Accounting Tools and Measures for Decision Making
The Better Chair Company is a large furniture designer, manufacturer, and retailer headquartered in Country X. The company has just started manufacturing a new premium lounge chair at its new production division in Country X. The company also plans to internally sell the chair to its overseas retail division in Country Y. Additionally, the company is considering another new product, an ottoman. You have been hired as a consultant to help the new divisional management team make some decisions affecting these products by using managerial accounting information. You have also been asked to explain to them how this information can be utilized to make good managerial decisions. You are to provide your findings and recommendations in a single formal business report.
In addition to the requirements that follow, be sure to incorporate references to appropriate academic sources, such as those found in the learning resources from this Competency or those in the Walden Library.
Important Note: Although these instructions contain the basic framework for this Assessment, you will need additional information to complete it. When you are ready to begin the Assessment, ask your subject matter expert (SME) for the additional items that you will need. Your SME will send you further instructions, templates, documents, and any other needed information.
Your report should address the following four parts:
Click each of the items below for more information on this Assessment.
Part 1: Sunk Costs, Opportunity Costs, and Accounting Costs – Fixed and Variable (3–4 pages)
After your initial meeting with the management team and assessing their level of experience with managerial accounting, you have decided to provide some starting information on the various types of costs utilized in managerial accounting. Your purpose for providing this information is to give the necessary context to the new management team to enable them to fully understand the accounting information and recommendations you will provide in your final report. Be sure to address the following:
Explain sunk cost, opportunity cost, and accounting cost, and provide three examples of each.
Explain how each of these costs relates to developing managerial accounting information required for decision making.
Summarize why a manager should understand these concepts, providing an example to support your rationale.
Explain the differences between fixed and variable costs and provide three examples of each type of cost.
Summarize the importance for managers to classify these costs correctly, including how the correct classification can inform decision making.
Part 2: Variance Analysis (2–3 pages)
The next area you have been asked to address for the management team is to help them understand why the actual costs for the new chair are not aligning with the determined standard costs. The company has set up standard costs for labor and each component of the new chair. It now has the actual costs for the previous month’s production run. You are asked to determine which costs are meeting the standards and which are not, to analyze the probable cause of the variances, and to provide a recommendation for moving forward. To determine this, you will conduct a variance analysis. Your SME will provide you with standard and actual costs to use for this part of the Assessment, which will include the numerical values to replace the variables (i.e., “X”):
The standards are as follows:
Plastic tubing
X meters at $X per meter
Fabric
X square meters at $X per square meter
Padding
X kilograms at $X per kilogram
Direct labor
X hours at $X per hour
The actual costs for the X chairs the company made last month are as follows:
Plastic tubing
X meters at $X per meter
Fabric
X square meters at $X per square meter
Padding
X kilograms at $X per kilogram
Direct labor
X hours at $X per hour
Using this information, address the following:
Using the AM002_Assessment_Template_Part2 file, calculate the price variances (price variance and wage rate variance) and quantity variances (quantity variance and labor efficiency variance) for each material and direct labor.
Note: In addition to submitting your work in Excel, include your calculations within your report by copying and pasting the information from Excel. For information on inserting data from Excel into Word, refer to the following:
Microsoft. (n.d.). Insert a chart from an Excel spreadsheet into Word. https://support.microsoft.com/en-us/office/insert-a-chart-from-an-excel-spreadsheet-into-word-0b4d40a5-3544-4dcd-b28f-ba82a9b9f1e1
Analyze what the variances to the standards are, including an examination of possible causes.
Propose at least two recommendations for potential remedies to address the variances.
Summarize how understanding variance analysis can impact managerial decision making.
Part 3: Transfer Pricing (2–3 pages)
The next area you have been asked to address is regarding the decision to transfer the new lounge chair from its production division in Country X to the company’s retail division in Country Y. The management team wants to understand which transfer pricing method should be used: full cost or variable cost.
Here is the information you were provided (Note: Your SME will provide you the numerical values to replace the variables):
The Better Chair Company manufactures high-end chairs in alpha division in a country with a/an X% income tax rate and transfers these chairs to beta division in a country with a/an X% income tax. An import duty of X% of the transfer price is paid on all imported products. The import duty is not deductible in computing taxable income. The fixed cost for a high-end chair is $X and the variable cost is $X, which brings the full cost (i.e., total cost) for each chair to $X. They are sold by beta division for $X. The tax authorities in both countries allow firms to use either variable cost or full cost as the transfer price.
Using this information, address the following:
Using the AM002_Assessment_Template_Part2 file, calculate the full-cost transfer pricing method and the variable-cost transfer pricing method.
Note: In addition to submitting your work in Excel, include your calculations within your report by copying and pasting the information from Excel.
Synthesize the results of your calculations to recommend which transfer pricing method will result in a better overall outcome.
Explain how understanding and utilizing transfer pricing can impact managerial decision making.
Part 4: Break-Even Point (1–2 pages)
The final area you have been asked to evaluate is related to the company’s feasibility to produce a new product, an ottoman. The management team wants to understand the quantity and sales needed for this product to be profitable. To determine this, you decide to conduct a break-even analysis to calculate the number of ottomans and the total sales needed for the company to break even.
Here is the information you were provided (Note: Your SME will provide you the numerical values to replace the variables):
The company plans to develop a new product: an ottoman with multiple storage compartments. The sales & marketing team has projected a demand of X units per month at a selling price of $X. The company estimates each ottoman will cost $X to produce. The additional facility costs will be $X per month, interest on a loan will be $X per month, and other costs are expected to be $X per month.
Using this information, address the following in 1–2 pages:
Using the AM002_Assessment_Template_Part2 file, calculate the number of sales per month (i.e., the number of ottomans and total dollar amount) the company will need to make in order to break even.
Note: In addition to submitting your work in Excel, include your calculations within your report by copying and pasting the information from Excel.
Synthesize the results of your calculations to determine the feasibility of the company to make a profit based on the sales & marketing projections and recommend solutions to the management team that would help to ensure profitability for the ottoman project.
Summarize how understanding and utilizing break-even analysis can impact managerial decision making.
2.2 Identify and Apply Basic Cost Behavior Patterns
Franklin, M., Graybeal, P., & Cooper, D. (2019). 2.2 identify and apply basic cost behavior patterns. In Principles of accounting, volume 2: Managerial accounting. OpenStax. https://openstax.org/books/principles-managerial-accounting/pages/2-2-identify-and-apply-basic-cost-behavior-patterns
Cost Considerations for Accounting Decision Making
Walden University, LLC. (2021). Cost considerations for accounting decision making [PDF]. Walden University Brightspace. https://mytempo.waldenu.edu
8.5 Describe How Companies Use Variance Analysis
Franklin, M., Graybeal, P., & Cooper, D. (2019). 8.5 describe how companies use variance analysis. In Principles of accounting, volume 2: Managerial accounting. OpenStax. https://openstax.org/books/principles-managerial-accounting/pages/8-5-describe-how-companies-use-variance-analysis
Standard Costs, Actual Costs, and Variances
Walden University, LLC. (2021). Standard costs, actual costs, and variances [PDF]. Walden University Brightspace. https://mytempo.waldenu.edu
