498 Accounting: Business Reporting for Decision Making
Required
a. Identify the most appropriate costing system to value products for Teninarow Industries’
financial statements.
b. Calculate the inventoriable product cost.
c. Comment on the usefulness of the inventoriable product cost for decision making.Decision-making activities
11.38 Royal Valley Hospital is a major hospital that serves 11 small rural communities within a
40-kilometre radius. The hospital offers all the medical and surgical services of a typical small
hospital. It has a staff of 18 full-time doctors and 20 part-time visiting specialists. Royal Valley
Hospital has a payroll of 150 employees consisting of technicians, nurses, therapists, managers,
directors, administrators, dieticians, secretaries, data processors and cleaners.
Required
a. Using your (limited, moderate or in-depth) knowledge of a hospital’s operations, identify as
many activities as you can.
b. For each of the activities listed in (a), identify a cost driver that would serve as a valid measure
of the resources consumed by the activity.11.39 In recent years, slow response times and frequent repairs have plagued Jetson Engineering’s
computer system. The cause was a substantial increase in computer-aided design work that
pushed the system beyond its intended capacity. Bob Wilson, the production manager, decided
that a new computer should be acquired to absorb some of the additional work. Surprisingly,
six months after installing the new computer, he noticed that many of the engineers continued
to use the old computer system, even though the new system had excess capacity and several
features that simplified programming.
Bob discussed the situation with the supervisors of the entity’s six design teams. They
explained that the finance director’s office allocates the cost of each computer to their work,
based on the number of hours they use the computer. One responded, ‘Look, the old computer
didn’t cost much and it’s highly utilised — even the accounting department uses that machine.
When the cost per hour of use is calculated, it’s very low.
‘The new machine, on the other hand, costs a lot of money, and in the first couple of months
we didn’t use it much because it takes time to learn a new system. I was shocked when I saw
how high my charges were for using the new machine. Because the cost is high and use is low,
the cost per hour charged to my work was incredible. I’ll tell you something: next month we’ll
probably use the new computer even less. Our job performance doesn’t look very good when our
jobs cost a fortune to complete because of huge allocations of computer cost.’
‘What a mess,’ Bob sighed. ‘Even though the new computer is bought and paid for and has
plenty of capacity, the engineers aren’t using it. Don’t they realise that most of the computer
costs are fixed costs? Using the new computer for 200 hours a month doesn’t really cost the com-
pany much more than using it for 20 hours a month.’
Required
Recommend a change in the allocation system at Jetson Engineering that will change the behav-
iour of the design teams.11.40 Waterford University offers an MBA program that is widely respected around the world. The
tuition for the program has always covered the costs of the program until a recent recession
increased the sensitivity of students to the cost of tuition. The business school managers decided
to freeze the tuition cost for the past few years. The director of the MBA program asked a
cost accounting class to act as consultants for the program and to make recommendations on
possible ways to reduce costs or to increase tuition. You are part of a student team assigned to
this project.