Cost Accounting Case Study: Ezi Sleep

Question 1

The requirement 1 mainly calculated the overall cost of each product according to traditional method while in requirement 2 the total costs is mainly calculated as per ABM approach, which is why the total costs if different in both the requirements. The ABM approach is more strategically viable, as it allows the organisation to identify the adequate cost for each products that is been produced. However, major revenue is mainly generated from larger retail chain, whereas the use of ABM approach could help the organisation increase its competition level and capture more market share (Abdelhak, Grostick and Hanken 2014).

The above table mainly depicts the relevant mark-up price according to traditional costing is mainly at 462.15 for both retail chains. Furthermore, mark up price of large retailers chain under ABM approach is mainly at 440.49, which relatively adequate for investments. Therefore, use of ABM approach is much better options, as adequate cost of the product is identified, which could help in improving its competitiveness in the market.

Therefore, the above table mainly represents the net profit margin, which could be attained by the Ezi sleep. The use of new selling price could eventually help in generating the required profit of minimum 9% from operations. Hence, the use of ABM approach could eventually allow Ezi Sleep to maintain the level of 9% profit margin from investment (Demski 2013).

The evaluation of above requirements in 1, 2 and 3 mainly depicts the relevant cost, which needs to be evaluated before considering the right seller. The use of total supplier related activities cost per unit mainly allows the organisation to understand the exact cost of each material that is been purchased by the supplier. Moreover, total revised suppler cost per unit mainly helped in identifying the extra cost, which was being incurred by JamesStreet. Therefore, it is assumed that use of activity-based supplier costing method mainly allows the organisation make important internal decisions concerning the selection of adequate supplier (Drury 2013).

It has been observed from the given information that the company has categorized its various operating activities under different activity levels. The management uses these different activity levels to measure the performances of its different departments. Hence, it can be concluded that the company follows activity-based costing method for evaluating its organizational performance (Galliers and Leidner 2014).

The minimum transfer price, acceptable by both KiwiBoss and OzoBoss, is $64, as this is the actual manufacturing cost of KiwiBoss. Hence, KiwiBoss would not be able to deliver the product below this price level otherwise it would incur loss on transfer.

The maximum transfer price, which can be accepted by KiwiBoss and OzoBoss, is $75. If, KiwiBoss would charge higher transfer price to OzoBoss, then the later would purchase the similar substitute product as it would cost lesser and generate higher profit

The NPAT, generated under cost-based transfer pricing method, is higher than the NPAT, under market-based transfer pricing method. Hence, cost-based transfer pricing method will maximise the NPAT for Globoss.

Question 2 (a)

The new offer would cause a decrease in the NPAT of OzBoss, as it would have to acquire material at higher price. Therefore, the new purchase offer should not be accepted from the perspective of OzBoss.

KiwiBoss does not earn any profit for transferring the product to OzBoss. However, it can earn profit from this new offer and hence, the company can accept this offer.

Globoss is parent company of OzBoss and KiwiBoss. If the new offer the is accepted, then the profit, earned from OzBoss, may decrease, but Globoss would earn profit from KiwiBoss. From the above tables, it is clear that earlier, the company was earning $39.20 from OzBoss. However, now, the combined profit from KiwiBoss and OzBoss would be amounted to $33.90. Therefore, Globoss should not accept the offer.

If NPAT is selected as the evaluate performance metric, then Globoss would face problem for both maximum and minimum transfer pricing method.

If the company would select minimum transfer pricing, then KiwiBoss would not be able to deliver any profit on the product, transferred, and as the result, the performance of this section would be considered as poor.

On the other hand, for transferring the product at maximum price level, the NPAT of OzBoss would fall significantly. In such scenario, the performance of the section would be negatively affected.

Therefore, it is recommended that Globoss should implement cost plus transfer pricing method. Under this method, the transfer price would be determined by adding certain margin, which must be accepted by both the sections, over the actual production cost. In this manner, both OzBoss and KiwiBoss can be able to maintain their respective NPAT at such level, which would not cause any significant negative impact (Hill, Jones and Schilling 2014).

If the company decides to evaluate performance on the basis of NPAT, then the production managers may try to reduce the cost of production by using inferior quality raw materials at cheaper price. As the result, the quality of the final product would also deteriorate. However, due to silo view, the production managers would not bother about the problems faced by the marketing team in selling the low quality product.

Balance scorecard can be used as a non-financial measure alternative to NPAT while minimizing a lack of goal congruency among managers caused by NPAT.

References

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Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7), pp.414-428.

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