Cost Allocation and Management Accounting

This assignment delves into the crucial aspect of cost allocation within management accounting. It examines how organizations like hospitals and manufacturing companies (using Adelaide Brighton Cement as an example) allocate costs to specific services, products, or departments. The discussion highlights the use of subsidiary ledgers, labor hour tracking, and overhead cost allocation methods to ensure accurate cost representation and facilitate informed decision-making regarding pricing and resource allocation.

Running head: ACCOUNTING FOR MANAGERS
Accounting for Managers
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1ACCOUNTING FOR MANAGERS
Table of Contents
Answer to Question 1: Bonza Handtools Limited...........................................................................2
Answer to Question 2: The Tassie Company..................................................................................5
Answer to Part (i):.......................................................................................................................6
Answer to Part (ii):......................................................................................................................7
Answer to Question 3: ABC Limited..............................................................................................7
Answer to Part 1:.........................................................................................................................7
Answer to Part 2:.........................................................................................................................8
Answer to Part 3:.........................................................................................................................8
Answer to Part 4:.........................................................................................................................8
Answer to Part 5:.........................................................................................................................8
Answer to Question 4:...................................................................................................................10
References:....................................................................................................................................12

2ACCOUNTING FOR MANAGERS
Answer to Question 1: Bonza Handtools Limited
To,
The Directors of Bonza Handtools Limited
Date: 17.01.2018
Subject: Analysis of the proposed alternatives
Respected Sir/Mam,
The main intention of this report is to present the influence and advantages of the three
separate proposals laid down on the part of the different organisation personnel after critical
dissection of the same. The evaluation of each of these proposals is represented briefly as
follows:

3ACCOUNTING FOR MANAGERS
Proposal of the accountant:
According to the provided information, it has been identified that Jan Rossi is the
accountant of Bonza Hnandtools Limited. The person has come up with a proposal of making the
selling price per unit to $140, as it would help in increasing the profit margin. This could be
validated with the help of figures seen in accordance with the above table. This is because the
adoption of this proposal would help in increasing the profit margin by $75,000, as the current
profit level would change from $300,000 to $375,000. However, for experiencing this increase in
profit level, an effective advertising campaign is required for Bonza Handtools Limited.
In order to conduct this advertising campaign, it would have to spend $125,000. If the
advertising campaign fails to meet the desired goals of the organisation like dragging the
attention of the customers, it might lead to rise in the overall risk level. The effect would be
considerable decline in the existing profit level of the company, while the burden of cost for
promotion and advertising would rise largely. In order to combat with this situation, the
management of Bonza Handtools Limited would have the selling prices of its products and
hence, the customers might have to bear additional costs to avail the products of the organisation.
As a result, the organisation might experience reduction in customer loyalty (Alammar and Kohn
2016).
Proposal of the production manager:
According to the provided information, it has been identified that Tom Tune is the
production manager of Bonza Hnandtools Limited. According to the personnel, there should be
increase in sales volume by 25% with rise in variable cost per unit by $5. The intention is to
improve the overall product quality for generating additional revenues. For this goal to be

4ACCOUNTING FOR MANAGERS
achieved, it is necessary for the company to use promotional tools that would cost $50,000. As
identified from the case study, the contribution margin per unit would decline, if there is increase
in variable expense. However, it is to be borne in mind that the person has suggested an
advertising campaign, which is although lower in contrast to the proposal of the company
accountant, despite the profit level remaining the same.
The motive is to enhance the level of satisfaction of the customers by improving the
overall quality of the products. Moreover, this proposal would fetch long-term benefits to the
organisation in the form of new and repeat purchases. This is because with the improvement in
product quality, the existing customers would tend to buy more and new customers might
develop that might lead to generation of additional profit in future years.
Proposal of the sales manager:
According to the provided information, it has been identified that Mary Watson is the
accountant of Bonza Hnandtools Limited. According to the personnel, it is necessary to reduce
the selling price by $10 per unit for the initial three months of the accounting period. In addition,
the company is needed to incur cost of $40,000 in advertising, which would lead to profit
generation of $60,000. However, the repercussions might be negative for the organisation in the
long-run. The reason is that the fall in the price of its products might result in negative thoughts
in the minds of the customers due to the fact that the product quality has degraded. Thus, the
revenue generating capacity of the company might be reduced.
Recommendations:
The above analysis clearly inherits that the directors of the organisation should accept the
proposal of its production manager. This is because reliance is kept on improving the product

5ACCOUNTING FOR MANAGERS
quality and total sales volume. As a result, a profit of $75,000 would be generated. Although the
profit is identical to the accountant’s proposal, there is adequate risk involved in the latter
alternative due to greater focus on promotional and advertising campaign.
The third alternative would result in increased profit compared to the second proposal.
This is because the organisation is likely to encounter an increase in customer turnover.
However, after crucial analysis of the provided alternatives, Bonza could adopt the proposal laid
down by its production manager, Tom Tune.
Answer to Question 2: The Tassie Company
The below-stated table is formed based on the present plan and two proposed capacities
of production of Bonza depending on the given information:

6ACCOUNTING FOR MANAGERS
Answer to Part (i):
The information provided states that the Tassie Company has the ability of manufacturing
200,000 units per annum. However, it is currently manufacturing 150,000 units as laid down in
the existing plan. In the words of Butler and Ghosh (2015), if the use of the overall capacity is
made, the volume of sales could increase leading to rise in the income level of the organisation.
However, as argued by Bennett and James (2017), if the production capacity is increased in case
of falling market demand, the company might encounter significant loss. In the provided
situation, the existing level of production need not have to be sacrificed to manufacture the
additional 40,000 units needed to fulfil the contract of the government. Therefore, the Tassie
Company would be able to sell its products at $10.80 each unit. The per unit cost is obtained by
adding variable expense, fixed expense and mark-up cost on cost price (Collier 2016).

7ACCOUNTING FOR MANAGERS
Answer to Part (ii):
The provided scenario clearly states that the company has the capability of manufacturing
180,000 units per annum. However, the present level of production is 150,000 units per annum.
In such scenario, it is required to sacrifice 10,000 production units for earning a profit of $2.50
each unit in order to execute the government contract successfully. Therefore, the average price
would be $10.80 each unit for the initial 30,000 units and for the leftover units, the average price
would be $13.30 each unit. Thus, the average price of the overall number of units is calculated as
$11.43.
Answer to Question 3: ABC Limited
Answer to Part 1:

8ACCOUNTING FOR MANAGERS
Answer to Part 2:
Answer to Part 3:
Answer to Part 4:
Answer to Part 5:
“Segmented overhead cost pools” and “activity-based costing” help in distributing the
amount spent on a specified activity depending on the department head. In the words of Collier
(2015), the allocation of cost is made for activity depending on the time spent in the production
department in order to manufacture goods and services for activity-based costing. Along with

9ACCOUNTING FOR MANAGERS
this, the usage of “segmented overhead cost pools” as well as “activity-based costing” provides a
platform for the managers of an organisation in making decisions related to the structure of cost.
This is because the motive is to maximise the level of profit. A favourable situation might arise
in front of the production manager of a firm while the customer negotiations are carried out
(Edmonds et al. 2016). The actual direct cost in relation to a specified department is detected and
based on such detection; the anticipated departmental hours are computed in case of activity-
based costing.
When the above-depicted steps are carried out, the division of actual direct cost is made
by the anticipated hours. This would enable in arriving at the per unit rate. Moreover, after
evaluation of the unit cost, each cost activity could be apportioned to the product so that activity-
based costing could be used (Weygandt, Kimmel and Kieso 2015). Furthermore, at the time the
cost is ascertained under activity-based costing and then the cost of overhead per unit could be
anticipated that could be distributed to each product. Henceforth, it could be used to ascertain the
unit cost of each product, which would help in generating greater sales and profit margin.
The direct cost includes the cost pool, while the detection of anticipated hours is carried
out as driver of cost (Klychova, Faskhutdinova and Sadrieva 2014). As a result, the fall in cost is
inevitable coupled with formation of competitive pricing structure and rise in business income.
For instance, the apportionment of supervision charges is carried out by taking into consideration
the total number of staffs in a specified department (Kravet 2014). Thus, it could be stated that
cost pool is beneficial for tracking the cost driver useful in gaining an understanding of the total
cost.

10ACCOUNTING FOR MANAGERS
Answer to Question 4:
The overhead segmentation is highly advantageous at the time of cost determination;
however, such declaration is not made in the normal course of a business, particularly during the
projection of overhead costs, despite their relationship. Every production department would
receive an allocation of income and expense for identifying those business areas, which are
providing maximum profits to the organisation (Mouritsen and Kreiner 2016). On the other hand,
if the concentration lies on beyond a single product, there could be efficiency in the cost of
overhead. As a result, it would be easier for the managers to project the profit margin pertaining
to the product line. Along with this, the identification of overhead would be easier for the
accountant of the firm that might result in product variations. Such variations could be either
positive or negative. As a result, various heads of expenses would be used for segregation of the
overhead costs. Thus, the costs could be determined in relation to single jobs or services.
Some examples could be provided to gain an overview of various types of cost falling
under the expense head. The variable overhead comprises of wages related material handling
along with equipment utilities and production supplies. The indirect overhead might be in the
form of telephone and office expenditures, salaries of the administrative staffs, legal costs,
research and development cost and finally, auditing and accounting fees. The administrative
overhead takes into account office supplies, expenses related to front office, wages or
commission, external audit and legal costs and lease related to sales office and administration.
Finally, the manufacturing overhead is made up of factory rent, salaries for the managers and
maintenance personnel, property taxes, factory utilities and janitorial employee wages.
Some real-life instances could be used to describe the overhead costs. For instance, in
Victoria State Hospital, in order to fix timing of treatment, the use of computer system is made

11ACCOUNTING FOR MANAGERS
on the part of the physicians and such usage is carried out mainly at the nurse station (Osadchy
and Akhmetshin 2015). Along with this, the orders related to treatment and other materials are
requisitioned and the other costs and charges are recorded in a systematic way, as per the stay of
the patient in the hospital. The costs pertaining to medicines, meals of the patients, X-ray reports
and bed fees are taken into account. Therefore, as soon as the patient recovers, the hospital
authority provides bills to the person. These bills mainly include fees of the doctors attended,
medicines coupled with both direct and indirect overhead costs. Thus, there is effective
presentation of the costs in subsidiary ledger that includes medical number and episode number
of the patients.
Another instance of a manufacturing organisation in Australia, Adelaide Brighton
Cement, could be cited that allocates the labour hours in order to assign the precise cost to the
employees in order to generate costs that the company would have to bear (Siguenza-Guzman et
al. 2014). Along with this, the direct cost and labour hours pertaining to the workers are
maintained on the part of the lawyers and the accountants. At the time the allocation of cost is
conducted to distinct services and jobs, it becomes simple to track the precise cost amount to be
spent. Hence, it assists in formulating the policy related to pricing along with undertaking
effective decisions. At the time the overhead cost is allocated to different services and jobs, the
total cost of every department is detected and the benefits obtained from all the departments.

12ACCOUNTING FOR MANAGERS
References:
Alammar, A. and Kohn, D., 2016. Proper Accounting is Vital for Sustainable Business Growth.
Bennett, M. and James, P. eds., 2017. The Green bottom line: environmental accounting for
management: current practice and future trends. Routledge.
Butler, S.A. and Ghosh, D., 2015. Individual differences in managerial accounting judgments
and decision making. The British Accounting Review, 47(1), pp.33-45.
Collier, P., 2016. Accounting For Managers Interpreting Accounting Information For Decision
Making 0470845023.
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision
making. John Wiley & Sons.
Edmonds, T.P., Edmonds, C.D., Tsay, B.Y. and Olds, P.R., 2016. Fundamental managerial
accounting concepts. McGraw-Hill Education.
Klychova, G.S., Faskhutdinova, М.S. and Sadrieva, E.R., 2014. Budget efficiency for cost
control purposes in management accounting system. Mediterranean journal of social
sciences, 5(24), p.79.
Kravet, T.D., 2014. Accounting conservatism and managerial risk-taking: Corporate
acquisitions. Journal of Accounting and Economics, 57(2), pp.218-240.
Mouritsen, J. and Kreiner, K., 2016. Accounting, decisions and promises. Accounting,
Organizations and Society, 49, pp.21-31.

13ACCOUNTING FOR MANAGERS
Osadchy, E.A. and Akhmetshin, E.M., 2015. Accounting and control of indirect costs of
organization as a condition of optimizing its financial and economic activities. International
Business Management, 9(7), pp.1705-1709.
Siguenza-Guzman, L., Van Den Abbeele, A., Vandewalle, J., Verhaaren, H. and Cattrysse, D.,
2014. Using Time-Driven Activity-Based Costing to support library management decisions: A
case study for lending and returning processes. The Library Quarterly, 84(1), pp.76-98.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John
Wiley & Sons.