Cost Accounting Calculation and Analysis

This assignment focuses on calculating the total cost of producing Wonder Products. It involves determining direct material, labor, and overhead costs based on specific activities like machine hours and labor hours. The assignment also explores the concept of activity-based costing and predetermined overhead allocation rates. Finally, it calculates the quoted price for the products, considering a 40% profit margin.

ACCOUNTING FOR MANAGERS

Answer 1.
(a) Financial budget is prepared to estimate the expenses for the year at the beginning of the
period. This helps the company to know about the gap between the estimated and the actual
data. The management of the company enquires the reason for the difference and take
necessary actions in order to improve.
There are two types of budget: Fixed budget and flexible budget. In a fixed budget all the
assumptions are made based on the output of the business. The output is also forecasted and
therefore, it may differ from the assumption made. This is the main reason why flexible
budget is preferred over fixed budget. The flexible budget helps to understand all the items
present in the income statement based on the actual output (Horngren, Datar and Rajan,
2017).
The following table are an example of fixed budget and flexible budget:
Statement showing fixed budget.
Particulars Budget amount for each unit Static budget Actual budget
Varianc
e
5000 units 8000 units
Revenue 30 150000 200000 -50000
Variable cost:
Material 12 60000 78000 -18000
Labour 8 40000 70000 -30000
Overhead 5 25000 42000 -17000
Total 25 125000 190000 -65000
Contribution 5 25000 10000 15000
Fixed cost:
Manufacturing 50000 45000 5000
Marketing 25000 26000 -1000
Total -50000 -61000 11000
The actual output and the budgeted output may differ from each other and this is observed in
the fixed budget.
Statement showing flexible budget.
Particulars
Budget amount for each
unit
Flexible
budget
Actual
budget
Varianc
e
8000 units 8000 units
Revenue 30 240000 270000 -30000
Variable cost:
Material 12 96000 125000 -29000
Labour 8 64000 70000 -6000
Overhead 5 40000 42000 -2000
Total 25 200000 237000 -37000
Contributio
n 5 40000 33000 7000

Fixed cost:
Manufacturin
g 50000 30000 20000
Marketing 25000 20000 5000
Total profit -35000 -17000 -18000
The budgeted cost is in respect of actual number of units produced so that the company can
identify the variation and know the reasons for it.
The flexible budget is considered to be more useful than the fixed budget because it helps in
evaluating the cost and the profitability in depth.
(b) The cash budget is prepared by every company in order to the source of the cash generation
and the application of this cash in the company. The main business of any company is to
produce goods and sell them; therefore a sales budget and production budget is to be
prepared. Three budgets that are required to be prepared before the cash budget are-
1. Sales Budget- Sales budget is prepared by the company to forecast the sale for a short period
of time on a monthly or quarterly basis. It is prepared for a short period because of the
dynamic nature of the economy. Sales is the main source of cash generation for the company
and hence this information of cash inflow is necessary to prepare the cash budget
2. Production Budget- Goods are required to be produced in order to generate revenue. It is
equally important to know how much goods a company should produce so that they are in
adequate quantity. As there is a cash outflow during the production process it is important to
prepare this budget prior to preparing cash budget.
3. Raw material budget- The raw material requirement of the company is based on the number
of units to be produced. Raw material are the main expense of the company and therefore, it
is very important to maintain a material budget. Material budget helps to record the amount
of cash drainage because of the purchase of raw material and hence it is also prepared before
the prepararyion of the cash budget of the company.
(c ) The most common feature of a cash cycle and an operating cycle is the management of
the cash available and also its working capital. Operating cycle is the time in which includes
the entire process which is conversion from resource to cash. The starting of the operating
cycle starts from the procurement of raw material and ends with receiving the payment from
the buyers whereas cash cycle can be explained by the cash outflow during the procurement
of raw materials and ends with receiving payments.
The working capital ratio can be defined as the ratio between the current assets and the
current liabilities of the company. Other various working capital ratios are Inventory turnover
ratio, debtor turnover ratio, creditor turnover ratio.
Inventory turnover ratio =
Cost of goods
sold
Average
inventory

Debtors turnover ratio= Credit sales
Average accounts
receivables
Creditors turnover ratio= Credit Purchases
Average account payable
(d.) I totally disagree with the statement that accounting is more important in the private
organisations than the government organisations. Like private organisation, there are many
people to whom the accounting information is useful for taking various economic decisions.
These persons include investors, creditors, government officials and also the other citizens of
the country. The government organisations are not only considered about earning profits that
are also concerned about the satisfaction of people and also the economic development of the
country so the accounting information is considered very important by the stakeholders.
(e.) A costing system deals with the procurement of resources needed to manufacture a
product and the method of production. The information relating to the manufacture is
provided to the management of the company which is helpful to take important decisions
such as cost controlling and decisions regarding outsourcing. The management before taking
any decision regarding a particular order analyses whether it will be profitable for the
company or not. If this information is present with the management then they may take
relevant steps to improve them. There may be an order which may involve huge cost and less
profit, it will help the management to plan its activities accordingly. Most importantly, it will
help the stakeholders of the company to stay updated with the accounts of the company
(Paramasivan and Subramanian, 2009).

Answer 2.
(a) Calculation showing the manufacturing overhead allocation rate of Wonder Products.
Manufacturing overhead
rate= Manufacturing overhead
Machine hours
= 598080
7000
=
85.44 per machine
hour.
Note: Manufacturing overhead are calculated as per the machine hour.
(b) Calculation of administrative overhead allocation rate for wonder products
Administrative overhead
rate= Administrative overhead
Labour hours
= 695520
14000
= 49.68 per labour hour.
Note: Administrative overhead is calculated as per labour hours.
(c ) Calculation of total cost:
Quoted price = Total cost + Profit
margin.
Total cost 90436
Profit (40%) 36174.4
Quoted Price
126610.
4
(d.) The indirect cost that are incurred to produce a product is known as Overhead cost. It
forms a huge part of the total cost apart from the raw material cost. In the traditional method,
overhead cost is allocated based on a single cost driver which is calculated for all the various
activities that are taking place. This is incorrect because if there are numerous activities then
there should be different cost drivers based on the activities. The activity based costing is
Direct material 19000
Cost due to labour hours
(750*49.68) 37260
Cost due to machine hours
(400*85.44) 34176
Total cost 90436

adopted by most countries in order to get information relating to the cost of each unit and its
breakup (Pillai, 2010).
In the above question different activities were based on different cost drivers like labour
hours and machine hours. The cost of overhead is added along with the other direct cost in
order to get the total cost.
(e) The reason for preferring predetermined overhead allocation rate than real overhead rate
is the Time frame. The actual overhead that has been incurred is known by the company only
when the work gets completed. It becomes difficult for the company to estimate the overhead
and recover from the customers. Therefore, a predetermined rate is calculated and according
to that the cost is recovered. It is however not necessary that the cost will be recovered
correctly i.e. it is possible that there may be under absorption or over absorption. Therefore,
the rate determined is not calculated as a long term view (Tulsian, 2006).

References:
Horngren, C., Datar, S. and Rajan, M. (2017). Horngren's cost accounting. Harlow, Essex,
England: Pearson Education Limited.
Paramasivan, C. and Subramanian, T. (2009). Financial management. New Delhi: New Age
International (P) Ltd., Publishers.
Pillai, R. (2010). Management accounting. [Place of publication not identified]: S Chand &
Co Ltd.
Tulsian, P. (2006). Financial accounting. New Delhi: Pearson/Education.