Cost and Management Accounting: Activity-Based Costing and Cost-Volume-Profit Analysis

This study material covers topics such as activity-based costing, cost-volume-profit analysis, and key assumptions for cost-volume-profit analysis. It also includes a section on sustainability reporting by firms and corporations in Australia, along with a comparison of different local and international sustainable reporting frameworks.

BUACC5933 – Cost and Management
Accounting Semester 2 2018

TABLE OF CONTENTS
Part 1..........................................................................................................................................3
Question 1..............................................................................................................................3
A.........................................................................................................................................3
B.........................................................................................................................................3
Part 2..........................................................................................................................................3
Question 1..............................................................................................................................3
Question 2..............................................................................................................................4
Part 3..........................................................................................................................................4
References..................................................................................................................................5

PART 1
Question 1
A
In the present era, the production process of multiple products in manufacturing companies is
supported by various activities and department due to which it is not feasible to allocate
overhead as per the single rate (Oseifuah, 2018). Therefore, traditional costing is not suitable
as it leads to a wrong decision regarding cost consumption and profit generation for
individual product or departments. By considering this aspect, companies are required to
adopt activity-based costing as it allocates overheads as per cost drivers which consider
actual cost consumption. By implementing this model, business will be able to eliminate
activities not providing value benefit to business in order to make optimum utilisation of
available resources. Further, they can improvise product mix as per consider an actual
contribution by each product (Mahaland Hossain, 2015).
B
(i)
i Predetermined plant-wide overhead rate
Budgeted Manufacturing overhead cost A $819,000.00
Budgeted Machine Hours B 22,500.00
Plant-wide overhead rate A/B 36.4
(ii)
ii
.
Estimate the overhead costs of each of the two products
Particulars Slices Herbs Total
Machine Hours for the month of
July-18 A 900 450 1350
Plant-wide overhead rate B 36.4 36.4 36.4
Estimate the overhead costs A*B $32,760.00 $16,380.00 $49,140.00
(iii)
iii Compare the actual overhead cost to the amount of overhead applied to the two

products in July
Actual overhead cost for the month of July-18 A $76,500.00
Overhead applied to the two products in July-18 (ii) B $49,140.00
Adverse Variance (Budgeted - Actual)
B-
A $27,360.00
PART 2
Question 1
Yes, it is possible for two identical companies to charge different prices even if they have
similar products with the same fixed costs and variable costs per unit. It is possible because
of economies of scale. With the increase in production units company will be able to make a
reduction in their fixed cost per unit and their overall profitability will be increased and
therefore they will be able to offer products at low price and can earn profits (Brealey, Myers
and Marcus, 2012). After surpassing the breakeven point, contribution per unit on each
additional unit is a profit of the business as a fixed cost is already covered.
Figure 1: Break-even point
(Source: Tsorakidis, Papadoulos, Zerres and Zerres, 2011)
By considering the above graph, it can be noticed that after attainment of breakeven point,
additional units of production will provide higher profits as the cost will be entirely variable
to the sales price (Tsorakidis et al. 2011).

Question 2
Key assumptions to be considered for cost-volume-profit analysis are enumerated below: All cost covered under operations can be categorised as fixed and variable cost as
without categorisation this analysis is not possible. The fixed cost associated with the production will remain the same in the short
run,andthe variable cost is completely proportionate to the sale per unit (Weygandt,
Kimmel and Kieso, 2015). Selling price per unit will be constant during the production irrespective of the
volume produced This model assumes that there is no drastic modification in the inventory size. It
means ether accounting of inventory is done as per variable costing or entire
production has been sold within the same period (Lulaj and Iseni, 2018).
Cited assumptions provide the following linear equation regarding total costs and revenues
Total costs = fixed costs + (variable cost per unit × No. of units produced)
Total revenue = sales price per unit × No. of units produced
These assumptions are applied so that variables of cost-volume-profit analysis can be formed
into a linear equation. However, in a real scenario, cost and revenues associated with the
productions are non-linear which makes analysis more complicated in nature.
These assumptions do not reduce the viability of this tools,but it imposesa restriction on its
application. This tool has various advantages for car rental business such as improvising a
decision-making process (Otley, 2016). By applying this statistical model, the manager can
determine targets to attain for achieving desired profitability. Further, application of this
model providesa detailed analysis of activities of the business. However, inaccurate
forecasting can also lead to making the wrong decisions (Said, 2016). Therefore, the value of
this model for business is completely based on available information.
PART 3
This part of the study is based on assessing the importance of Sustainability Reporting by
firms and corporations in Australia. Along with this study also covers the comparison and
contrasting of different local and international sustainable reporting frameworks.

Sustainability reporting engages firms and corporations stating their corporate responsibility
by measuring and reporting their performance based on economic, social and environmental
conditions. Further, this can be served by the annual report of the corporation, a sustainability
report, environmental impact report and triple bottom line report (Flower, 2015). Preparing a
sustainability report is turning out to be an accepted aspect of corporate accountability. The
reports are believed to demonstrate the approach of the company and their performance on
such social, governance and environmental issues to the stakeholders (Parliament of
Australia, 2018). The information based on sustainability performance might be presented as
an element of the annual report of the organization, or on the basis of the standalone report;
sustainability report, environmental impact report and triple bottom line report. It is the key
measure wherein the company’s state, and judgement upon their performance is done, and
their commitment towards corporate responsibility is considered.
In context with reporting structure, a rapid amount of companies based in ASX200 are now
applying the Several guidelines of reporting have also been established to help the procedure
of sustainability reporting. The most broadly realized are the Global Reporting
Initiative (GRI) Reporting Guidelines, in accordance with the same, it aims to make
sustainability reporting as widespread and general as financial reporting so as to engage in
company routine aspects to account their efforts they prepare on and have impact on the
natural resources, economy and communities globally (Australian Council of
Superannuation Investors, 2017). The adoption of the GRI framework is also related with the
level of the transparency score of the firm and with its concerned analysts pursuing the acts as
an aspect for the capital markets, calling for a high information environment. Corporate
sustainability reporting inclusive of the risks of economy, environment, social and
governmental is improvising, but there is still the presence of considerable gaps in regards to
the climate associated disclosures. Majority of the ASX200 companies consider value in
terms of sustainability disclosure, in which 92% have undertaken some reporting. Companies
are encouraged by the ACSI to implement best and justified practice structure established by
the Financial Stability Board’s Task Force based on the Financial Disclosures related to
climate.
Moreover, prime principles of sustainability disclosure rapidly increased the norm, with more
than 50% of the ASX200, currently reporting to a detailed or leading level, in comparison

19.5% in the year 2008. Furthermore, the 85% in each dollar being invested in the ASX200
moved to the corporations that reported to the high standard.
ACI and its involved members believe in their contributions, which are made to improve
sustainability disclosure over the past few years. The improvements made them are inclusive
of: several companies made report to either Leading or Detailed level has magnified from 39
in the year 2008 to 101 in the year 2016, the number of companies that made no reports have
almost divided in 31(2008) to 16 (2016) (Higgins, Milne and Van Gramberg, 2015).With the
rate of sustainability disclosure of all ASX200 companies and benchmarking in opposition to
their industry and the ASX200, they provide companies with a perception of an institutional
investor on their progress. With the sustainability reporting and its disclosure, robust and
evident business decisions are facilitated while long-term value creation is ensured.
It is highly effective when it comes to the disclosure of the material environmental, social and
governance risks are determined, managed and mitigated. Sustainability reporting held in
Australia is affected by the international development simultaneously. Within this, the
significant developments climate-related changes, the United Nations Sustainable
Development Goals, integrated reporting, the European Union (EU) Shareholder Rights
Directive and the Sustainable Stock Exchanges Initiative.
In addition, the foreign companies having operations in Australia voluntarily report, being
rated at over twice as of companies owned by Australia, with 43% and 18% respectively. The
Sustainability reporting held within Australia is led by a range of core sectors like financing,
manufacturing, mining, trading and utilities (Adams, 2015). The main reason behind the
lower reporting rates is the insufficient involvement of the majority of financial markets.
In a situation where the financial analysts do not make use of sustainability information then
there will be less prompt for companies to generate the same. On the other hand, the financial
analysts make no demand for information; it is because it is not prepared in the specified
format that the companies generally use.
Consequently, the non-financial activities of risk management that corporations are taking
into account are not valued in the market as a whole (De Villiers, Rinaldi and Unerman,
2014). Although, it should be noted that, the low rate of the sustainability reporting in

Australia does not demonstrate on the solid or weak company performance, but is only
unreported and thereby complexity is faced while measuring.
The lawful compulsions held on the Australian sustainability reporting are demonstrated
under the Corporations Act 2001 inclusive of:
 s299 (1) (f) requiring the corporations while making it mandatory to comprise details
regarding environmental laws and annual report licenses breaches.
 ss1013(A) to (F) prescribed under Corporations Act 2001, requires financial items
providers with an investment element to make disclosure to the degree by which the
environmental or labour laws, social and ethical concerns are considered while
making decisions regarding investments (A. Adams, Muir and Hoque, 2014).
On the other hand, as per the Australian Stock Exchange (ASX), the standards and best
recommendation on practices of the good corporate governance with a code of conduct are
placed by the Corporate Governance Council, that can state the company’s commitment
towards ethical compliance and practices (Parliament of Australia, 2018).
Reporting international companies to have several choices in terms of disclosures, such as
GRI standards, IIRC, SASB, CDSB and CDP which offer many ways in front of them to be
transparent. Emerging frameworks such as the International Integrated Reporting Council and
Sustainability Accounting Standards Board can experience a rising struggle to hold grip till
the time they can prove their actual value in context with providing a range of beneficial
tools, market recognition and their part validation (Global Reporting Initiative, 2013). The
most generally used detailed sustainability reporting standard internationally is the GRI
Sustainability Reporting Guidelines. These guidelines are voted as the most useful and
appropriate reporting framework, along with the CDP and the DJSI with the rate of 50% of
individuals determining the GRI as the most suitable and favoured principle flowing between
companies and other organizations.
There is the presence of various sustainability frameworks and principles which are
internationally recognizable. The mainstream providers of the guidelines related to non-
financial reporting are inclusive of Global Reporting Initiative (GRI Sustainability
Reporting Standards), The Organisation for Economic Co-operation and Development
(OECD Guidelines for Multinational Enterprises), UN Global Compact (Communication

on Progress), International Organization for Standardization (ISO 26000 Guidance on social
responsibility) and The International Integrated Reporting Council (IIRC
International Framework). In relation to the rising demand for transparency, local standards
are being improved along with the international frameworks (GRI, 2013). At present era,
companies have criticized for the depressing effects of the environment on the community,
there is a higher requirement of the proper disclosures maintained by firms, and for the same,
and there are a range of sustainability reporting framework applied internationally which are
GRI (Global Reporting Initiatives), DJSI (Dow Jones Sustainability Index) and carbon
disclosure project.
On the basis of the present analysis, it can be concluded that Sustainability Reporting is a
very important aspect when it comes to financial reporting. A range of international as well as
local initiatives operates to help organizations with their sustainability reporting. Further, the
analysis of local as well as the international framework shows that they have similar
objectives however their effectiveness varies as per the factor considered for sustainability
reporting (Flower, 2015). In addition to this, the GRI is considered to be the most suitable
framework, as it a liberal international firm that assists the companies to communicate their
effects on crucial sustainability issues and is more committed to improvising the optimum
usage of guidelines.
Irrespective of the framework to be chosen by corporate for its non-financial reporting, it
should be noted that while communicating the relationship among the business and
sustainability, company’s value can be greatly improvised (GRI, 2013). This also helps in
measuring and mitigating changes, while ensuring improvements and innovations
simultaneously.

REFERENCES
A. Adams, C., Muir, S. & Hoque, Z., (2014). Measurement of sustainability performance in
the public sector. Sustainability Accounting, Management and Policy Journal, 5(1),
pp.46-67.
Adams, C.A., (2015). The international integrated reporting council: a call to action. Critical
Perspectives on Accounting, 27, pp.23-28.
Australian Council of Superannuation Investors, (2017). Corporate Sustainability Reporting
in Australia (pdf). Retrieved from <
https://www.acsi.org.au/images/stories/ACSIDocuments/generalresearchpublic/2017-
Sustainability-Report-FINAL.pdf >.
Brealey, R. A., Myers, S. C., & Marcus, A. J. (2012). Fundamentals of corporate finance.
McGraw-Hill/Irwin,
De Villiers, C., Rinaldi, L. & Unerman, J., (2014). Integrated Reporting: Insights, gaps and
an agenda for future research. Accounting, Auditing & Accountability Journal, 27(7),
pp.1042-1067.
Flower, J., (2015). The international integrated reporting council: a story of failure. Critical
Perspectives on Accounting, 27, pp.1-17.
Global Reporting Initiative, (2013). Sustainability Reporting: Practices, performance and
potential In association with GRI, (pdf). Retrieved from <
https://www.cpaaustralia.com.au/~/media/Corporate/AllFiles/Document/professional-
resources/sustainability/sustainability-reporting-practice-performance-potential.pdf>.
GRI, (2013). Collaboration among reporting frameworks: the future of sustainability
reporting (Online). Retrieved from <
https://www.globalreporting.org/information/news-and-press-center/Pages/
Collaboration-among-reporting-frameworks-the-future-of-sustainability-
reporting.aspx>.
GRI, (2013). Ranking the standards: Which sustainability frameworks are best? (Online).
Retrieved from < https://www.globalreporting.org/information/news-and-press-

center/Pages/Ranking-the-standards-Which-sustainability-frameworks-are-
best-.aspx>.
Higgins, C., Milne, M.J. & Van Gramberg, B., (2015). The uptake of sustainability reporting
in Australia. Journal of Business Ethics, 129(2), pp.445-468.
Lulaj, E., &Iseni, E. (2018). Role of Analysis CVP (Cost-Volume-Profit) as Important
Indicator for Planning and Making Decisions in the Business Environment. European
Journal of Economics and Business Studies, 4(2), 104-120.
Mahal, I. and Hossain, A., 2015. Activity-Based Costing (ABC)–An Effective Tool for Better
Management. Research Journal of Finance and Accounting, 6(4), pp.66-74.
Oseifuah, E. K. (2018). Activity-based costing (ABC) in the public sector: benefits and
challenges. Management, 12, 4-2.
Otley, D. (2016). The contingency theory of management accounting and control: 1980–
2014. Management accounting research, 31, 45-62.
Parliament of Australia, (2018). Chapter Six - Sustainability reporting: background and
current status (Online). Retrieved from <
https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and
_Financial_Services/Completed_inquiries/2004-07/corporate_responsibility/report/
c06>.
Parliament of Australia, (2018). Sustainability reporting (Online). Retrieved from <
https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/
Parliamentary_Library/Browse_by_Topic/ClimateChangeold/responses/economic/
sustainability>.
Said, H. A. (2016). Using Different Probability Distributions for Managerial Accounting
Technique: The Cost-Volume-Profit Analysis. Journal of Business and
Accounting, 9(1), 3.
Tsorakidis, N., Papadoulos, S., Zerres, M., &Zerres, C. (2011). Break-even analysis.
Bookboon.

Weygandt, J. J., Kimmel, P. D., &Kieso, D. E. (2015). Managerial accounting. Wiley.