Cost Management Assignment
Q1: Read the scenario and answer the questions at the end.
Asbos Linings Ltd. manufactures wall sheets, ceiling insulation and motor vehicle brake pads using a raw material that has been reported as potentially causing long-term health problems, and there are concerns about the resources used to create the products. The products are used in the construction and insulation of homes, schools and offices, while the brake pads are installed in private and commercial vehicles.
Currently, the company has reported good earnings per share, increased profits and increased dividends over a three-year period. Share prices have increased to reflect this performance. The company's board and executives have received a report from an external environmental and social consultant, which contains the following advice.
1. There is raw material that is a substitute for the raw material currently used by Asbos in the three products it manufactures, but the substitute costs about 50% more than the current material.
2. The availability of the current raw material will be limited in the future.
3. There is mounting strong evidence that the current raw material is linked to long-term health problems for employees, installers, customers and school children.
The company's board and executives know they have a stockpile of the current raw material and a contract to purchase it for another two years. The company would incur extra cost if it were to breach the contract with the supplier. They decide to continue to use the current raw materials until the cost of the substitute is about the same price as the current raw material or the current raw material resources is depleted.
Required:
1. What contemporary management accounting information gathering system should the company's board and executives consider before making their decision?
2. What forms of reporting are available to different stakeholders if Asbos Linings Ltd adopted EMA*?
3. Explain the benefits of EMA to both internal decision making and external reporting.
*EMA= Environmental Management Accounting
Q2: Read the scenario and answer the questions at the end.
The board of management of Nelson New Age Theatre is considering the replacement of the theatre's lighting system. The old system requires two people to operate it, but the new system would need only a single operator. The new lighting system will cost $129 750 and save the theatre $27 000 annually over the next eight years. The Theatre does not pay any income taxes.
Required: Construct an Excel spreadsheet showing the net present value of the proposed lighting system for each of the following discount rates: 8 per cent, 10 per cent, 12 per cent, 14 per cent and 16 per cent. Use the following headings in your spreadsheet. Comment on the pattern of the NPV in the right-hand column.
- Discount rate
- Annuity discount factor
- Annual savings
- Acquisition cost
- Net present value
Q3: Explain the benefits of using transfer pricing within organisations.
Q4: Explain how negotiation between the supplying and buying units may be used to set transfer prices. How does this relate to the general transfer pricing rule?