MAA262: Acqua Company Case Study - Management Accounting Assignment Help

Assignment Task:

Required: 

a) Using the information given above, list all the manufacturing overhead items showing the amount for each one and the total amount of manufacturing overhead for May. (3 marks)

b) Calculate the total amount of product costs for May. (3 marks)

c) Prepare a list of the May period costs that shows the amount of each cost and the total amount of all the period costs. 

Required: 

a) Use the high-low method to calculate the variable and fixed cost components, and express them in a cost equation. (9 marks)

b) The owner feels that the maximum level of operating costs that the company can sustain, because of cash flow concerns, is $14,500. Determine the number of kilometers that correspond to that level of total operating costs. 

Part I 

You are reviewing the quality cost activities (Year 1) of the company you work for and noted that the company has been spending too much money on warranties. With the support of your supervisor the following changes were implemented: 

• Development of a new system for streamlining the assembly line. 

• Offering technical support to suppliers for minimizing the chances of receiving faulty material. 

• Field testing of products at customers’ sites. 

• Inspection of products on the assembling line. 

The amounts spent on quality costs are listed below: 

Required: 

a) Classify the above 7 activities among the four categories of quality costs. 

b) Using the information provided in the table above, explain the relationship between the four categories of quality costs and what has changed through the years. 

Question 2 continues over the page 

Question 2 

Part II 

When the quality costs for Year 3 were ready, your supervisor was disappointed with the outcome of the changes implemented. The total quality costs have increased in Year 2 and finally, in Year 3, the company was back to square one, spending $ 2,500 in quality costs. 

Required: 

a) Explain what is expected to happen in Year 4 if the company persists with the implemented changes. (5 marks) 

b) Explain what is expected to happen in Year 4 if the company cancels the activities implemented. (5 marks) 

Question 3 (This question has 2 parts, Part I with 1 item and Part II with 2 items) 

Part I 

Happy Café purchases potatoes from farmers. The potatoes are then peeled, producing two intermediate products-peels and depeeled spuds. The peels can then be processed further to make a cocktail of organic nutrients. And the depeeled spuds can be processed further to make frozen french fries. A batch of potatoes costs $37 to buy from farmers and $14 to peel in the Cafe's special equipment. The peels produced from a batch can be sold as is for animal feed for $22 or processed further for $13 to make the cocktail of nutrients that are sold for $40. The depeeled spuds can be sold as is for $37 or processed further for $21 to make frozen french fries that are sold for $53. 

Required: 

Should each of the intermediate products, peels and depeeled spuds, be sold as is or process further into end products? Explain. (5 marks) 

Part II 

Acqua Company produces a variety of water pumps to power water jets. Currently, the company has found that 35% of the pumps have failed within their 12 month warranty period, causing huge warranty costs. Because of the company’s inability to manufacture high quality pumps management is considering buying from a reputable outside supplier who will also bear any related warranty costs. 

Acqua Company’s unit cost of manufacturing water pumps is $83.75 per unit, including 17.25 of allocated depreciation of equipment (no resale value). Also, the company has spent on average of $22.00 (labour and parts) repairing each pump returned. Acqua Company can purchase pumps from a new outside supplier for $92.50 per pump which covers the warranty cost as well. 

Required: 

a) Determine whether Spa Company should make or buy the pumps, and the amount of cost saving arising from the best alternative. 

b) What qualitative factors should be considered in making decision in part (a) above? 

Question 4 (This question has 2 parts, each part with 2 items) 

Part I 

Fresh Apples, a division of a company named Still Life Corporation, has a net operating income of $7,500,000, and average operating assets of $50,000,000. The required rate of return set for the divisions is 10%. 

Required: 

a) What is the division’s return on investment (ROI)? (show your workings) 

b) What is the division’s residual income (RI)? (show your workings)  

Part II 

There is an opportunity for the Fresh Apples division to invest $7,500,000, that would generate additional net operating income of $1,000,000 per year. 

Required: 

a) If the manager of the Fresh Apples division is evaluated based on return on investment (ROI), will the manager want to invest? Justify your answer. 

b) If the manager of the Fresh Apples division is evaluated based on residual income (RI), will the manager want to invest? Justify your answer. (4 marks) 

Question 5 (This question has 2 parts, Part I with 2 items and Part II with 1 item) 

Part I 

Cubes is a company that provides residential cleaning services in their local neighbourhood. For budgeting purposes, the company's expenses for cleaning supplies are considered a variable cost of $15 per residence cleaned. For August, the company budgeted cleaning 25 residences. At the end of the month, it was determined that the actual number of residences cleaned was 20 and the actual amount paid for cleaning supplies was $350. 

Required: 

a) Regarding the company’s cost of cleaning supplies, compute the activity variance for August. (show your workings) (5 marks)

b) Regarding the company’s cost of cleaning supplies, compute the spending variance for August. (show your workings) (5 marks) 

Part II 

You are interested in understanding whether the difference, in August, between the flexible budget and the actual results in the direct labour is due to a direct labour rate and/or efficiency variance. The standard rate is $15 per hour and the standard amount of time for completing one cleaning service is half an hour, and the total number of residences cleaned is 20. 

The payroll indicates, for August, that the company paid $160 for direct labour for a total of 12 hours of service for cleaning the 20 residences. 

Required: 

Calculate the labour rate variance, efficiency variance, and total variance for the direct labour regarding the cleaning supplies used. (show your workings) (5 marks) 

Required: 

a) Assume that the company uses absorption costing. Compute the unit product cost for one set. (show your workings) (4 marks)

b) Assume that the company uses variable costing. Compute the unit product cost for one set. (show your workings) (4 marks)

c) Explain how the choice between absorption costing and variable costing impacts the net operating income. (show your workings as necessary)

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