MAA262 – Management Accounting Assessment Task 2

Question 1

Division A at Geunhye-Park Foods (GPF) operates at capacity and considers applying ABC analysis to three product lines within its division: tofu, milk, and ramen. Mary Lamb, the manager of Division A, identifies four activities and their activity cost allocation rates as follows:
Ordering $102 per purchase order
Machine set up $78 per set up
Freezing $21 per hour
Packaging $0.22per item sold
The revenues, cost of goods sold, and activity usage of the three product lines (year 2019) are as follows:
Year 2019 for Division A Tofu Milk Ramen
Financial data
Revenues $59,000 $66,000 $51,000
Direct manufacturing cost $36,000 $48,000 $34,000
Manufacturing overhead allocated ? ? ?
Activity usage (cost-allocation base used)
Ordering (purchase orders) 25 20 15
Machine set up (set ups) 90 35 30
Freezing (hours) 190 180 40
Packaging (items sold) 13,500 17,500 8,000
Using a division wide allocation rate, Division A allocated manufacturing overhead to the three products at the rate of 30% of direct manufacturing cost. Profitability is measured by “gross margin÷ Revenues”.
Required
a) Using a division wide allocation rate, calculate the gross margin of Tofu. (Chapter 11, 3 marks).

b) Using ABC, determine the ranking of profitability among the three product lines for year 2019 for Division A. (i.e., specify the highest, the middle, and the lowest profitable product line.) (Chapter 11, 6 marks)
c) The COVID-19 pandemic has hit Division A’s business significantly. Specifically, Division A expects that, in year 2020, there will be no freezing activity because Division A wants to sell the products as fresh as possible. Division A wants to manufacture the products at a smaller batch each time so there is a 100% increase of set up activities for every product line as below.
Pandemic effect on Division A’s operation (Year 2020)
Activity Tofu Milk Ramen
Ordering 25 20 15
Machine set up 180 70 60
Freezing 0 0 0
Packaging 13,500 17,500 8,000
If everything else is equal (activity cost allocation rate, direct manufacturing cost and sales revenue for all three products remain the same), provide the annual change of gross margin under ABC for each product and for Division A (i.e., total gross margin under ABC in 2020 minus total gross margin under ABC in 2019).(Chapter 11, 6 marks)