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ACCT6004 Management Accounting

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Subject Code and Title ACCT6004 Management Accounting
Assessment Case Study
Individual/Group Group
(2,000 words +/- 10%), if applicable
Learning Outcomes
b. Identify and analyse ethical and organisational issues
confronting contemporary management accountants.
c. Categorise and identify the nature of various types of
costs, cost objects and cost behaviours and use cost
estimation techniques to develop cost functions.
d. Apply cost accounting techniques to calculate the cost
of a range of cost objects, as well as analyse costs.
e. Apply cost information to planning, control and
f. Critically evaluate the relevance of both quantitative
and qualitative costing information to management decision
Submission By 11:55pm AEST/AEDT Sunday of Module 5 (week 10)
Weighting 25%
Total Marks 100 marks
A case study document will have been distributed to students in Week 1. Students in each
class will organise themselves into groups of 3 to 4 (no less than 3 and no more than 4).
Students will work in their groups to prepare a response to ALL of the case questions and will
prepare and submit a report, presented in proper report format (including a reference list) by
the end of Week 10.


‘J&B Sports’ and its Customer ‘Sports-Strength’

Introduction to J&B Sports
J&B Sports manufactures custom club soccer uniforms (jerseys, shorts, socks and jackets) and
supplies local Adelaide clubs and their teams each season. J&B Sports focuses on quick delivery
and fast customer response time. Recently, J&B Sports has experienced a decrease in available
cash and an increase in inventory. Sales revenue has been increasing at a faster rate than
expenses, generating a higher level of profits. Approximately half of J&B’s asset base is
financed through debt and half through equity. The industry faces increasing pressure from
imports, particularly from China, which creates a need to compete on price. However,
customers in this market are willing to pay a higher price for goods that are durable and of
high quality. The internet is becoming an increasingly important sales channel and source of
competition at the same time.
The company, which started out as J&B Uniforms, was founded in 1962 by the Hellas family
and began its operations manufacturing work uniforms for local factory workers in South
Australia. As manufacturing declined in the local economy, the family began to look for a
market niche to guide the company’s future growth. Recognising the increasing number of
youth participating in organised sports, and the projected growth in popularity of soccer in
Australia, the family decided to focus on the manufacture of custom soccer uniforms. The
family has made a conscious decision not to follow the textile industry’s trend of transferring
manufacturing operations to China and other foreign countries that offer cheap labour. They
have chosen to remain a domestic producer and to focus on quick delivery and fast customer
response within the local market.
The company manufactures and supplies three main products in a typical soccer kit: custom
soccer jerseys (tops), custom soccer shorts and soccer socks.

Sports-Strength – part of J&B’s supply chain
J&B Sports is part of a supply chain whereby they source fabrics and other raw materials from
their suppliers, and they in turn also use retail outlets such as ‘Sports-Strength’ to take
customer orders and supply custom soccer uniform items on behalf of the manufacturer.

Exhibit 1 – J&B Sports’ supply chain
eg Sports


Martin Cole, senior sales director at Sports-Strength was reviewing the latest corporate
income statement prior to meeting with the company’s chief financial officer. “I don’t
understand these numbers”, Martin thought. “We fell short of our projected sales volume of
jerseys by 10%, so I was anticipating net income to be 10% lower than expected as well. But
that’s not what the numbers are showing. How can I use this information to help me plan for
the coming year?”.
The company had been preparing absorption costing income statements, which it used for
external reporting. To shed some light on the situation, the new internal accountant prepared
an additional income statement using variable costing – a contribution format income
statement for the year.
Year ended February 1, 2019
Per Unit Ratio
Sales $1,039,500 $20.00 100%
Less: variable expenses
Cost of goods sold


14.80 74%
Sales commissions 62,370 1.20 6%
Total variable expenses 831,600 16.00 80%
Contribution margin 207,900 $4.00 20%
Less: fixed expenses


Administrative 51,500
Total fixed expenses 168,000
Operating income $39,900
Exhibit 2 – Sports-Strength’s Contribution Format Income Statement
For simplicity, assume that Sports-Strength sell only one product, soccer jerseys. SportsStrength
buys each jersey from J&B for $14.80 and sells it for $20. Sports-Strength pays a fixed
wage and 6% commission to sales staff.


Activity 1: Cost Behaviour and Cost Estimation at Sports-Strength
1) Identify each of the following costs incurred by Sports-Strength in terms of its cost
behaviour – variable, fixed, mixed or step:
a. Monthly sales staff payroll of $5,000 plus 6% sales commission on jerseys
b. $200 monthly rental for credit card processing equipment
c. Cost of goods sold for $14.80 per jersey
d. The cost ($1) of price tags attached to each jersey
e. Inventory insurance that costs $2 per $1,000 of sales
f. Website hosting cost of $100 per month

2) Refer to the Sports-Strength’s Contribution Format Income Statement for the year ended
February 1, 2019 (Exhibit 2) and answer the following:

a. What is Sports-Strength’s operating profit equation?
b. How many jerseys has Sports-Strength sold during the year? If it has sold 10% less than
it had expected, how many jerseys had it planned to sell? Assuming a 30% tax rate, how
much more income after tax would the extra 10% of sales have generated?
c. If Sports-Strength sells 55,000 jerseys what total expense will be reported on the
income statement?
d. The Messenger, a local newspaper, has approached Martin Cole with a $20,000 annual
ad campaign. If Martin accepts the ad campaign, what will change in Sports-Strength’s
operating profit equation?
e. Assume Martin Cole accepts The Messenger’s ad campaign and as a result SportsStrength
sells 60,000 jerseys next year. Prepare a contribution format income
statement for the year.
f. Discuss (max 500 words) the results shown in part e above. Should the ad campaign be
accepted? Comment on the distribution of costs between fixed and variable for Sports
Strength. How can the information on cost behavior and the contribution margin
statement be used by management to make decisions and to plan? Give two specific
examples of decisions and plans that could be made with this information.


Activity 2: CVP Analysis for Sports-Strength
Sports-Strength has just received notice from J&B Sports that the price of a soccer jersey will
be increasing to $15.30 next year. In response to this increase, Sports-Strength is planning its
sales and marketing campaign for the coming year. Managers have developed two possible
plans and have asked you to evaluate them.
The first plan calls for passing on the entire $0.50 cost increase to customers through an
increase in the sales price. Managers believe that $10,000 in additional advertising targeted
directly to current customers will allow the sales force to reach the current year’s sales volume
of 51,975 jerseys.
The second plan relies on a new advertising campaign that focuses on the sales price remaining
the same as last year. The campaign would include a new database that offers more potential
customers than Sports-Strength has had access to in the past. The cost of the campaign is
expected to be $5,000. Managers believe that the campaign will be more successful in
generating new sales than the current incentive-based sales and marketing plan. As a result,
they want to reduce the sales commission from 6% to 4% of sales and increase sales salaries
by $22,000. The campaign is expected to generate an additional 10% in sales volume.
Using the information in Exhibit 2 as a starting point, answer the following questions:
a. What is Sports-Strength’s breakeven point in units and dollars before any of the above
changes take place (ie. given the sale price and cost structure indicated in Exhibit 2)?
b. What was Sports-Strength’s margin of safety in units and dollars in the year ending 1
February, 2019?
c. How much would operating income decrease if Sports-Strength did nothing to recover
the increase in cost of goods sold, all other things being equal?
d. Determine the expected operating income under each proposed sales and marketing
e. Why does the first plan result in the reduction in operating income that is greater than
the $10,000 advertising?
f. Which plan do you recommend to management? Write a memo in the proper format
which justifies your recommendation by providing relevant and appropriate supporting
information. Include and explain any qualitative factors which may affect your


Activity 3: Job Order Costing and Ethics in J&B Sports
J&B Sports custom makes soccer tops (jerseys), shorts, socks and jackets for individual clubs
and players within the clubs. Players order their name and selected number on the back of
each jersey. Clubs also have specific requirements regarding the sponsors’ logos which need
to be added to the clothing. The kits are manufactured in batches and product costs are
accumulated for each batch or job. When the job is completed, the total costs accumulated
for the job are divided by the number of units produced to determine the average cost per
J&B Sports has determined the following unit costs for three of its four products:
Shorts Jerseys Jackets
Direct materials $4.47 $6.85 $44.72
Direct labour 2.40 1.92 14.40
Manufacturing overhead 3.00 2.40 18.00
Total unit cost $9.87 $11.17 $77.12
Sales price per unit $12.00 $14.80 $125.00

On May 31, J&B Sports Work in Process Inventory consisted of the following items:
Job Units Accumulated Cost
PA – 1247 Shorts 100 $717
JE – 1397 Jerseys 200 1,802
JA – 426 Jackets 50 3,046

During June, a total of $191,591 in direct materials and $74,208 in direct labour costs were
incurred. Units finished and sold during June were as follows:
Product Units Finished Units Sold
Shorts 13,500 14,000
Jerseys 3,200 3,100
Jackets 2,500 2,500


a. Given that J&B Sports uses direct labour dollars as its application base, what is the
company’s predetermined overhead rate?
b. Taking into consideration only these three products:
i. Calculate the total manufacturing cost for June. ii. Calculate
the Cost of Goods Manufactured for June.
iii. Calculate the Ending Work in Process Inventory for June.
iv. Calculate Gross Profit for June.
c. For each of the three products, state whether there are more, fewer, or the same
number of finished units in Finished Goods Inventory on June 30 than there were on
June 1.
d. J&B Sports board of directors has adopted a long-term strategy of maximising value of
the shareholders’ investment. To achieve this goal, the board established the following
five-year financial objectives:
• Increase sales by 10% per year
• Increase income before taxes by 15% per year
• Increase dividends by 12% per year.
The managing director added a fourth financial objective last year: maintaining cost of
goods sold at a maximum of 70% of sales. The company failed to achieve this goal in
the year ending 1 February 2019, and it appears that it will again not be achieved in
the current year. Because employee bonuses are tied to performance on all four
objectives, the new internal accountant is concerned about company morale. She
decides that if she overestimates the amount of ending work in process inventory and
reclassifies the fabric inspection costs as administrative rather than manufacturing
overhead costs, cost of goods sold for the year will fall below the 70% maximum level.
She makes the adjustments and presents the managing director a set of financial
statements that meet most of the financial objectives.
i. Explain why the adjustments the accountant made are
unethical, referring to the Australian Accounting code of ethics.
ii. What additional costs, both monetary and nonmonetary might
J&B Sports incur because of the accountant’s actions?


Activity 4: Activity Based Costing at J&B Sports
The new internal accountant at J&B Sports is concerned about the current method of
allocating overhead to production, using a volume-based allocation base (direct labour cost)
and one plant-wide overhead rate. She decided to undertake an activity analysis across the
manufacturing processes of the company and to identify the relevant cost drivers of these.
She determined that J&B Sports had the following four activity pools and associated activity
Activity Pool Activity Driver
Product design Number of product lines
Warehousing/Packaging Number of batches
Cutting Number of cuts
Sewing Direct labour hours

Once the activity pools were established, manufacturing overhead costs are assigned to these:
Product Design

Cutting Sewing
Indirect labour $40,000 $40,000 $7,500 $15,000
Depreciation 7,396 34,696
Indirect materials 37,512 110,869 135,861 101,064
Utilities 41,330
Other 6,377 12,297 3,747 14,730
Total $83,889 $170,562 $147,108 $206,820
Data was also collected on the activity drivers for each activity pool:
Activity Pool Total Activity
Product design 3 product lines (jerseys, shorts,
Warehousing/Packaging 9,170 batches
Cutting 56,580 cuts
Sewing 86,175 direct labour hours

Chris Desmond, J&B Sports’ operations manager, recently received a sales brochure for a new
electric cutting tool. Based on the tool’s specifications, Chris believes that J&B Sports could
increase the batch size on jersey production to 50 jerseys, up from the current 35 jerseys.


While the cutting tool would be used on shorts and jackets as well, other production factors
prevent increasing the batch sizes for these products.
The new tool would increase annual operating costs by $14,082. Before deciding whether to
purchase the cutting tool, Chris wants to know how the new tool will affect the cost of
producing the company’s three main products.

a. Calculate the activity rates for each of the four activity pools before the new tool was
b. Classify each activity using the ABC cost hierarchy categories.
c. Calculate and present a schedule of the total annual cost included in the cutting activity
cost pool assuming the cutting tool is purchased.
d. Calculate the cost per cut assuming the cutting tool is purchased.
e. Identify any other activity rates that will be affected by the purchase of the new cutting
tool and explain how they will be affected.
f. Explain to Chris why unit costs for all three products will change after the purchase of
the new cutting tool.
g. Do you recommend that Chris purchase the new cutting tool? Write a memo in the
proper format which justifies your recommendation by providing relevant and
appropriate supporting information. Include and explain any qualitative factors which
may affect your recommendation.

End of Case Study

The following rubric provides guidance for marking the group case study.


Assessment Rubric – Case Study – Group (100 marks)
Attributes Fail (0-49%) Pass
High Distinction (85-
Knowledge and
understanding of the
cost concepts and
techniques used in the
case study.

Shows very little to no
understanding of how to
apply the costing system
technique to the case
study questions.

Key components of the
assignment are not

Demonstrates little to no
capacity to explain and
apply relevant concepts.

Has answered most
parts incorrectly.

Shows limited
understanding of how to
apply the costing system
technique to the case study

Has answered some parts
Thorough knowledge or
understanding of the
costing system techniques
relevant to the case study.

Highly developed
understanding of the
costing system
techniques relevant to
the case study.

A sophisticated
understanding of the
costing system techniques
relevant to the case study.


Knowledge and
understanding of
accounting concepts,
techniques and

Limited awareness of
relevant management
accounting information
required for business

Difficulty and/or
confusion in identifying
correct management
accounting concepts,
tools and processes
required for case study
Understanding and being
able to identify relevant
accounting information
for business decisions

Understanding a range of
management accounting
techniques and processes
available for generating
and analysing information

Ability to use appropriate
management accounting
techniques and processes

Understanding rationale
for selecting specific
management accounting
tools and processes

Understanding and being
able to explain
quantitative and
qualitative characteristics
of management
accounting information
useful for business

understanding the
management accounting
concepts, techniques
and processes

Being able to justify
selection of specific
accounting tools and

Thoroughly understanding
management accounting
concepts, techniques and
processes, and accounting
information required for
solving practical problems

Being able to critically justify
selection of applicable
accounting tools and


Analysis and
application of relevant
accounting concepts,
techniques and

No or little use of
accounting information
for decision making

Difficulty and/or
confusion in preparing
accounting reports

Difficulty and/or
confusion in identifying
and applying correct
accounting procedures
Applying correct steps in
preparing management
accounting reports

Applying appropriate
accounting procedures

Identify and explain
quantitative and
qualitative characteristics
of management
accounting information,
which are useful for
business decisions

Analysing quantitative
and qualitative
characteristics of
accounting information,
and applying analysis to
solve practical problems

Correctly preparing and
interpreting different
management accounting

Correctly preparing and
interpreting different
management accounting

Critically justifying business
decisions using relevant
management accounting



Difficulty in explaining
rationale for selected
accounting tools and

Mostly clear information
presentation, with some
minor errors

Evidence of attempts to
make clear to audience,
the rationale and
application of selected
accounting tools and

Mostly clear and
presentation of

Clearly presented and
adequately justified

Good references to
quantitative and
qualitative information
where applicable

Clearly presented and
adequately substantiated
responses, which indicate
full understanding and
thorough application of
relevant accounting tools
and processes

Sufficiently substantiated
discussion of quantitative
and qualitative information

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