Chapter 5, Problem 58P

1.

To determine

Calculate the material handling rate that would have been used by Person K’s predecessor at Industries NA.

Explanation of Solution

Activity-based costing: It is a method that helps in finding the activities performed by a company and it tracks the indirect costs to the activities of the company that consumes resources.

Calculate the material handling rate that would have been used by Person K’s predecessor at Industries NA.

$\begin{array}{c}\text{Material handling rate =}\frac{\text{Total material-handling department costs}}{\text{Total direct material costs}}\\ =\frac{\$288,000}{\$2,006,000+\$874,000}\\ =0.10\text{or 10\%}\end{array}$

Working note:

Calculate total material handling department costs.

Particulars	Amount
Payroll	$180,000
Employee benefits	$36,000
Telephone	$38,000
Other utilities	$22,000
Material and supplies	$6,000
Depreciation	$6,000
Total material handling department costs	$288,000

Table (1)

2.a.

To determine

Calculate the revised material handling costs to be allocated on a per purchase order basis.

Explanation of Solution

Calculate the revised material handling costs to be allocated on a per purchase order basis.

Particulars	Amount
Total material handling department costs	$288,000
Less: Direct costs:
Direct government payroll	$36,000
Fringe benefits	$7,200
Direct phone line	$2,800
Material handling costs applicable to purchase orders (A)	$242,000
Total number of purchase orders (B)	242,000
Material handling cost per purchase order (A ÷ B)	$1.00

Table (2)

b.

To determine

Discuss the reason behind purchase orders might be a more reliable cost driver than the dollar amount of direct material.

Explanation of Solution

Purchase orders can be a more dependable cost driver than is the dollar amount of direct material, since resources are disbursed in the handling a purchase order. The size of the order does not essentially have an effect on the depletion of resources.

3.

To determine

Calculate the change in material handling cost applied to government contracts by NAI as a result of the new cost assignment approach.

Explanation of Solution

There is a $74,600 decrease in the material handling costs allocated to government contracts by NAI as a result of the new allocation method calculated as follows:

Particulars	Amount
Previous Method:
Government material (A)	$2,006,000
Material handling rate (B)	10%
Total (1 =A × B)	$200,600
New Method:
Directly traceable material handling costs ($36,000+($36,000 × 20%) + $2,800))	$46,000
Purchase orders (80,000 × $1)	$80,000
Total ( 2 = A × B)	$126,000
Net reduction ( 1–2)	$74,600

Table (3)

4.

To determine

Prepare a forecast of the cumulative dollar impact over a three year period from 20X1 through 20X3 of Person K’s recommended change for allocating material handling department costs to the Government contracts unit.

Explanation of Solution

Calculate forecasted variable material handling costs.

Figure (1)

Calculate forecasted purchase orders:

Particulars	Forecasted Purchase orders
20X2 ($242,000 × 1.05)	$254,100
20X3 ($254,100 × 1.05)		$266,805
Governmental purchase orders (Purchase orders × 33%)	$83,853	$88,046

Table (4)

Calculate material handling costs allocated to governmental contracts.

Figure (2)

Calculate cumulative dollar impact.

Figure (3)

The cumulative dollar impact of the recommended change in allocating material handling department costs is $234,346 ($74,600 +$78,464 +$81,282).

5.a.

To determine

Discuss the reason for Person K has an ethical conflict related to the standards of ethical conduct for management accountants.

Explanation of Solution

Denoting to the standards of ethical conduct for management accountants of Person K faces the following ethical issues are given below:

Competence:

• “Provide decision support information and recommendations that are accurate, clear, consise and timely.”

Integrity:

• “Refrain from engaging in any conduct that would prejudice Person L’s ability to carry out her duties ethically.”
• “Abstain from engaging in or supporting any activity that would discredit person L’s profession.”

Credibility:

• “Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports analyses or recommendations. Person L has information that Person J should see if he is going to make a reliable judgement about the results of the Government contracts unit.”

b.

To determine

Identify the several steps that Person L could take to resolve the ethical conflict.

Explanation of Solution

The steps of Person K could take to resolve these ethical conflicts are as follows:

• Person K should first follow the recognized policies at NAI.
• If this method does not decide the conflict or if such policies do not exist, Person K must communicate the problem with her immediate superior, suppose when it looks that the superior is involved. If the government contracts unit manager, Person P is her controller, then she apparently cannot debate the problem with him. In this case she must go to the next upper managerial level and proceed, up to the audit committee of the board of director, until the conflict is decided.
• She must also discuss the position with an independent advisor to explain the issues involved and find an accepting of possible courses of an action.
• If the ethical conflict still happens after draining all levels of internal review, then person K might have no other course of action than to leave from the company and submit an useful memorandum to an suitable demonstrative of the company.