FreeAir Skate Pty Ltd is a company that was set up by John Eustace in the past year. The company prides itself on producing innovative and stylish skateboards. The company’s production base is in Malaga, Western Australia, with its retail store in Innaloo, about 16km away. FreeAir Skate currently produces three lines of skateboards: SnowSkate, SurfSkate and DirtSkate. Each of the lines were developed to specifically address what John felt was missing in the market, ie a skateboard to mimic the feeling of snowboarding, surfing and off-roading respectively. You have just been hired as a graduate accountant by John. On the first day of work, John said to you: “Look, we are a pretty small operation here. I am not sure if I really need an accountant going forward. I guess I need you to balance the accounts and prepare the year end reports, but apart from that, I do not see how we have enough work to warrant me keeping you on full-time. Tell me what it is that you accountants typically do when it’s not year-end or month end, because I can’t really see accountants adding value to FreeAir.” Not an entirely good start to your first job, but you now have to convince John that accountants are necessary in an organisation and show that you can add value to FreeAir. “Before you head off,” John continued, “here’s some information I need you to help make sense of.” He then handed you some information as shown in Appendix A. “Can you put them into a format that I can actually understand and make sense of? Everyone is giving me all these numbers but I have no idea what they mean! I know what an income statement is, but I think most of these don’t even appear in there. If so, what do these numbers do and why do I need them?” As you head back to your assigned office to do what John has requested, you meet Bernard Buckley, the production manager. “Hi there,” he says. “Good to see that we have a numbers person on board. I hope you are settling in well. I have some stuff here that I need you to have a look at. John wants to know which costs are mixed, which are variable and which are fixed. I have no idea how to determine that. Could you please have a look at it and then include that in your report to John? He will also need the mixed expenses to be separated into their fixed and variable components.” CASE ANALYSIS Management Accounting Page 2 As you were about to leave, John stopped you. “Listen, I have heard talk of this new costing system that some of our competitors are using and I want to know more about it. I need you to tell me what it’s all about and whether it would suit us. They are calling it ABC or something like that. It is said to be a better costing system but I am not sure. Tell me more about it. I need to know how it works, its benefits and its limitations. If it works for us, I would like to implement it as well. I do not want to be left behind!” REQUIRED: Prepare a report (no more than 10-pages) for John Eustace that addresses the following: a) How a management accountant can add value to FreeAir Skate Pty Ltd. b) Preparation of an Income Statement and Schedule of Cost of Goods Manufactured. Explain the purpose of both the Income Statement and Schedule of Cost of Goods Manufactured. c) Determine which expenses are mixed and separate the variable and fixed components to derive a cost formula for each mixed expense. d) Discuss the purpose of ABC. Evaluate whether ABC should be introduced. (Hint: remember to consider both the costs and benefits of any action recommended.) CASE ANALYSIS Management Accounting Page 3
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