CMAII Case Study Analysis – Winter 2021
25 MARKS (5%) – ALLOW 3 PER GROUP
The president of MacDonald Inc., has asked the Controller, Laura Spence, to review the
way the company is costing its products. The company uses manufacturing cost as a basis
for setting prices and has determined that overall, the selling prices of its products seem
to be out of line with the prices of competitors. For example, the very popular Black
Diamond model is priced much lower than competitors whereas all other models are
priced well above the products of competitors. As a result, profits are declining along
with sales for some models. The president has a gut feeling that this all has something to
do with how the ski boards are costed (in comparison with competitors).
The company currently uses a single plant-wide rate to charge overhead to the various
company products. This method no longer seems to be providing the precision needed in
determining costs and setting prices. Ms. Spence has therefore called together your group,
the Special Analysis Group (part of the Accounting Department), to look into other
possibilities for charging overhead to the products. In particular, she wants your group
to explore another alternative—–the direct method of allocating service department costs
to specific operating departments and to allocate variable and fixed costs separately. She
wants your analysis to focus on one product line in particular, the Double Black Model.
She asks you to complete the analysis in the form of a long memo and submit it to her. It
should include the following items:
1. A schedule showing the calculation for the current single plant wide overhead rate
and the related overhead cost for the Black Diamond model.
2. A schedule showing the calculations using a separate overhead rate for each
department assuming the direct method is used and assuming separate allocations
for variable and fixed costs. Assume the fixed overhead is allocated based on the
percentage of peak-period requirements. In computing the rates, use a machine-
hours basis in the Finishing Department and a direct labour hours basis in the other
3. Determine the overhead cost in total for the Black Diamond Model in each
department and in total for all departments .
4. Compare this with the answer in part one and explain in detail why there is a
difference in the total product cost between the two methods. Explain how this
might also account for the apparent over costing and overpricing of the company’s
other products. Give your opinion on which method is recommended and why.
5. Ms. Spence also wants you to suggest any other alternative methods or approaches
to costing (that you have studied in CMA1 or CMA2) that might lead to more
precise product costs and explain why these other choices might be superior to
simply adopting the direct method of service department allocations. Briefly
describe why any other alternatives might be superior.
MacDonald Inc. manufactures and markets a complete line of ski boards. MacDonald has
three manufacturing departments-Moulding, Assembly, and Finishing- and two service
departments Physical Resources and Human Resources.
The basic fiberglass boards are fabricated in the Moulding Department. Fittings are
attached to the boards in the Assembly Department. The boards are painted, surfaces are
sanded and polished, and the completed boards are packed in the Finishing Department.
Varying amounts of materials, time and effort are required for each of the various ski
boards produced by the company. The Physical Resources and Human Resources provide
services to the manufacturing departments
MacDonald has always used a plantwide overhead rate. Direct labour hours are used to
assign the overhead to products. The overhead rate is computed by dividing the
company’s total estimated overhead cost by the total estimated direct labour hours to be
worked in the three manufacturing departments.
Sarah Lane, the manager of cost accounting has recommended that the company use
department overhead rates rather than a single, plantwide rate. Planned operating costs
and expected levels of activity for the coming year have been developed by Sarah and are
Service Department Costs
Variable Costs $ 60,000 $ 8,000
Fixed Costs 140,000 78,000
Total service department costs $200,000 $86,000
Moulding Assembly Finishing
Departmental activity measures:
Direct labour hours 10,000 40,000 30,000
Machine hours 0 8,000 50,000
Raw materials $ 800,000 $2,000,000 $ 100,000
Direct labour 150,000 600,000 450,000
Variable overhead 100,000 200,000 50,000
Fixed overhead 1,200,300 702,300 597,400
Total department costs $2,250,300 $3,502,300 $1,197,400
Moulding Assembly Finishing
Use of service departments
Estimated physical resources hours 4,000 3,000 1,000
Percentage of peak-period requirements 50% 35% 15%
Estimated human resources hours 200 600 800
Percentage of peak-period requirements 15% 40% 45%
Assume that the Double Black ski board has the following annual requirements for
machine time and direct labour time in the various departments
Moulding Department 0 500
Assembly Department 200 1,000
Finishing Department 1,500 800
Total hours 1,700 2,300
Prepare the memo and related schedules for Ms. Spence. Normal case format should be
Typical Case Format CMAII Case Studies
The typical format for a Case Study in CMAII consists of a memo 3 to 6 pages including
schedules that is generally prepared by an Accounting Analysis Group within the
controller’s office, or by an external group of accounting consultants, either for the
controller or for the top management team.
While the details and approach to every case are different, the basis format is as follows:
1. An introduction which describes the major problem or challenges facing the
business which you are being asked to help solve. It also generally includes a
review of the specific issues you were asked to deal with and an overview of how
you plan to proceed. This last aspect is to refresh the memory of the person who
assigned the project to you and can be done as a list of the contents of your memo.
2. A list of alternatives that may be considered to help solve the problem facing the
business (as outlined in part 1.) and an analysis of each alternative (both
qualitative and quantitative aspects). Be sure and include any assumptions and
you are making and any necessary calculations so it is clear to the reader how you
arrived at your numerical results.
3. A recommendation that is based on one of the alternatives or a combination of
alternatives and an explanation as to why this alternative was chosen (if not
4. A brief conclusion.
Any supporting schedules may either be included right in the body of the case memo or
put in an Appendix. Be sure to make reference to any schedule in an appendix in the
main body of the memo.
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