direct materials price and efficiency variances, Managerial Accounting

Welcome to the Fall 2011 version of the comprehensive assignment prepared specifically for Accounting 294.

Made up of 3 parts this assignment is meant to fulfil a number of objectives for you. These include:

1) Test and apply your knowledge of the concepts of managerial accounting.

2) Increase your experience and abilities with respect to report writing.

3) Illustrate scenarios and issues you will face in the "real world"

4) Provide for an additional method of evaluation of your knowledge and skills rather than the traditional quizzes and tests.

Please take all parts of this assignment seriously. This is an opportunity to actually apply your knowledge rather than just memorize a textbook.

Please prepare the assignment using either Word or Excel rather than by hand. The finished product will look more professional as well as create some consistency between submissions.

All submissions must be on 8 1/2 by 11 inch paper using a size 12 font. Grammar and spelling are very important and marks will be deducted for poor grammar and spelling.

For the memos, please use a memo format. Examples of this can be found in Word. Write in a form that is understandable and answers the client's question.

In order to make this assignment easier and your result more successful we suggest that you do not leave this assignment to the last day or even week. The assignment parts are constructed to coincide with the topics that have been or will be covered in class. If you begin working on the assignment immediately then as your lectures/seminars progress you will be immediately reinforcing the course content that you are being exposed to and it will make application of that content easier as well.

The 3 parts of the assignment are worth a total of 20% of your final grade and therefore each part will have a significant effect on your final letter grade. Making a submission on time even if incomplete, will be more to your benefit than giving up and not making any submission at all.

Your Role

While you believe you are a student currently taking Accounting 294, for the purposes of this assignment you are in fact a new employee of the CGA firm of Graff and Spears(GS). GS specializes in providing accounting and consulting advice and analysis for manufacturing businesses. For your first assignment Tom Graff (TG) of GS wants you to work on the new client file, Smack Packaging Machinery Ltd. He expects this engagement to include writing memos, performing quantitative and qualitative analysis as well as providing conclusions or recommendations for the management and owners of Smack Packaging Machinery Ltd. (Smack). At all times, work submitted must be professional both in terms of content as well as presentation. This is not high school or university but rather the real world. Do the work as if your job depends on it, because it does!!

Smack Packaging Machinery Ltd.

Smack is a private company founded in Duncan in 1981 to design, develop, and manufacture packaging machines. Since then, Smack's activities have slowly and steadily grown and today it caters to clients in Cosmetic and Food Industries with over 40 varieties of packaging items. Smack Packaging machines are well known and used by different companies in Western Canada. These machines are built with the best available state of the art technology to increase productivity. The owner and founder of the company Mr. Mike West, CMA passed away at the beginning of 2011 and left the company to his three children Emma, John, and Rich. Emma (28 years old) is a PhD Candidate in social studies at UBC with no business experience. John (32 years) dropped out of high school and since then has worked in assembly at Smack and he is currently the Production Manager. Rich (36 years) ran his own successful dentistry practice in Victoria.

The company has concentrated on the area of custom packaging machines and until recently has shown good revenue and profit growth. In 2011, for the first time in its history it appears that Smack's expenses exceeded its revenue. The three siblings were very concerned with the financial results, and approached Graff and Spears for advice. Thanks to you not only do they now realize that they actually had a profit in the last fiscal year and therefore can now turn to planning for next year, they also have an idea what level of activity and income they need in order to reach the level of success that they desire.

Transcript of Meeting with Emma, Rich, and John, and Tom Graff and Student on November 16, 2011

John: Tom, while we greatly appreciate all the good information and advice that we have received to date, until we go through a complete year I think we will be relying on you and Student for advice and guidance.

Tom: That is understandable. As a family you have been through a difficult year and there is a lot of information to absorb in a short period of time.

Rich: As you know we were pretty upset initially because we thought that we had lost money but then you recalculated the statements and presented them properly and we in fact made money which we think was great.

I am still unsure however how well we operated. For example, it is great that we made money but did we make as much as we should have? Were expenses in line with expectations?

Emma: On that note, I know Dad was stickler for details and would have likely had some sort of a budget that he followed or compared to but I could not find one. All I was able to find in Dad's papers was some information regarding standard costs of machines.

Student: Standard costs relate to the amount and cost of materials, labour and overhead that goes into one unit whereas a budget is the same general idea but it in fact shows the information on a total organization basis rather than a per unit basis.

Emma: So we cannot analyze anything unless we find Dad's overall budget?

Tom: Actually we can. Using the standard cost information we can build up the overall budget on the basis of the actual output levels. It is called a flexible budget.

John: So what do we then do with that information?

Student: If we have the flexible budget done we can compare to the actual results and identify variances or differences between the actual amounts and planned amounts in a variety of areas. When we have these differences calculated I can even suggest departments to go talk to and get an explanation as to why the variances occurred and depending on the explanation you can judge whether the information should be used in employee evaluations.

Emma: You guys have an answer for everything.

Rich: I understand what you are saying about getting an explanation as to why variances occur but I am unsure about the employee evaluation aspect. Surely we cannot just reward or punish employees on just any variances that occur in their department. That just sounds so arbitrary.

Tom: Good concerns expressed Rich. It is not as arbitrary as it originally sounds. There is some thought that goes into the performance evaluation based on who has control over activities as well as responsibility for the outcomes. Even beyond that, managers are often only evaluated based on their authority items such as costs, revenues or even investment funds.

Student: Rich, to address your concerns I could prepare a memo to you detailing the idea of responsibility accounting and also the types of authority categorization that Tom is referring to.

Rich: I would greatly appreciate that. If we are going to evaluate the employees we certainly should understand the methodology used.

Emma: Student, after I found the standard cost of machines information in Dad's papers I calculated the actual amounts for this past year on the same basis. I hope this will be a help to you.

Student: It certainly will.

Tom: Alright then, based on my notes I will get Student to report back to us on the flexible budget income statement calculation, the variances for the past year and a memo on responsibility centres and accounting. Student, I realize that this is a busy time of year and time is short but when do you think you can have this information ready?

Student: I'll be glad to review the paperwork and give you my answers within three weeks, let us say no later than Monday December 5th.

1) Using the information provided in Exhibits 1 -3 to prepare a flexible budget income statement for the year ended August 31, 2011

2) Calculate the following variances, identify the department to get additional information from regarding the variances and lastly suggest one plausible explanation for each variance.

a. Direct Materials Price and Efficiency Variances

b. Direct Labour Rate and Efficiency Variances

c. Variable Overhead Spending and Efficiency Variances

d. Fixed Overhead Budget Variance

3) Prepare a memo describing the concept of responsibility accounting and the possible categorization of evaluation for managers.

Posted Date: 2/22/2013 12:20:33 AM | Location : United States

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