Jan Turyna
MANAGERIAL ACCOUNTING – CASE ANALYSES

CASE 1 Management Board of Furniture Company X is considering one-year contract for producing office desks. Accounting Department has prepared preliminary list of contract costs and revenues:
|Specification |Amount |
|1. Direct material costs, including: | |
|- plywood (stock-carried in company’s store) |20000 |
|- varnish (ordered) |9000 |
|- metal connectors (still not ordered) |1500 |
|2. Direct labor costs |20000 |
|3. Indirect labor costs (salary of technical supervisor) |5000 |
|4. Technical equipment, including: | |
|- rented one (200/per week) |10400 |
|- company’s own equipment (one year’s depreciation) |10000 |
|5. General overhead costs |20000 |
|6. One year’s planned revenue (guaranteed by contractor) |50000 |

Additional information:

1. The plywood has been bought 2 years ago. It is possible to use it also for producing book-shelves as a substitute of wood of value 25000. In such a case, adaptation of plywood is necessary; estimated cost of adaptation is 2500.

2. The varnish has been ordered 2 months ago but the delivery is behind time because of disaster (fire) in varnish factory. In such a case decreasing of purchase price has been negotiated. If the furniture company has resigned desks’ contract then the varnish should be sold with a selling price of 4500.

3. The metal connectors can be used only for the production of office desks. They’ll be ordered only in the case of contract.

4. Company’s Management Board has decided before to employ a technical supervisor That decision doesn’t depend on the desks’ contract realization. But if the contract will be agreed upon then another supervisor employment, with a one-year salary of 4000 will be necessary.

5. The rented equipment is actually used for production of wardrobes. If the desks’ contract will be realized then a new rental of extra equipment for wardrobes production, with rental fee of 250/week is necessary.

6. Company’s own equipment has been bought 3 years ago for 50000 and its full time of usage was planned for 5 years. The actual value of cumulated depreciation is 30000 and one-year depreciation is 10000. If the equipment hasn’t been used for the production of office desks then it should be sold immediately, for 12000. The selling price of that equipment after the contract is 6000.

7. The general overhead costs are mainly spendings for company’s administration. The level of the costs doesn’t depend on the contract.
Should the Management Board decide to realize the contract or to resign it.

CASE 2 The bike-producer company produced 1000 mountain bikes. The costs of production and revenues were following:
|Items |Amounts |
|1. The selling costs, including: | |
|advertising |8000,- |
|salaries |15000,- |
|business trips |3000,- |
|selling office rental |2000,- |
|insurances of forwarding |2000,- |
|2. The production variable costs |100000,- |
|3. Sales |250000,- |

The sales size increasing, to the level of 1480 bikes, is foreseen for the next year. Costs will also increase i.e. advertising costs by 20%, salaries by 40%, costs of business trips by 1400,-, office rental costs by 2000 ,- and insurance costs by 50%.
Calculate future marginal costs of bikes production.

CASE 3 The accounting department of the company „X” has prepared the report, as below:
|Items |Amounts |
|Sales of final products |250000,- |
|Sales of services |100000,- |
|Direct materials costs |120000,- |
|Direct salaries and social insurance costs | |
|Other direct costs |80000,- |
|Fixed production overheads |20000,- |
|Variable production overheads |30000,- |
|General & administrative overheads |20000,- |
|9. Selling costs |50000,- |
| |10000,- |

Calculate: a) net sales income using full costing system, b) gross margin and gross margin ratio using variable costing system.

CASE 4 During the last year a textile company „Y” has made 10000 jackets and sold 9000 jackets by 98,-/unit. Unit production costs were following: - direct materials 42,50,- - direct salaries 10,00,- - other variable costs 10,50,- - fixed production costs 9,00,-
General & administration and selling costs were total 120.000,-.

Compare net sales income of the company using parallel: full costing and variable costing systems.

CASE 5 During the last year a textile company „Y” (see case 4) has made and sold 10000 jackets for 98,-/unit. Variable production costs were 63,- /unit and fixed production costs were 210000,- per year. It is necessary to calculate: a) break-even point (BEP) by quantity and by value, b) margin of safety and margin of safety ratio, c) net sales income for 10000 units sold, d) with an assumption of increasing of size of company’s production to 11000 of jackets calculate a net sales income and margin of safety.

CASE 6 According to assumptions in case 5 (above) answer the following questions: 1. How should a net sales income of the company “Y” change, if the sales size of 10000 units was the same and: a. variable costs decreased to 60,-/ unit and fixed costs increased to 250000,-, b. variable costs increased to 70,-/ unit and fixed costs decreased to 200000,-, c. fixed costs increased to 240000,- and price increased to 105,-/ unit. 2. How many jackets should be sold to increase net sales income to 210000,- (price and costs without change)? 3. What should the new unit selling price be to reach the net sales income of 160000,- (size of sales and costs without change)? 4. What should the new size of sales be to cover extra fixed costs of advertising of 7000?

CASE 7 The company „Z” has realized sales of 800000,-. Gross margin ratio was estimated at 30% and margin of safety ratio at 20%. Calculate:
a) break-even point by value,
b) net sales income,
c) a new value of sales to reach the net sales income of 25% higher than before.

CASE 8 The company “A” produces two kinds of final products: Y and Z. The company’s annual budget assumes sales volume at the same level and planned unit gross margin for both products is 12,- and 8,- respectively. A variance analysis between budget items and their real values shows changes of sales structure i.e. sales volume of product Y is 75 % of total sales value and sales volume of product Z is only 25% of total sales.

Recommendations: calculate planned break-even point and real break-even point with the following assumptions: • planned and real fixed costs are the same and they are 1800000,-, • unit sales prices and unit variable costs are at the same level like in the budget.

CASE 9 The accounting department of the company “P” producing home furniture has prepared annual report about sales and costs for managers board (as below):
|Items |Wardrobes |Tables |Chests of drawers |
|Size of sales |500 |1000 |800 |
|Unit selling price |200,- |120,- |100,- |
|Unit variable costs |140,- |84,- |70,- |

The company’s fixed costs are following:
- fixed production overheads 20000,-
- administrative overheads 38000,-
- selling costs 5000,-
Calculate for all assortments together: a) gross margin and its ratio, b) net sales income, c) break-even point, d) margin of safety and its ratio.

CASE 10 The management board of company “P” (assumptions above) is working out a decision, how to increase the company’s net sales income in the next year. Four variants are analyzed: a) variant 1: the edition of new advertising folder for promotion of company’s products; estimate costs of edition are 10000,-; the expectations of new sales size are following: wardrobes – growth of 70 units, tables – growth of 100 units, chests of drawers – growth of 50 units. b) variant 2: the change of sales structure, preferring wardrobes with the highest gross margin per unit; the board assumes increasing of sales size of that assortment, from 500 units to 1100 units and reduction of number of chests of drawers sold (the smallest margin), from 800 units to 200 units; estimated increasing of costs is, as follows: a. rental fee of equipment for wardrobes production = 5000,- per year, b. rental fee for additional store = 4000,- per year, c. extra costs of advertising = 4000,- per year. c) variant 3: the new motivating salary system for sales department workers; commission of 2% of selling price of each product sold should increase in size of sales of all assortments made by the company of 10%. d) variant 4: the new technology of production; the company’s research department suggests to buy new machines; it is assumed to decrease variable costs of furniture production of 20% and increasing of fixed costs (depreciation) of 20000,-.
Calculate financial consequences of every variant to the copmpany’s net sales income, planned for the next year.
CASE 11 A company is doing two forms of business activity i.e. production and service. They produce small, wooden cottages, sell them to garden owners and assembly cottages in buyers’ gardens. The company’s accounting department has prepared a report including costs of production and costs of services in April, as below:

|Items |Production (PLZ) |Services(PLZ) |
|Direct materials |300000,- |2000,- |
|Direct labor |60000,- |20000,- |
|other direct costs |9000,- |1000,- |
|fixed production overheads |18000,- |4000,- |
|variable production overheads |12000,- |3000,- |

The general & administration overheads were 10000,- and selling costs were 2000,- . In April 10 cottages have been finished and sold to garden owners. The production of next 10 cottages has also been started and at the end of April the work-in-progress has been advanced in 50% of processing costs. The costs of services included the assembly process of cottages for buyers.

Using the “cost-plus” pricing formula, calculate: • unit price of a cottage, based on full production costs method and calculating 30% margin of profit, • unit price of a service (cottage assembly), based on full own costs method and calculating 10% margin of profit.

CASE 12 A factory, producing home and kitchen equipment, is going to produce electric, wireless kettles for boiling water. Planned unit variable costs of production are 60,- . Fixed production overheads – 160000,- and general and administration overheads are 240000,-. Also additional capital outlays are necessary. They consist of: • fixed assets expenditures of 1600000,- , • operating capital expenditures of 200000,-.
Annual internal rate of return of 20% has been also calculated.

Using return on investment pricing formula calculate two versions of unit selling price of electric kettle i.e. • one version, based on full production costs, • another version, based on full own costs.
CASE 13 A book editing company produced and sold 16000 albums with photos of color landscapes. Variable production costs were 560000,- and gross margin ratio was 30%. Calculate unit selling price on the base gross margin pricing method.

CASE 14 The accounting department of the company “P” producing home furniture has prepared annual report about sales and costs for managers board (as below):

|Items |Wardrobes |Tables |Chests of drawers |
|Size of sales (units) |500 |1000 |800 |
|Unit selling price |200,- |120,- |100,- |
|Unit variable costs |140,- |84,- |70,- |
|Total gross margin |96000,- |96000,- |24000,- |

A company has reached the new offer for production of 300 units of book shelves.

variant 1: a shelf unit price, proposed by wholesaler, is 160,- and estimated unit variable production costs are 120,-; no production costs would increase and no changes of production size would appear;

variant 2: an offer would increase production overhead costs by 6000,- (rental fee of new equipment for wood processing); another assumptions as in variant 1 and no changes of size of other products are expected;

variant 3: an offer would decrease a production size of: wardrobes (from 500 to 350 units) and chests of drawers (from 800 to 650 units): no changes of prices and production costs are expected.

Recommendations: Analyze financial effects of following variants of shelves production:

CASE 15 An accounting department has prepared items illustrating: one year production size and operating costs of company’s producing three products: A, B and C as below).
|Items |A |B |C |
|Production size (units) |5000 |10000 |8000 |
|Unit variable costs, including |280,- |168,- |140,- |
|direct materials |160,- |100,- |88,- |
|direct labor |80,- |50,- |40,- |
|variable production overheads |40,- |18,- |12,- |
|Fixed production overheads |96000,- |56000,- |48000,- |
|Administration overheads |180000,- |104000,- |96000,- |
|Selling costs |24000,- |15000,- |10000,- |

Assume profit rate: 8% for A, 10% for B and 5% for C and calculate:
a) minimal price in a short run.
b) minimal price in a long run.
c) strategic price.
CASE 16 An accounting department of noodles producer is reporting an annual: production size, sales production costs and profits/losses, as below:
|Noodle type |Production size (tons) |Sales (€) |Variable production |Fixed production costs (€)|Profit/ |
| | | |costs (€) | |loss |
| | | | | |(€) |
|“Ribbons” |1,000 |200,000 |150,000 |60,000 |-10,000 |
|“Shells” |2,000 |600,000 |440,000 |120,000 |40,000 |

Additional assumptions: 1. There are no possibilities to increase production size of “shells” but the production volume of “ribbons” should go up. 2. No changes of prices and costs are expected. 3. Fixed production costs are not allocated to separate products. 4. A company was offered a new contract for production of “ribbons” noodles; production size is 500 tons and unit selling price is 180 €/1 ton. 5. A management board is obliged to make the decision: variant 1: to resign “ribbons” production (loss reported), or variant 2: to continue “ribbons” production and to realize a new contract.
What decision should be made by company’s management board.

CASE 17 During the last year a textile company „Y” has made and sold 10,000 jackets for 100 € /unit. Variable production costs were 63 € / unit and fixed production costs were 210,000 € per year. The opinion of company’s management board is that usage of production agents is not satisfied because technical equipment and human resources of the company let sew 15,000 jackets a year. For the better productivity level the company’s board analyzed four variants of future activities i.e.: • variant 1: a trade agent is offering a sale of 13,000 jackets but for an extra commission of 10% of unit selling price;

• variant 2: the licenser’s proposal is to buy extra 4,000 jackets but a licenser quality needs increase production costs i.e. variable costs by 25% and fixed costs by 50,000 €;

• variant 3: according to market analysis results the company should start with production and selling of leather jackets; a size of new production is estimated at 5,000 units, unit price is 150 € and unit variable costs of leather jacket are 110 €; this form of business activity needs also a lease of new sewing machines and professional training of staff, what would increase company’s fixed production costs by 170,000 €;

• variant 4; a lease of technical equipment not used today is also possible; an annual lease gain is estimated at 15,000 €.

Calculate financial effects of every variant for improvement of company’s production agents and advise the best to management board.

CASE 18 A company is a producer of standard product X. The calculation of unit variable product cost is presented below: • direct materials 10.00 € • direct labor 7.50 € • variable production overheads 1.25 € • total unit cost 18.75 €.
The following information is also included into company’s budget: • sales volume 80000 units • fixed operating costs, including: o production overhead costs 1,000,000 € o administration overhead costs 600,000 € o selling costs 500,000 € • total gross margin 2,500,000 € The company’s management board is not satisfied with financial results and with budget for the next year. During the board meeting the following variants of future activities, to improve company’s results, have been discussed. Here they are: 1. Chief production officer (CPO) has suggested to decrease in unit selling price of product A by 10%, what should increase sales volume by 25%. However, fixed production costs would increase by 50,000 € and selling costs would also increase by 25,000 €. 2. The idea of chief financial officer (CFO) was opposite to CPO suggestions i.e. he proposed to increase in unit selling price by 10%. He also suggested to increase costs of promotion from 100,000 € to 400,000 €; it will increase of sales volume to 90,000 units. Fixed production costs will increase by 25,000 € and selling costs will increase by 20,000 €. 3. Chief executive officer (CEO) said, he should expect future net selling profit at 600,000 €. He asked what future unit selling price should be to reach expected net selling price. He also assumed an increase of costs of promotion by 360,000 € should cause an increase: sales volume by 10%, fixed production costs by 25,000 € and selling costs by 17,000 €. 4. Chief marketing officer (CMO) suggested to support a promotion campaign and expected sales increase by 20%; then net sales profit should reach a level of 15% of company’s turnovers. Fixed production costs will increase by 40,000 € and selling costs will increase by 25,000 €. He asked what additional costs for promotion activities must be to realize those assumptions.

Calculate financial aspects of each variant of activities presented by management board members.