Management Accounting for Wisdom Electronics
Wisdom Electronics is one of the leading electronic products manufacturing companies in Gulf region. The company has been doing well in its sales and achieving growth. Their Sales always exceeded the targets fixed and costs had always been under control. This resulted in maximum profit for the company in the region. The founder of the company, Mr. Ahmed, has been wondering whether there could be some changes in internal processes possible in the company. To get an answer this question, the founder had several meetings with the staff members working for the company. In such meetings, the staff recommended for a major restructure in the organization which could include changes in structure, policies, procedures and processes.
The finance department of the company recommended that the company is in need of management accounting systems which would help in a greater extent to achieve this objective. The founder of the company had to ask finance people about the role of management accountant and management accounting in an organization. The finance department staff had to work on the role of management accounting and its relevance for the successful implementation of certain strategies and present a report to the founder.
(1) Cost Statements of Wisdom Electronics
Wisdom Electronics is manufacturing three different products say A, B and C. The cost details of these three products for the month of March 2017 are as follows:
|
|
Products
|
|
Information
|
A ($)
|
B ($)
|
C ($)
|
|
Beginning work in process inventory
|
42,400
|
81,000
|
4,400
|
|
Direct Materials used
|
28,400
|
70,400
|
6,600
|
|
Direct Labour
|
21,600
|
41,400
|
2,800
|
|
Manufacturing Overheads
|
21,000
|
21,000
|
1,600
|
|
Ending work in process inventory
|
20,400
|
51,800
|
5,000
|
(2) Estimations for Products A, B and C
Wisdom Electronics has estimated the sales and cost details for the month of April 2017 as given below:
|
Information/Products
|
A
|
B
|
C
|
|
Sales price per unit
|
$ 60
|
$ 180
|
$ 200
|
|
Variable Cost per unit
|
$ 30
|
$ 60
|
$ 140
|
|
Total Fixed Cost ($)
|
$ 162,500
|
Wisdom Electronics expects to sell A, B and C in the ratio of 3: 2: 1 sales mix ratio.
(3) What if analysis for Wisdom Electronics
The summary of cost and selling price details of Products A, B and C is given again below:
|
Information/Products
|
A
|
B
|
C
|
|
Sales Units
|
1500
|
1000
|
500
|
|
Sales price per unit
|
$ 60
|
$ 180
|
$ 200
|
|
Variable Cost per unit
|
$ 30
|
$ 60
|
$ 140
|
|
Total Fixed Cost ($)
|
$ 162,500
|
Wisdom Electronics has been using what if analysis (sensitivity analysis) to predict changes that might arise in sales and cost estimations. The following what if scenario have been estimated by the finance department.
What if scenario?
(1) Selling price is expected to increase as $ 90, $ 200 and $ 240 for Products A, B and C respectively and variable cost per unit does not change (as given above in the table)
(2) Variable Cost per unit is expected to change as $ 50, $ 80 and $ 150 for A, B and C respectively and the selling price expected to be same (as given above in the table)
Required -
(1) Based on cost details given in Table (1), determine the cost of goods manufactured for Products A, B and C for the month of March 2017.
(2) Based cost and selling price estimation data (given in 2), find the following:
(i) BEP in units for each of the products and prove your answer
(ii) Estimate the sales (units) & (in money value) required to earn a target profit of $ 227,500.
(3) Evaluate what if scenarios (given above in 3) by finding operating income (profit) earned on each scenario separately (2 scenarios) and comment on the results.