Newtons Sunglasses Special Order Analysis

This assignment examines a special order for Newton's Sunglasses. It requires calculating the potential operating income from the order, comparing it to existing production costs, and assessing whether accepting the order is financially beneficial. The analysis considers direct materials, labor, variable manufacturing overhead, and selling price. Additionally, it addresses the perspective of Peter Kyler, who included fixed overhead manufacturing and variable selling expenses in his calculations, highlighting the importance of accurate cost allocation for informed decision-making.

Running head: BMAC 5203 ACCOUNTING FOR DECISION MAKING
BMAC 5203 Accounting for Decision Making
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Task 1: Topic 9: Standard Costing and Variance Analysis........................................................2
1. Using the variance formula calculating direct material and labour variance, while
indicating favourable or unfavourable variance:........................................................................2
2. Discussing why the variances have occurred:........................................................................3
3. Explaining whether unfavourable variances should be investigated:....................................4
Task 2: Topic 10: Responsibility Accounting............................................................................5
Considering the key performance indicator in accordance with balance scorecard:.................5
Task 3: Topic 6: Short-term Decision Making..........................................................................6
1. Depicting whether accepting the order will affect Newton’s operating income and stating
whether to accept the order or not:.............................................................................................6
2. Explaining whether the analysis is correct, as per accountants of Newtown’s:.....................7
Reference and Bibliography:......................................................................................................8

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Task 1: Topic 9: Standard Costing and Variance Analysis
1. Using the variance formula calculating direct material and labour variance, while
indicating favourable or unfavourable variance:
Particulars Value
Actual Usage 110,000.00
Standard price 10.00
Actual price 9.00
Material price Variance 110,000*(10-9)
Material price Variance (Favourable) 110,000.00
Particulars Value
Standard price 10.00
Standard quantity 100000
Actual quantity 110000
Material usage/quantity Variance 10*(100,000-110,000)
Material usage/quantity Variance (Unfavourable) (100,000.00)
Particulars Value
Actual hours worked 22,000.00
Standard rate per hour 9.00
Actual rate per hour 9.50
Labour rate Variance 22,000*(9.00-9.50)

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Labour rate Variance (Unfavourable) (11,000.00)
Particulars Value
Standard rate per hour 9.00
Standard hours of actual output 26,000.00
Actual hours worked 22,000.00
Labour efficiency variance 9.00*(26,000-22,000)
Labour efficiency variance (Favourable) 36,000.00
2. Discussing why the variances have occurred:
Variances Explanation
Material price Variance The favourable price variance was mainly achieved, due to the
reduction in actual price against standard price. This helped in
achieving a favourable variance of $110,000. For instance, if the
company has favourable variance it could reduce its cost price and
attain higher profitability.
Material usage/quantity
Variance
The unfavourable material variance is mainly conducted due to the
increased actual quantity purchased by the company. This
unfavourable variance was mainly conducted due to the decline in
material price, which increased actual purchases of the
organisation. For example decline in material price allow
organisation to stock more raw materials, which increase usage

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variance and is unfavourable in nature.
Labour rate Variance The unfavourable variance is mainly incurred, as the actual cost is
higher than the standard rate taken into consideration. This
indicates that the estimation in budget was not conducted
according to market trend.
Labour efficiency
variance
The favourable variance is mainly conducted due to the increment
in actual productivity from standard productivity. This mainly
allows the organisation to estimate efficiency of its labour in
increasing its productivity.
3. Explaining whether unfavourable variances should be investigated:
From the evaluation it is estimated that both unfavourable and favourable variances
should be investigated to understand the factors affecting profitability of the company.
However, certain criteria need to be maintained by the company, while evaluating variances,
as investigating all the variance would increase expenses of the organisation. Therefore, it is
not cost effective to investigate variance, which are close to budget and have immaterial
differences. On the other hand, evaluation of variance directly allows the organisation to
understand main reason behind the variance, which could help in increasing efficiency and
effectiveness of the operation. Nielsen, Mitchell and Nørreklit (2015) mentioned that
management with the evaluation of variances are able to identify loopholes in the budget
preparation system, which could be adjusted to nullify variance occurrence.

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Task 2: Topic 10: Responsibility Accounting
Considering the key performance indicator in accordance with balance scorecard:
Indicators Classifying Indicators
Number of customer complaints Customer perspective
Number of information system upgrades completed Internal business perspective
Residual income Financial perspective
New product development time Learning and growth perspective
Employee turnover rate Internal business perspective
Percentage of products with online help manuals Internal business perspective
Customer retention Customer perspective
Percentage of compensation based on performance Financial perspective
Percentage of orders filled each week Internal business perspective
Gross margin growth Financial perspective
Number of new patents Learning and growth perspective
Employee satisfaction ratings Internal business perspective
Manufacturing cycle time (average length of production process) Internal business perspective
Earnings growth Financial perspective
Average machine setup time Internal business perspective
Number of new customers Customer perspective
Employee promotion rate Internal business perspective
Cash flow from operations Financial perspective
Customer satisfaction ratings Customer perspective
Machine downtime Internal business perspective
Finished products per day per employee Internal business perspective

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Percentage of employees with access to upgraded system Learning and growth perspective
Wait time per order prior to start of production Internal business perspective
Task 3: Topic 6: Short-term Decision Making
1. Depicting whether accepting the order will affect Newton’s operating income and
stating whether to accept the order or not:
Particulars Value Amount
Selling price $ 80.00 $ 1,360,000.00
Direct materials $ 39.00 $ 663,000.00
Direct labour $ 15.00 $ 255,000.00
Variable manufacturing overhead $ 6.00 $ 102,000.00
Total cost $ 60.00 $ 1,020,000.00
Operating income $ 20.00 $ 340,000.00
From the evaluation of above table, the relevant operating income of Newtown’s can
be identified from the special order. The operating income will be around $20 from $71,
which was previously obtained from $154 selling price. The fixed manufacturing overhead
and variable selling expenses is not considered in the special order case, as it is one-time
order conducted by the company. The factors such as variable selling expenses and fixed
manufacturing overhead needs to be accommodated by the management in actual production
function, which could be neglected in the special order. Seeing the profits that will be
accumulated by the production of new order, the company should commence with the
production and accommodate a new buyer for the organisation. Therefore, it could be
estimated that the current profitability generated from the new order could be used by the

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company in making adequate investment decision regarding profitability and production.
Hence, the managers of Newtown could accept the new order, as it might help in increasing
profitability, while maintaining same level of fixed cost. Collier (2015) argued that
assumption of production function without adequate research could increase cost and hamper
profitability of the company.
2. Explaining whether the analysis is correct, as per accountants of Newtown’s:
From the evaluation of calculation and returns provided by the new order neglects the
estimation made by Peter Kyler, as he is taking the expenses of fixed overhead manufacturing
and variable selling expenses. This estimation is mainly increasing the total cost of
production to $83 per sun glass, which is not actually the case. Moreover, the reduction of the
fixed overhead manufacturing expenses and variable selling expense, while decline the total
cost to $60 will providing profits of $20 per sun glass. Therefore, it could be said that the
evaluation conducted by Peter Kyler was not appropriate and the company should go ahead
with the production of new order.