M II

CHETAN SARUP ROHILLA

MBA07190 B 01/12/2021

MANAGEMENT ACCOUNTING

Dr. Amrinder Singh

Declaration:

1. I have submitted faculty feedback 30 minutes prior to appearing in the End-Term Exam.
2. any other sources.

Signature of the Student

Ans1)

a) The cost of processing cartons through the facility:

There are 2 costs to process cartons through the facility. One is warehouse personnel
cost per carton and the other one is warehouse costs without personnel per carton.
Hence the total processing costs through the facility is $54 per carton.

b) Cost of entering electronic and manual customer orders:

The cost here is completely based on personnel costs. Manual costs have 2 components
namely “entering basic information” and “additional cost for each line item”. The
electronic entry consists of only single cost.
c) Cost of shipping cartons on commercial carriers

It is the freight cost per carton which is equal to: -

𝑡𝑜𝑡𝑎𝑙 𝑓𝑟𝑒𝑖𝑔ℎ𝑡 𝑐𝑜𝑠𝑡

(𝑛𝑜. 𝑜𝑓 𝑐𝑎𝑟𝑡𝑜𝑛𝑠 𝑠ℎ𝑖𝑝𝑝𝑒𝑑 𝑏𝑦 𝑐𝑜𝑚𝑚𝑒𝑟𝑐𝑖𝑎𝑙 𝑓𝑟𝑒𝑖𝑔ℎ𝑡. )

d) The cost per hour for desktop deliveries

It includes both the costs of driers and the trucks (leasing, maintenance, etc.). As there
are 4 working drivers, working 1500 hours, the cost/hour is the total cost divided by
6000.
Ans 2) The major issue with the Midwest existing system is that it doesn’t distinguish between the late
paying customers and the customers who use different delivery method (freight vs delivery
truck). They just lump all these costs together which ultimately makes it difficult to identify most
profitable customers. The cost and profitability calculated is given below.

Ans3) Since the ‘standard Midwest way’ was not adequately determining the profitability of each
order based on the true cost of both the delivery methods (Truck and Freight) and late
payments (1% interest per month), it resulted in certain orders, like order no. 2 in the above
table, to appear profitable but in reality, it actually means that the payment was late and it cost
a very large amount to deliver the order ($300).
Ans4) Based on the above analysis, John Malone should rethink the Midwest’s desktop delivery option
at least for small orders as it drastically cuts into the profitability of small deals. He can also
make it that the payment should be received within 30 days or late payments should be
charged.

John can also hire more people to use his new electronic system which will further reduce the
costs of operator entry. Even though these are not major costs, it can add up for orders with lots
of line items.

Ans5) Issues that might arise due to implementing ABC costing are: -

a) Collection and preparation of data is very time consuming and it costs more to
accumulate and analyze information.

b) Upper management is generally more concerned about the profits and are less
considerate about costing system which leads them to be stiff towards the decision of
switching to ABC costing.

c) The ABC system also requires highly trained and exquisite personnel who have in depth
knowledge about costing system and now how to analyze the output.

d) ABC estimates are often subjective and could introduce measurement error, especially
on an engineering effort.