Management Accounting Consultancy Report

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ACC/ACF2200 Management Accounting S1, 2021 Assignment

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MONASH UNIVERSITY DEPARTMENT OF ACCOUNTING

ACC/ACF2200 MANAGEMENT ACCOUNTING ASSIGNMENT – SEMESTER 1, 2021

REQUIRED:

Each student is required to read the case and address the issues raised at the end of the case. You are expected to conduct research relating to costing systems in similar organizations (and elsewhere in other industries) when preparing your assignment. The assignment should be in REPORT format. The report should include: cover page, executive summary, table of contents, introduction, overview of main recommendations, discussion (with appropriate sub-headings), conclusion, bibliography and appendices. Please ensure you include summary calculations in the body of the report and include detailed workings in appendices. Also, it is important that all articles, books and weblinks used for the assignment are properly referenced throughout the assignment. Handwritten assignments are not acceptable.

Please remember to complete the assignment cover sheet. The assignment represents 30% of your overall grade for the subject.

DUE DATE: The assignment is due before 5pm, Thursday 6th May, 2021 (Australian Eastern Standard Time). Please submit a copy of the assignment (WORD document in either .doc or .docx format) online through the Assignment submission drop box provided in the Assessments tab on Moodle, and follow the instructions. Please submit your signed assignment cover sheet separately to ‘Assignment coversheet only’ submission drop box on Moodle.

SPECIFICATIONS: The suggested word limit for the assignment is strictly between 1,800-2,000 words including calculations, tables and figures but excluding bibliography and appendices (see page 10 for penalties of breaching the word limit). The total word count should be indicated as a footnote on the cover page of your assignment. Submitted assignments must be typed (12p font in Times New Roman). Where appropriate, the assignment must be adequately referenced, and a bibliography included. Students should keep a copy of their assignment.

LATE SUBMISSIONS: Students who submit the assignment after the due date will receive a penalty of 10 per cent of the marks allocated to the written report per calendar day. If the submission is more than 7 calendar days late, students will receive a mark of 0. Extensions will only be provided to students who receive approval from the Chief Examiner prior to 6th May, 2021.

ACC/ACF2200 Management Accounting S1, 2021 Assignment

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Nature Candle

The Case of Nature Candle Limited

Nature Candle Limited is a medium-sized Australian-

owned manufacturer of candles based in Richmond,

Victoria. It specialises in the production of quality

candles for the wholesale and retail markets. Following

the “eco-friendly” value, Nature Candle Limited only

produces candles made of natural ingredients, such as

soy wax and beeswax, with cotton or linen wicks. Their customers range from household

candle lovers to a broad range of corporate and boutique companies that are proud to put

their labels on the customised candles.

The market of candles is traditionally dominated by paraffin candles made of paraffin wax –

a petroleum by-product refined from crude oil that is also commonly used in beauty

products. However, increasing research in recent years show that paraffin candles,

particularly those with artificial scents and dyes, are potentially hazardous to users, causing

damage to the brain, lung and central nerve system. Hence, more and more candle

manufacturers turn their eyes to the eco-friendly candle segment. With its long-standing

expertise in the design and production of high-quality soy wax and beeswax candles, unique

ability to meet customer’s individual needs and flexibility with specific requirements of

different demanding markets, Nature Candle is able to compete with larger local

manufacturers in the segment.

James Bright, a Monash commerce graduate who has recently been employed by Nature

Candle Limited, was asked by the CEO of Nature Candle to review the company’s cost

accounting procedures. In outlining this project to Bright, the CEO expressed three concerns

about the present system:

1. Its adequacy for purposes of cost control

2. Its accuracy in arriving at the true cost of products

3. Its usefulness in providing data to judge employee and departmental performance

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The CEO is keen to resolve these issues due to certain realities in Nature Candle’s external

environment. In addition to the increasing competition with larger Australian candle

manufacturers, the signing of free trade agreements, such as Comprehensive and

Progressive Agreement for Trans-Pacific Partnership (CPTPP), has also opened the gate for

candles, lower in price, manufactured in South East Asia. While Nature Candle traditionally

does not compete with other players on price, the pressure of lower-priced imports on the

eco-friendly candle market is being felt by the company.

Bright began the cost accounting study in Nature Candle’s MCT division that manufactures

candles for commercial users, which accounts for about 36% of Nature Candle’s sales. This

division has five production departments, namely wick making, wax melting, molding,

custom work and packing. The production flow is shown below:

The production process starts from the wick making department where cotton or linen

wicks are braided and then treated with inorganic salt solutions. The treatment allows wicks

to bend at a 90-degree angle when burning so that the end will remain in the outer mantle

of the flame and shorten naturally. Next, the wax melting department prepares the wax

base by heating and melting wax into a clear, near-liquid state in huge metal kettles. The

molten wax is then filtered carefully to remove impurities that may affect the burning

process. At this time essential oils and natural dyes are added to wax for different products.

In the molding department, molding machines are used to give shapes to the candles. The

wick is pulled through the tip of the mold before wax works its way into each mold. Once

the wax has solidified, the finished candles are pulled out of the molds. Excess wax is

trimmed and collected for reuse. Standard products will be transferred to the packing

department directly, whereas custom products will be sent to the custom work department

Wick Making Wax Melting Molding

Custom

Work

Packing

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to perform additional custom work and other operations before transferring to the packing

department.

Thus, custom products pass through all five

departments and standard products pass through all

departments except the custom work department.

In addition, spare candles are produced as buffer

stock for fluctuation of customer orders. These

spare candles will go through only the first three

departments.

Bright’s investigation showed that with the exception of materials cost, all product costing

was done on a single, plant-wide, hourly rate. This rate included both direct labour and

factory overhead costs. Each batch of products was assigned to labour and overhead cost by

having workers charge their time to the job number assigned to each batch, and then

multiplying the total hours charged to the job number by the hourly rate.

Exhibit 1 shows how the October hourly rate of $41.95 was calculated.

It seemed to Bright that because the average labour skill level varied from department to

department, each department should have its own hourly costing rate. With this approach,

time would first be charged to each batch of products by department. The hours charged by

a department would then be multiplied by that department’s costing rate to arrive at a

departmental labour and overhead cost for the batch. Eventually these departmental labour

and overhead costs would be added (along with materials cost) to obtain the total cost of a

batch.

Bright decided to see what impact this approach would have on product costs. The MCT

division’s accountant pointed out to Bright that labour hours and payroll costs were already

traceable to departments. Also, some overhead items, such as departmental managers’

salaries and equipment depreciation, could be charged directly to the relevant department.

However, many other overhead items, including heat, electricity, property taxes, and

insurance, would need to be allocated to each department if the new approach were

implemented. The accountant was also concerned that the non-manufacturing costs of

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administrative departments like finance, HR and IT are at present being incorrectly allocated

(based on direct labour cost) and do not accurately reflect the usage of these departments.

Accordingly, Bright determined a reasonable allocation basis for each of these joint costs

(for example, cubic metre of space occupied as the basis of allocating heat costs), and then

used these bases to recast October’s costs on a departmental basis. Bright then calculated

hourly rates for each department (shown in Exhibit 2).

To obtain some concrete numbers to show the CEO, Bright decided to apply the proposed

approach to three MCT activities: 1) the production of BW-18 beeswax candles (MCT’s best-

selling product); 2) production of spare candles for inventory, and 3) work done by MCT for

other Nature Candle divisions. Exhibit 3 summarises the hourly requirements of these

activities by department. Bright then costed these three activities using both the October

plant-wide rate and the pro forma October departmental rates.

Upon seeing Bright’s numbers, the CEO noted that there was large difference in the

indicated cost of BW-18 beeswax candle as calculated under the present and proposed

methods. The present method was, therefore, probably leading to incorrect inferences

about the profitability of each product, the CEO surmised. The impact of the proposed

method on spare candle inventory valuation was similarly noted. The CEO, therefore, leaned

towards adopting the new method, but told Bright that the department managers should be

consulted before any plans are made.

Bright’s explanation of the proposal to managers prompted strong opposition from some of

them. The managers of other departments for which the MCT division does work felt it

would be unfair to increase their costs by increasing charges from the MCT division. One of

them stated:

The MCT division handles our department’s overflow work when we’re at capacity. I

can’t control costs in the MCT division, but if they increase their charges, I’ll never be

able to meet my department’s cost budget. They’re already charging us more than

we can do the work for in our own department, if we had enough capacity, and

you’re proposing they charge us even more!

Also opposed was the production manager of the MCT division:

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I’ve got enough to do getting good quality output to our customers on time, without

getting involved in more paperwork! What’s more, my department managers haven’t

got the time to become bookkeepers either. We’re already charging all of the

company’s production costs to products and work for other divisions; why do we

need this extra complication?

The company’s sales manager also did not favour the proposal, telling Bright:

We already have trouble being competitive with not only the big companies in our

industry at home, but now also overseas where production is much cheaper. If we

start playing games with our costing system, then we’ll have to start changing our

prices. We have to carry some low-profit – or even loss – items in order to sell the

more profitable ones. As far as I am concerned, if a product line is showing an

adequate profit, I’m not hung up about cost variations among the items within the

line.

The strongest criticism of Bright’s proposed new system came from Nature Candle’s finance

director:

Departmentalising the costing rate may be a good idea, but I’m not sure you are

attacking the main problem. How can we do anything with these cost estimates

when you change the rates every month? When volume is rising, all our products

make money, no matter what system you use. But when overall volume is falling,

some products begin to show losses even though their own sales continue to hold up.

I don’t know whether they’re really losing money or whether they just can’t carry a

full share of overhead costs. I don’t see how your system is going to help me answer

that question.

Faced with all these arguments, Bright decided to do some more calculations before going

back to the CEO. First, Bright asked the industrial engineering department to estimate the

monthly volume at which each of the five production departments typically operated over

the course of a year (normal volume). Then he assembled a new set of overhead cost

estimates and recalculated the proposed overhead rates, as shown in Exhibit 4. Finally,

Bright recalculated the labour and overhead costs of a 100-unit batch of BW-18 beeswax

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candle, a typical month’s spare candle production and work for other divisions, based on the

“normalised” departmental rates.

When Bright circulated these new calculations, the production manager of MCT division was

even more perturbed than before:

That’s even worse! Now you’re piling paperwork on paperwork! And on top of

everything, we won’t be able to charge out all of our costs. What am I supposed to do

with the costs in molding and packing if I can’t charge them to products or the work

we do for other divisions?

When Bright reported the various managers’ opposition to the CEO, the CEO replied:

I really don’t want to cram anything down their

throats, they have to be comfortable with it. But

I’m still not satisfied our current system is

adequate. What do you think we should do?

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Required:

Upon deeper reflection on the above issues both Bright and the CEO decide that external

expertise is needed to solve the current impasse in the costing system. They hire you to

provide recommendations in the form of a management consulting report. They have

requested that the following information be included in the report:

1. Using the data in the exhibits, determine the conversion cost of a 100-unit batch of

BW-18 beeswax candle, a month’s production of spare candles for inventory, and a

month’s work done for other divisions under the present model, Bright’s first

proposal, and his revised proposal.

2. Assume that direct materials cost for a 100-unit batch of BW-18 beeswax candle is

$2,200 and that Nature Candle sells these candles at $46 each. Using both the

present and first proposed costing methods, advise if the BW-18 price should be

increased? Should it be dropped from the product line?

3. Comment on the cost differences you observe in question one and two between the

different costing approaches. What causes the differences? Are they significant

enough to cause a revision of the costing system? Explain your answer.

4. Drawing on your considerable expertise in cost management, suggest other costing

techniques that Nature Candle might find useful besides those proposed by Bright.

Describe specifically how these techniques could be used within Nature Candle by

providing tangible examples of how they would operate and the benefits they would

bring in terms of decision-making.

5. It is clear that any new costing system within Nature Candle could potentially be met

with considerable hostility and opposition from the department managers. Conduct

research and make suggestions on how these behavioural issues could be minimised.

You are required to write a report between 1,800 - 2,000 words. Nature Candle has asked

you not to go over this word limit as they are busy people and would prefer if you keep it

short, concise and to-the-point. Therefore, this word limit includes everything – the only

exceptions are the bibliography and appendices.

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Upon receiving this brief, you return to your office and discuss the report with your boss.

Having had a lot of experience writing these kinds of reports, she gives you the following

tips:

• Your feedback to the client’s questions must be given with specific reference and

applicability to the unique context of a candle manufacturer. Generic answers that

could apply to any organisation or environment should not be included.

• Research into costing systems in similar organisations (and elsewhere in other

industries) is essential. Make sure all articles, books, and weblinks used for the

report are properly referenced throughout the report. In fact, the more references

you include the more comprehensive and informative the report will be!

• Make sure your report looks like an actual management consulting report, not like a

university assignment or essay (suggested format of a management consultancy

report can be found on Moodle). Use ‘visual’ information (e.g., diagrams, charts,

pictures, headings, bullet points etc.). As Nature Candle has pointed out - they are

busy people and anything you can do to make it easier for them to read and

understand the information you are giving them will be greatly appreciated! Google

‘management consultancy report’ to see what they should look like. Just make sure

any visual tools you use are included within the overall word-count limits. If your

word processor cannot count the words in these visual tools make sure to count

them manually and include in your overall word-count.

• Make sure the report includes a table of contents, executive summary, introduction,

and conclusion. Make sure you fully understand what should be included in each of

these sections. In particular, make sure that all the main points of the report are

summarised in the executive summary (ES). The report should not read like a

mystery novel – all your main points need to be explained upfront in the ES, then

should be elaborated upon and expanded in the main body of the report. The ES

should not be longer than one page.

• Make sure you set aside enough time to evaluate the final report before you submit

it to Nature Candle. Make sure its content is of high quality and is not sloppily

written with spelling, grammar or formatting errors.

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• VERY IMPORTANT: Make sure your report does not include any information that the

client already knows. For example, nowhere in the report should there be a

description/summary of the organisation, their operations, staff etc. – they will know

all this already. Your job, as a management consultant, is to add value – to highlight

problems and make suggestions, from a management accounting/costing

perspective, about issues they may not have been aware of or considered in detail.

• Penalties for breaching the word count limit

The suggested word limit is strictly between 1,800-2,000 words including everything

such as calculations, tables, and figures (but excluding bibliography and appendices).

The following penalties apply for breaching the word limit:

Between 1 and 150 words over the limit Penalty of 5%

Between 151 and 300 words over the limit Penalty of 10%

Between 301 and 500 words over the limit Penalty of 15%

Between 501 and 1000 words over the limit Penalty of 20%

An excess of 1,000 words over the limit penalty at the discretion of the marker with

a minimum penalty of 25%

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Exhibit 1: Calculation of Plantwide Labour and Overhead Hourly Rate for October

Labour Dollars Hours

Wick making $40,873 2,527

Wax melting 28,760 2,138

Molding 143,899 7,678

Custom work 61,137 3,712

Packing 218,638 15,357

Total labour 493,307 31,412

Overhead 824,492

Total labour and overhead 1,317,799

Hourly Rate = $1,317,799/31,412 = $41.95 per hour (= $15.70 1abour + $26.25 overhead)

Exhibit 2: Proposed Departmental Labour and Overhead Hourly Rates

Labour Rate Overhead Total Cost

Department per Hour per Hour per Hour

Wick making $20.10 $23.53 $43.63

Wax melting 18.50 22.61 41.11

Molding 19.75 46.89 66.64

Custom work 23.10 30.36 53.46

Packing 15.00 15.89 30.89

Exhibit 3: Direct Labour Hour Distribution for Three MCT’s Activities

BW-18 Beeswax Spare Candles Work for

Candles (per Batch for Inventory Other Divisions

Department of 100) (per Month) (per Month)

Wick making 8 hours 122 hours 270 hours

Wax melting 5 hours 108 hours 216 hours

Molding 23 hours 446 hours 863 hours

Custom work - - -

Packing 14 hours - -

Total 50 hours 676 hours 1,349 hours

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Exhibit 4: Departmental Overhead Rates Based on Normal Volume

Normal Volume Normal Overhead Overhead

Department (DLH) Cost* (per DLH)

Wick making 2,500 $59,100 $23.64

Wax melting 2,400 51,750 21.56

Molding 8,000 369,000 46.13

Custom work 3,600 110,865 30.80

Packing 17,500 264,338 15.11

Total 34,000 855,053 25.15

* Estimated overhead cost if each department operates at its normal volume.