Accouting for Decision Making

PART 1:

2/ Enterprise risk management system (ERM)

-­? It is the process which is combined with existing operations and exist for fundamental business reason.

-­? It is applied in strategy setting and across the entity which means it takes into account activities of all level.

-­? It is intended to identify, evaluate the current and potential events that may affect the entity and manage the risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.

-­? It includes financial, strategic, operational, and other risks. -­? It is effected by people at every level of an entity, especially by board of directors, managements.

It provides a mechanism helping people to understand risk, their responsibility and level of authority.

3/ Pull production system

-­? Is the system where production is not initiated until customer's order is received. -­? This means that stock level of raw material, work in process, component are kept to a minimum

level. -­? It enables the firm to produce only what is required in the correct quantity and in the correct time -­? Sometimes, it is called Just in time production. -­? However, this kind of production system require a carefully planned schedule and flow of

resources through production process because there is a little room for mistakes, the production relies heavily on suppliers.The emphasis is getting the work right on the first time

7/ "The variable cost per unit varies with output, whereas the fixed cost per unit is constant." Do you agree? Explain

The above comment is not correct. -­? A variable cost (in the total) is a cost which tends to vary with the level of activity. For example,

the material cost per unit -­? However variable cost per unit is the same for each unit produced

-­? A fixed cost (in total) is a cost which is incurred for a particular period of time and which, within a certain activity levels, is unaffected by changes in the level of activity. For examples the rental of the factory will stay the same for 10 years. The rent may change up or down when rental agreement is renegotiated. So the fixed cost of rental per unit will not be constant after 10 years.

-­? However, in the short run and within a certain volume, the total fixed cost remain the same, fixed cost per unit will reduce as more units are produced. For example, total fixed cost is 6000usd, Fixed cost per unit will be 2 usd/unit if the volume is 3000 units. However when the volume is 6000 units, it will be 1 usd/unit

8/ Only variable costs can be differential costs. Do you agree? Explain

-­? Variable cost is not only the differential cost. -­? Beside variable cost, there is a mixed cost or semi-fixed or semi-variable cost, which means part-

fixed and part - variable. For examples, Telephone includes a fixed element of line rental,

however the call charges are likely to increase if the volume of business expands. -­? In addition, fixed cost will be differential in the long run as the explanation above (note 7). For examples the rental of the factory will stay the same for 10 years. The rent may change up or

down when rental agreement is renegotiated. So the fixed cost of rental per unit will not be constant after 10 years.

PROBLEM 1

1/ Financial statement should be true and fair which is meant it should communicate information fairly and objectively and disclose all relevant information.

In this case, the obsolete inventory needs to be written-down to net realizable value as an expense and disclose this amount in financial statement.

Hiding the obsolete inventory will impairs the objectivity and relevance of financial statement.

2/ This would not be an easy thing to do for Perlman.

First, this would adversely affect her own bonus.

Second, this would make her co-worker (management colleagues) anger because it would diminish their bonus too.

However, the ethical course of action would be for Perlman to insist on write down inventory.

PROBLEM 2

Beginning WIP During May In total

a/

Pounds

10,000 100,000 110,000

Pounds

Material

Pounds

95,000 (100%) 9,000(60%*15000) 104,000 104,000

Material

Conversion

Pounds

95,000 (100%) 3000 (20%*15000) 98,000 98,000

Conversion

Completed&transferred out Closing WIP Total input Equivalent unit of productions

95,000 (balancing figure) 15,000 110,000

b/ $ $ $

1,500 154,500 156,000 1.5 (156000/104000)

Total cost per equivalent unit of production = 1.5 + 1.0 = $2.5 c/ $

7,200 90,800 98,000 1.0 (98000/98000)

Beginning WIP Cost added Total cost Cost per equivalent unit of production

Cost of units transferred out (95,000 * $2.5) Cost of ending WIP inventory (9000*1.5 + 3000*1.0) T otal

237,500 16,500 254,000

8,700 (1,500+7,200) 245,300