Mega Labs develops and manufactures medicines. The company has been successful during the past few years, due primarily to having discovered, patented, and successfully marketed dozens of new medicines. The Company started to increase its dividends to the shareholders since last three years. Last year, the Company distributed $5 million dividends ($1 million to the cumulative preference shareholders and $4 million to the ordinary shareholders). Annual net profit had been rising steadily until two years ago, when it peaked at $25 million. Last year, increased competition caused net profit to decline to $18 million. Management expects profit to stabilize around this level for several years. Mega generates the following proposals: a) To issue 5 years bonds payable. However, the bond contract requires the company to limit total dividends to not more than 25% of net profit. b) To buy back its own share when there is any idle cash. REQUIRED: Evaluate EACH of the above proposals from the perspective of Preference shareholders and Ordinary shareholders (treat each option separately).
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
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