PROJECT ASSIGN FOR ADVENCE MANAGEMENT ACCOUNTING May 31, 2020

NAME HAFIZ SAJJAD RASHEED

STUDIED IN MS ACCOUNTING AND FINANCE
SAP ID 19758
PROJECT ASSIGNED BY DR. QAISER MALIK

Question # 01
Requirement # 01

ADVANTAGES IMPACT

The quality of covers can remain the same and can be improved
Quality Control according to the needs of customer if QualSupport Corporation
manufacture covers from its own Denver Cover Plant.
The customers of the company would remain loyal with the company if
Customer Sustainability
the quality of the product has satisfied the needs of the customer.
QualSupport Corporation can alter the covers as needed if they produce
Alteration
covers form its own plant
The company can avoid shipping cost by avoiding purchased from
Freight / Shipping Cost
outside vendors.
The company uses the high quality fabric for its products so QualSupport
Material Quality
Corporation can retain the quality of material if plants remain open.
The company can earn the 3.2 million of salvage value for equipment
Salvage Value
and building, if plant has closed.

Requirement # 02
Part (i)
Costs those are relevant to decision making discussed as following
a) Material
Material cost ($14,000,000) is directly relevant to decision making because if
QualSupport Corporation has decided to close the plant material cost was not incurred
because there is no production.
b) Direct Labour
Labour cost ($13,100,000) are the relevant for decision, if plant remains open labour will
work but if company has shut down the plant labour cost was not incurred.
c) Supervision
If there is no labour cost, there will be no supervision cost ($900,000), only in case of
plant remains close.

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 PROJECT ASSIGN FOR ADVENCE MANAGEMENT ACCOUNTING May 31, 2020

d) Indirect plant
Indirect plant cost ($4,000,000) can be avoided if plant has shut down by the company.

e) Pension
Pension fund amounting to ($2,000,000) is relevant because in additional information
there is given that $3,000,000 pension expense would continue irrespective of plant
remain open or not.

Part (ii)
Costs that are not relevant, irrespective of decision they must be incurred.
a. Depreciation-equipment
Depreciation expense is not a relevant cost because at year end QualSupport corporation
must record the depreciation of equipment.

b. Depreciation-building
Irrespective of decision depreciation of the building must be incurred at year end.

c. Pension expense
As above discussed $3,000,000 of pension expense would continue whether plant has
shut down or continue to operate.

d. Plant manager & staff

Plant manager and staff salaries are fixed salaries these are not relevant to plant, whether
plant has opened or closed, these costs have incurred.

e. Corporate expense
These are fixed expenses and allocated to plants and other operating units so these are not
relevant.

Part (iii)
Non-recurring costs are unusual costs that would arise and discussed as following
a) Termination charges
Termination charges are unusual charges and would occur 20% of the cost of direct
material in consequence of plant closed, so Denver cover plant manager must think about
these charges while thinking to close the plant.
b) Employment assistance
$1.5 million of employment assistance cost would arise for the year as mentioned in
Denver cover contract in case of closing the plant.

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Requirement # 03
Financial advantages and disadvantages of closing the plant are explained in following

ADVANTAGES IMPACT
If plant has closed only the relevant cost (Material, Direct Labour,
Relevant cost Supervision, Indirect Plant and Pension) as discussed above, can be
avoided because there is no production.
After closing the plant, the company can use the equipment and
Salvage cost building for salvage value. These values can generate a cash inflow
for the company.

DISADVANTAGES IMPACT
Non-recurring cost has direct relation with closing the plant, when
Non-recurring cost plant has closed non-recurring cost would be arises; these costs
include (termination charges & employment assistant charges).
Pension expense amounting to 3 million has cash outflow effect
Pension expense
when plant has closed.
Plant manager and staff salaries remains to occur after closing the
Administrative costs plant.

Requirement # 04
QualSupport Corporation should think about the following costs for decision making.
• Repair and maintenance of building
Repair and maintenance of the building have been facing by the company when plant has
closed.
• Wear and Tear of machinery
Wear and tear of the machinery is another cost for the company. Because machinery is not in
used and can be rusty.
• Security expense
After closing the plant, the building is still in company use so the security expense is another
cost of the company.

Following are the revenues that should be in company’s mind

• Rent Income
Company can rent out the Plant building and machinery to earn rental income after closing
the plant

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• Consolidated Income
Denver cover plant is a loss making unit for the company. The company can decrease the
loss after closing the plant. The overall consolidated income of the company can be better.

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Question #02
Requirement # 01
At Clayton the cost of the facilities are sunk costs because these are too high and influence the
facility price and sunk costs are not considered in any decision making. These costs have
incurred in any way either the facility center remain open or not.
Only the future costs are relevant costs that have affected by the decision. If the facility is shut
down, there are the following disadvantages;
1. Additional Rent
If company shut down the Clayton and shifted its business to other centers, they will
required more space that have incurred more rent cost.
2. No resale value of building
Because there is no commercial activity around the Clayton so the building has no resale
value.
3. Freight cost
The company would bear the freight cost if they have moved the equipment from Clayton
to other centers
4. Loss on sale
Due to disruption of services there is a loss on sale for the company.
The following are the advantages;
1) Own Building
The company has its own building so if company transfer the other centers in Clayton the
will lead to save the rent cost for other centers.
2) Local Administrative expenses
If the company shut down the Clayton it will save the local administrative expenses.

Therefor the company shut down the Clayton it will lead to decline the overall company’s profit,
so the company should not be shut down the Clayton canter.

Requirement # 02
Haley Romeros’s intention to shut down the Clayton facility is because she doesn’t want a
negative performance for her career as Clayton is a money losing canter so this is unacceptable
for her and as well as if she shows an operating loss every year the headquarter will stand the
responsible for her for the previous years too.
Haley Romeros action to shut down the facility is non-ethical because it will have the following
impacts
• Bank services corporation’s profit will be declined as we have discussed above
• Some loyal employees will lose their jobs
• BSC’s services would be disrupt
• Due to disruption they can lose their customers

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Requirement # 03
Depreciation expense on clayton center have influenced the prices of the facility because if we
compare the depreciation on equipment with other center we will found that the depreciation on
clayton are high and it has a deprecation on building as other centers have not. So this
depreciation has decreased the revenue of the Clayton facility. Due to these expenses revenue
becomes a loss at the end of year.
Due to high deprecation expenses Clayton should increases the price of their services.

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Question # 03
The value-chain function costs would be affect the product when are redesigning the product.
These costs have the following effects
1) R&D
When a company wants to redesign a product first they will conduct a research whether it
is possible or not. If the results of the conducted research are positive then the company
will go for designing the product in new way in this process they have incurred some cost
called research costs.
2) Design
After getting successful research now the time is to redesign the product at our research
findings. Change in design has effect on shape and size of the product. All the costs
incurred on this phase are called designing costs.
3) Production
The third step is to produce the new product. In this stage we manufacture our new
product and the costs related to this step are manufacturing costs.
4) Marketing
After the production of new product now the time is to market the product. This is very
difficult task because to familiar the customer with new product is not easy. So
companies adopt different marketing strategies for new product. All these costs
associated with this called marketing costs.
5) Distribution
Distribution cost include freight, shipping or labour cost.
6) Customer Service
In this step company provide assistance to customers who buy product. All these costs
are customer service costs.
This all process affects the cost allocation of the product. Because each principal activity have
some costs and in all value chain function Process Company incurred some direct and indirect
costs. We allocate these costs to their relative pools. Like indirect costs goes to indirect pool cost
and direct cost goes to direct pool cost.
Customer Profitability analysis is the revenues and costs that are earned from customers and cost
incurred to earn those revenues. When we redesign our product then it will affect the customer
profitability. This affect would be positive when customer accepts the change and adopt new
product this will increase the revenue but if the change is not acceptable for customers then the
revenue drops and company bear a loss. Companies use five step decision processes to manage
customer profitability
1. Find the way how to manage and allocate the resources among customers
2. Obtain information from customers responds in past about the product
3. Managers expects the future revenues and cost for the product

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4. Managers make some decision with customer approach. Some customers are quality
oriented they did not worry about price. Some are price oriented
5. Manager evaluate the performance and learn from the product result
This change in product will also affect the sales variance because new product is not readily
acceptable for customers companies try to sell this product through different distribution
channels, internet and retail stores.
As our new product has not good market share in start so our market variance also affected by
this. Market variance shows the market sharing percentage of the product.

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 PROJECT ASSIGN FOR ADVENCE MANAGEMENT ACCOUNTING May 31, 2020

Question # 04
Requirement # 01
If wool yarn process into sweater the management will compare the relevant costs for
processing. As manufacturing costs are fixed so these are sunk costs, management compares
both revenues they will see that there is incremental revenue if selling price of sweater and yarn
are deducted from each other. And the costs that are included in processing are variable costs
that consist of raw material and labour. These cost will deduct from incremental revenue and
results in profit. At the end company will get the financial advantage that will decrease the
overall (loss) of the company.

Requirement # 02
Company should processes wool yarn into sweaters, because company have core strength in this
business and in peak season they can increase the selling price of sweater that will generate profit
for the company and further from the above analysis we see that when yarn processed into
sweaters, as a result it increases the operating profit of the company.

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Question # 05
Requirement # 01
In this case at first the management would decide that whether the byproduct is being used as
byproduct or main product. In most of the cases companies uses the byproducts as byproducts
and using the production method of allocating the cost, offset the processing cost. Byproducts are
not assigned costs. Their revenues treated as minor sale revenues.
And then the other consideration of the management is which method is used to assign the cost.
Management can use the sales value at split-off point because main products have more value
rather than the byproduct and cost can be assigned by value of the products. Another method,
physical measure (weight) can be used. In this method main product and byproducts can be
weighted and their weight nearly about to prime or main product. It is up to management which
method they feel best for decision making.

Requirement # 02
As company using physical measure method for all products, we recommend the following
changes for company;
a) Categorize the kinds of fishes, if multiple kinds of fishes are caught.
b) All processing activities must be categorized for joint cost.
c) For products or set of products in which separate process involves use separable cost.
d) Separate main products form byproducts.
e) In our recommendation fishes values are differ by their kinds so company uses salve
value method or net realizable method or other which best suit for company.

Requirement # 03
Our recommendation includes;
I. Costs of registration can be allocated by physical measure (no. of students registered) or
sales value (total sales of all departments) methods.
II. Sales volume methods include the total credit hours offered by each three department for
each semester.
III. And some departments occur more costs for credit hours offered use these costs as
separable costs.

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Question # 06
Requirement # 01
We can found the responsibility centers in centralized or decentralized organizations so it does
not create any difference what type of organization exist. If a centralized organization urges that
their managers are responsible for their actions and decisions, so for this purpose they can design
a reporting system that assigns all costs and revenues to their controllable managers. Centralized
organizations are profit oriented organizations and their focuses are to maximize the profits. In
centralized organization, managers are more responsible and control more items than are
reasonably possible and may have little freedom in decision making.

Requirement # 02
There are some limitations of decentralization are as follows:

1) Due to decentralization there is a lake of coordination among the various subunits of the
organization.
2) If company has not enough financial resources, they cannot appoint a talented manager,
so if manager is not exceptionally talented the company as whole is worse off.
3) Decentralization increases the administrative cost because company appoints highly-paid
managers.
4) In decentralization each subunit manger competes with other subunit manager in same
company like they are external rivals. Due to this they cannot focus on company goals the
only focus on their subunit performance.
5) If two or more subunits producing similar products this can generate internal competition
and subunits would try to steal market share from each other.
6) Decentralization may result in loss of control from the hands of top management. Each
subunits of the company are working as autonomous units for their own interest without
focusing of the overall interest of the organization.

Requirement # 03
Transfer pricing is an important accounting priority for managers especially when taxation is
involved. If we are producing products in high tax jurisdiction and transfer these products to low
tax jurisdiction unit our strategy would to show low income in high tax jurisdiction. We would
minimize the income because of high tax rate. We transfer the products on unreasonably low
transfer prices that only cover the expenses of that unit with minimum profit margin. Lower the
income lowers the tax.

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Requirement # 04
Transfer is a price which a subunit charges for the product or service transferred to other subunit
of the company. In decentralized organization cost and benefits of the decentralization have the
following effects.
Advantages
• Managers are well known with local conditions so their decisions are better and timelier.
• Motivation of managers is high because they have more control over results
• Mangers are concentrated focus on product.
• Top managers are not distracted in routine or local decision problems
Disadvantages
• Lack in coordination among managers in different subunits that affect the transfer price.
• Managers thinks only their unit profit so they charge the price which they would think
best for their subunit
• If company different subunit produce same product and sell in market this will also affect
the product price.

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Question # 07

Financial Performance Measure Non-Financial Performance Measure

Financial performance measure is expressed in Non-Financial measures information is not

monetary terms. e.g. stock price, profit, based on financial information of the company.
revenues, return on investment.

Financial performance measures are for short- Non-Financial measures are qualitative
term measures. measures of the company which includes the
quality of products or services, customer
satisfaction and market share etc.

Financial performance measure managers are Non-financial measure are expressed in units
relaying on short term goals. and used to evaluate the quality and quantity of
the business.

Outcome of financial performance measure Non-financial measures are precise objective

managers comes after a certain period of time measures.
so called lagging measure.

Difficulties of performance division operating in different countries

a) Environmental and cultural issue
Every country has its own cultural environment that differs from other countries and they
have their own social norms that affect the performance of a unit operating abroad.
b) Skilled labour issue
Skilled labour in another issue because it is difficult to find skilled labour for your
business specific across different countries
c) Material availability
There is another issue on material availability because the cost of material and quality of
material may differ across different countries.
d) Control prices
In some countries government control the selling prices so this is another issue to hold
the price with in government announced prices.
e) Legal and political issues
Different countries have different legal and political structure. So they have different
internal controls like duties, customs and taxes this is another issues.

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