Part 1- Introduction The report contains the...
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This ACCT5000 intermediate management accounting assignment discuss accounting management information and farmset corporation.
Background: Farmset Corporation
Farmset Corporation is a company that grew from humble beginnings, with shareholders comprising a collection of village-based cooperatives in the highlands ofPapua New Guinea, whose main source of income was from growing Arabica coffee on their small plots of land. Following a period of high coffee prices, the company expanded their business interests significantly to include the following: poultry farming, green-bean processing, green-bean exporting, a printing press, a bulk fuel distributorship, fuel service stations, new and used car sales, a mechanical workshop, paper packaging manufacturing, and coffee plantation management services.
The Managing Director Andy Birk originally came as a volunteer to assist the cooperatives, and was integral to the growth of the business entity from cooperatives to a company. ‘Accounting records’ consisted of a multi-column cashbook and a notebook containing narratives of non-cash transactions. Having a healthy balance in the bank account was an indication of ‘good’ performance, and during tougher times, very low-interest government-backed loans were easily accessible via the many development banks that were set up to encourage local businesses during that era.
A year ago, Anthony Joseph, a chartered accountant was employed to spruce up the accounting records and overall management process of the company. After a prolonged analysis and study of the various business interests of the company, he decided to engage the assistance of a former colleague to help with the enormous task that lay ahead.
Assume that you are Anthony Joseph, and that you have identified several critical issues that need to be brought to the attention of the Managing Director and ultimately, the Board of Directors (mainly village eldersrepresenting the various village cooperatives). You are required to submit two (2) reports to Andy Birk to address the various issues identified.
In your submission, you are encouraged to use examples that are specific to this business to present and argue your points. (Use your initiative to think about the various products and activities associated with the many business interests of a company like Farmset). You should not just provide a textbook summary of the theory and principles. (Please read the Guidelines available on Blackboard prior to writing up your reports. There are strict requirements as regards formatting and layout)
For Report One (Issues 1 and 2)
Prior to Anthony Joseph joining the company, the financial records have been managed by Andy Birk who did not have an accounting background, and as such, were rather basic and not always complete. The company has no clear idea of how much it cost to produce most of the items sold in their various businesses beyond the purchase cost of raw materials, and direct labour wages paid to the employees in each venture. As the growth happened in the ‘good’ times, there was always money in the bank to meet most commitments and finance new projects. Andy has always been of the opinion that “what has worked, will continue to work, and if something is not broken, why fix it?” Besides, he is already far too busy to bother with knowing exactly “what it cost” to produce an item or provide a service, so long as it was in his opinion, doing well (as indicated by a healthy bank balance). He also feels that the same reports that are being prepared for the shareholders and banks should be “more than sufficient” to serve as financial and operation management guides, since they are paying so much money for their preparation, and audit.
In your submission to Andy Birk and the Board of Directors:
(a) Explain why it is so important for a business to have a formal product costing system and to be able to determine how much it costs to produce a product/ deliver a service.(you are not required to detail a specific product-costing system but need to provide practical benefits of knowing the cost to produce/deliver a product/service).
(b) Explain why reports prepared for shareholders and banks (i.e. financial accounting reports) cannotprovide adequate information needed to facilitate sound management practices, and why management accounting information is more relevant for that purpose.(Remember to provide examples relevant to Farmset).
Recognising the diversity of activities that exists within the Farmset group of companies, Zac Anthony, the former colleague and newly employed assistant to Anthony Joseph suggested that it may be beneficial to look closely at implementing an Activity Based Costing approach to improve accuracy in costing their products and services.
In your submission:
(a) Explain the major differences between the ‘traditional volume-driven single cost driver approach’ and Activity Based Costing (ABC) approach to allocating overhead costs (you are not required to explain the detailed steps in implementing ABC), and
(b) Briefly discuss some typical warning signs within a business that might indicate a need to consider moving to an ABC approach. (use your initiative with regards to the kind of possible warning signs, taking into account the types of business activities in Farmset)
For Report Two (Issues 3 and 4)
In the past, Andy Birk made most business decisions regarding new ventures and new products and services based primarily on the requests of the major shareholders, and his ‘pet’ interests. Anthony Joseph and Zac Anthony are concerned that this approach to decision making coupled with an insufficient level of understanding of the relationship between business activities and the cost of those activities (cost behaviour) will ultimately result in financial ruin.
In your submission:
(a) Explain the benefits arising from having a good understanding of how costs behave, and briefly explain two (2) commonly-used methods to derive a cost function
(b) Discuss the difficulties that may be faced in the process of gathering information for such analysisin general.
In trying to encourage AndyBirk to make informed decisions, and for the company to become proactive in the pricing of products and services, Anthony and Zac are keen to undertake aCost-Volume-Profit analysis(CVP) of the various income generating activities within Farmset.
In your submission:
(a) Explain the variousbenefitsCVP analysis modeling can provide for planning purposes, particularly in the light of such a diverse range of products and services sold by Farmset, and
(b) Explain why the assumptions necessarily made in undertaking CVP analysis can cause problems for businesses in reality.