Accounting Managerial Case Study

Write in a form that is understandable and answers the client’s needs or questions. Use Excel for your quantitative/numerical analysis. Make sure each Excel sheet has a purpose statement and summary conclusion. Provide clear assumptions and detailed computations to support your quantitative/numerical analysis. To make this assignment easier and your result more successful I 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 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 two parts of the assignment are worth a total of 17% 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. © Colin Haime & Sameer Mustafa, 2020. All rights reserved 2 Important Notes Regarding Student Conduct Each part of this assignment is an individual assignment. All submissions are required to be your own words and calculations. While it is recognized that students may discuss concepts and ideas, each student is required to construct their own response. You are not allowed to share/exchange your written answers or computations with others. Otherwise, you will be reported for cheating. In the event that the responses prepared by individual students appear to be the same or highly similar the instructor will consider referring the students to the Faculty of Management Academic Misconduct Committee for consideration. Plagiarism Plagiarism refers to the practice of presenting the words of another author (it may be a text writer or another student) as your own. This is not permitted. At times you will be asked to learn about and discuss the views or theories of others. This should be done with appropriate acknowledgement of source materials. In other words, you must reference your work. Acknowledge your sources – both direct and indirect quotes – within-text citations. Refer to the Referencing section contained below for further information. Academic Conduct Violations Any violation of the rules of Academic Conduct as described above will result in the immediate confiscation of all related materials of all parties involved. In addition, all parties will be immediately reported to the Faculty of Management Academic Misconduct Committee for consideration of further actions including (but not limited to) receiving a zero for the submission, a failure in the course and the possibility of suspension or expulsion. Referencing Faculty of Management (Business) requires the APA style of referencing for academic papers. Resources for using APA are available from the VIU Writing Centre (Library, Room 474). You can find their hours of operation and access to online student resources (including tutorials and a printable Quick Guide) at: https://services.viu.ca/writing-centre or email Ted.hill@viu.ca. For further information please discuss with your instructor and/or refer to the following Student Academic Code of Conduct Sample https://international.viu.ca/sites/default/files/academic_code_of_conduct.pdf © Colin Haime & Sameer Mustafa, 2020. All rights reserved 3 PML Packaging Machinery Ltd. 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 CPA firm of Graff and Spears (GS). GS specializes in providing accounting and consulting advice and analysis for manufacturing businesses. For your first assignment Peter Graff (TG) of GS wants you to work on the new client file, PML 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 PML Packaging Machinery Ltd. (PML). 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!! PML Packaging Machinery Ltd. (PML) PML is a private company founded in Surrey, BC in 1971 to design, develop, and manufacture packaging machines. Since then, PML’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. PML 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. Don West, CMA passed away at the beginning of 2020 and left the company to his three children Anna, Ted, and Omar. Anna (28 years old) is a PhD Candidate in social studies at UBC with no business experience. Ted (32 years) dropped out of high school and since then has worked in assembly at PML and he is currently © Colin Haime & Sameer Mustafa, 2020. All rights reserved 4 the Production Manager. Omar (36 years) has his own successful dentistry practice in Victoria. The company has concentrated on the area of customer packaging machines and until recently has shown good revenue and profit growth. In 2020, for the first time in its history it appears that PML’s expenses exceeded its revenue. The three siblings were very concerned with the financial results, and so they have approached GS for advice. Transcript of Meeting with Anna, Omar, and Ted, and Peter Graff and Student on September 29, 2020 Anna: I feel so bad that we did not live up to our Dad’s expectations and the company is now losing money. I stopped my PhD and moved back to Surrey to oversee marketing and sales. I started by giving all our clients a 10% discount. I thought we were doing a very good job, so I requested that production be increased. Omar: I closed my successful dentistry practice to manage the company. I prepared the income statement myself as I have done in my dentistry practice for the past 10 years. Ted: I was extra motivated this year because of the sudden death of our Dad. I never saw production going as smoothly as it did this year. Omar: Peter, please we need your advice here. Obviously, our Dad left us big shoes to fill. He was so smart, and he managed everything by himself. He did the accounting and the marketing. Maybe it is time for us to sell the business? Anna: How could we sell the business if it is losing money? Ted: We should never think about selling! There must be something wrong. I do not know accounting, but I have been working long enough at PML to know we should have made a profit and not a loss this year. © Colin Haime & Sameer Mustafa, 2020. All rights reserved 5 Peter: Do not worry guys your late Dad was a good friend of mine. I knew him since we did our undergrad together at SFU and he always made things look easy. Omar: Thank you Peter, my dad always spoke highly of you. As I mentioned, I prepared the Income Statement as I have done for many years for my dentistry practice using a modified cash basis accounting. I used accruals for long-term balance sheet elements such as equipment and the cash basis for short-term ones such as raw materials. I feel that this method gives us a more accurate picture of our cash position. Peter: While it does better reflect your cash inflows and outflows, if your inventory is increasing it results in a net income that understates where you truly are. As you have a line of credit, I am sure that the bank would like to see your financial statements and if you give them this, they are likely to cancel your line of credit. Omar: You are correct, we have a line of credit up to 3 million dollars at a very competitive interest rate of 4.5% and I agree with you, I don’t want to lose it especially during these difficult times. Now, I am afraid that our net income might be even lower, and we will lose our line of credit. Ted: I don’t recall that we ever had to use our line of credit as extensively as we did last year. This included paying someone’s house rent!! Anna: Dad always helped me financially. Paying my rent for my house in Surrey is the least you could do for me. I am working very hard to increase our sales. Peter: Don’t worry guys! You are all hard-working honest people. We need to review the paperwork and see what is wrong here and how could we fix it? It might take some time to analyze your situation and come up with clear answers for you. That is why I have brought with me extra help, a bright Student from VIU. © Colin Haime & Sameer Mustafa, 2020. All rights reserved 6 Peter: The first thing that student must do is to restate the results of last year. Omar, while the format you have used works well for a service industry like yours, a manufacturing operation reflects its results differently. Student, could you please take the information provided and restate the results using a Schedule of Cost of Goods Manufactured and a separate Income Statement? Student: I can do that. Ted: I have never seen our warehouse packed with so many unsold machines. There is no more room in the warehouse or even in the storage room for anything. Anna: Those discounts encourage people to buy our products. In addition, I think we should consider doing customer orders. Currently our production process is fairly labour intensive so I think it would be easy to reallocate our workers to work on customer jobs. Peter: Anna, have you done any calculations to see how much you would have to charge for customer orders? Anna: No, I have not. I have some figures that I can give you based on a food industry customer who called me last week. Peter: Great! In addition to illustrating how to cost out this customer job, we can also provide you with a memo which describes the different characteristics of customer jobs compared to your regular manufacturing process for your standard machines. That will allow you to understand in the future which machines or processes should be considered under Job Costing and which ones should be considered under Process Costing. Student, if you could do this and please illustrate 2 different scenarios. As we are not yet sure what the best choice will be for the allocation base of manufacturing overhead do one example using direct labour dollars as the cost driver and a second example using machine hours as the cost driver. Please use the figures from the 2020 year as the predetermined amounts. Student: I can do with the information that I have been given already. © Colin Haime & Sameer Mustafa, 2020. All rights reserved 7 Omar: I think one of our problems is that we are stretching our resources between two packaging machine product lines: Cosmetics and Food. I wish I knew which product line more profitable, then I could discontinue the other line. Peter: Do these types of machines use different amounts of resources in their manufacture (e.g., labour, machinery, materials… etc.)? Omar: Yes, they do. As the food machines are going to be used in an environment that cannot be contaminated in any way, we are required to take greater care in their manufacture. Therefore, we need more supervisors on staff, there is greater inspection time, the factory insurance and the factory building is more related to the production of the Food machines than the Cosmetic machines. Peter: If we can get a bit more information on the supervisory, inspection, insurance and space utilization differences for the product lines we can do some Activity Based Costing that should give us an indication of how profitable each type of machine is. Student, the actual results for 2020 information page that Omar has provided us has a variety of information on it. I would like you to do a brief memo (1 page) identifying what measure is the best choice as a cost driver for supervisory cost, inspection cost, factory insurance and factory building amortization. All other costs should use machine hours as the cost driver. Student, 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 five weeks, let us say no later than Friday, November 6th. © Colin Haime & Sameer Mustafa, 2020. All rights reserved 8 PML Packaging Machinery Ltd. Required: (85 Marks) Each student is required to submit their files (Word and Excel) to the ACCT 294 D2L Case Part 1 Dropbox no later than 11:55PM, Friday November 6th, 2020. No late files will be accepted after the due date time. Please do not wait until the last minute to attach your files and email me if you have any problems. 1) Using the information provided restate the results by preparing (in good form) a Schedule of Cost of Goods Manufactured and a separate Income Statement. (20 Marks) {No page limit} 2) Customer Jobs a. Prepare a memo detailing out the similarities and differences between process costing and job order costing. (8 Marks) {1-page limit} b. Calculate the predicted total cost and proposed selling price for the customer order using the following separate assumptions: (10 Marks) {No page limit} i. Direct Labour Dollars is the cost driver. ii. Machine hours is the cost driver Note: Assume a Gross Margin of 15% in order to determine the proposed selling price. 3) Activity Based Costing a. Prepare a memo identifying and explaining your choices of cost drivers for the following expenses: (6 Marks) {1-page limit} i. Supervisory costs ii. Inspection costs iii. Factory insurance iv. Factory building amortization b. Using the concepts of ABC costing, calculate the resulting total cost and gross margins for both the Cosmetic and Food lines. (35 Marks) {No page limit} c. Discuss two advantageous and two disadvantages of implementing ABC costing by PML. (6 Marks) {1-page limit} © Colin Haime & Sameer Mustafa, 2020. All rights reserved 9 PML Packaging Machinery Ltd. You Make It, We Pack It! Exhibit 1 Results for the year ended August 31, 2020 Revenue Discount Net Revenue Cosmetic Food $12,000,000 $22,000,000 (1,200,000) (2,200,000) $10,800,000 $19,800,000 Materials purchased 7,899,802 Accounting and legal Utility Costs- Head Office Utility Costs- Production Administrative salaries Inspection Costs Factory Insurance Sales commissions Interest on business credit line Management salaries (Omar,Anna, Ted $120,000 each) Property Taxes- Head Office Factory Building Amortization Office supplies, Courier and Postage Annual Business Licenses and Fees Warranty Program Costs Amortization Expense- Fabrication Equipment Amortization Expense- Office Equipment Business Liability Insurance Telephone Costs- Factory Telephone Costs- Head Office Anna’s House Rent Labour- Assembly workers 2,000,000 Labour- Production supervisors Total 34,000,000 (3,400,000) $30,600,000 23,277,000 5,000 30,000 240,000 76,000 760,000 80,000 340,000 100,000 360,000 6,500 412,000 7,760 2,500 500,000 650,000 12,000 10,000 3,000 6,000 $15,000 5,500,000 600,000 15,377,198 3,500,000 32,992,760 Total Expenses ($2,392,760) Net Income (Loss) Current Year End Balances Raw Materials Costs- Machines unfinished at year end Costs- Machines complete but not sold Last Year End Balances Raw Materials Costs- Machines unfinished at year end Costs- Machines complete but not sold Cosmetic $1,500,000 1,000,000 3,000,000 Food $3,000,000 3,000,000 6,000,000 Total $4,500,000 4,000,000 9,000,000 1,000,000 2,500,000 $500,000 2,000,000 5,000,000 $1,500,000 3,000,000 7,500,000 $2,000,000 © Colin Haime & Sameer Mustafa, 2020. All rights reserved 10 PML Packaging Machinery Ltd. Exhibit 2 Actual Results for Fiscal 2020 Net Revenue in $ Cosmetic Food $10,800,000 $19,800,000 Total $30,600,000 $2,000,000 $3,500,000 $5,500,000 75,000 175,000 250,000 200,000 375,000 575,000 # of Machines sold 40 100 140 # of Machines Produced 70 120 190 420 2,160 2,580 11,250 22,800 34,050 Direct Labour Cost in $ # of Assembly Labour Hours # of Fabrication Machine Hours Inspection Hours Factory Area used (sq metres) PML Packaging Machinery Ltd. Exhibit 3 Details of Proposed Customer Order Direct Materials Direct Labour Expected # of Fabrication Machine Hours $226,000 $57,000 5,642 © Colin Haime & Sameer Mustafa, 2020. All rights reserved 11 …