeric materials in solar thermosiphon systemsCase study on pros and cons based on a total cost accounting approach.Solar Energy,125, pp.294-306. Deegan, C., 2013.Financial accounting theory. McGraw-Hill Education Australia. Domeika, P., 2015. Creation of the Information System of Enterprise Fixed Asset Accounting.Engineering Economics,60(5). DRURY, C.M., 2013.Management and cost accounting. Springer. Horngren, C.T., Sundem, G.L., Schatzberg, J.O. and Burgstahler, D., 2013.Introduction to management accounting. Pearson Higher Ed. Kamala, P., Struwig, J., Bornman, M., Boersman, R., Vermaak, M., McGill, M., Jordaan-Marais, J., Matthew, J., Hurter, C. and Taylor, P., 2015.Principles of Cost Accounting. Oxford University Press. Kaplan, R.S. and Atkinson, A.A., 2015.Advanced management accounting. PHI Learning. Kumbhakar, S., Lozano-Vivas, A. and Sun, K., 2013. A flexible cost function model with risk. Rieckhof, R., Bergmann, A. and Guenther, E., 2014. Interrelating material flow cost accounting with management control systems to introduce resource efficiency into strategy.Journal of Cleaner Production,30, p.1e17. Schmidt, A., Gtze, U. and Sygulla, R., 2015. Extending the scope of Material Flow Cost Accountingmethodical refinements and use case.Journal of Cleaner Production,108, pp.1320-1332.

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