ACCOUNTING FOR MANAGERIAL DECISION MAKING

Case 1 ;

WeRConsultants offers three professional services to its clients: (1) management
consultancy, (2) corporate training, and (3) outbound program.

Ruby Rahme, the chief accountant of the company, wants to apply the Activity-
Based Costing (ABC) system to determine the cost of each service. She obtains
the following cost information for 2014 as follows:

a. Professional labour annual salaries:
Type of          Numbers of        Salary per        Total salary
Professional       Professional        person           per year
labour            labour           per year
Consultants                5           $ 120,000         $ 600,000
Team Leaders               8              75,000           600,000
Trainers                  12              40,000           480,000

b. All other 2014 annual costs are support costs, and categorised into four
activity costs, as follows:
Supplies                                  $ 45,000
Building rent and maintenance                 80,500
Administrative costs to manage clients       240,000
Subcontract services                          90,000
$ 455,500

c. Consumption of supplies depends on the number of clients per year.
Other information about individual professional services:
Management       Corporate        Outbound            Total
consultancy      Training         Program
Square metre of           600           1,200            500               2,300
building space
occupied by each
service
Number of clients             30           70              60               160
per year
Number of                  50             100            300                450
subcontract
services per year

d. Professional labour allocations to individual professional services:
Management             Corporate              Outbound
consultancy             training              program
Consultants               5                     –                      –
Team leaders              2                     3                      3
Trainers                  2                     7                      3

2
Required:

a.   Using the Activity-Based Costing data presented above, choose the most
appropriate cost driver for each activity pool, and compute the cost-driver
rate for each activity. (3 marks)

b.   Compute the annual cost of each professional service for 2014. (7.5 marks)

Case 2

DingedIn manufactures Sweaters and Jumpers. The company’s product line
projected income statement follows:

Total   DingedIn’s DingedIn’s
Sweaters Jumpers
Sales revenue                                      $840,000   $620,000   $220,000
Cost of Goods Sold
Variable                                         203,000    128,000        75,000
Fixed                                            300,000    202,000        98.000
Total Cost of Goods Sold                            503,000    330,000       173,000
Gross profit                                        337,000    290,000        47,000
Marketing and administrative expenses
Variable                                         150,000     78,000        72,000
Fixed                                            115,000     88,000        27,000
Total marketing and administrative expenses         265,000    166,000        99,000
Operating income (loss)                            $ 72,000   $124,000     $ (52,000)

Management is considering to discontinue the DingedIn’s Jumpers product line.
Management accountants for the company estimate that dropping the DingedIn’s
Jumpers line will decrease total fixed Cost of Goods Sold by $45,000 and total
fixed marketing and administrative expenses by $9,500.

Required:

Prepare an analysis supporting your opinion about whether or not the DingedIn’s
Jumpers product line should be dropped.