Management Accounting

This document provides comprehensive study material on management accounting. It covers topics such as manufacturing cost flows, cost behaviour, manufacturing budget, strategic and international issues, and strategic management accounting. The document also includes case studies and analysis. Suitable for students studying management accounting.

Running head: MANAGEMENT ACCOUNTING
Management accounting
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Table of Contents
Answer 1 – Manufacturing cost flows.......................................................................................2
Answer 2 - Cost Behaviour........................................................................................................3
Answer 3 - Comprehensive Manufacturing Budget...................................................................4
Answer 4 – Strategic and International issues in Management Accounting..............................8
Answer 5 - Strategic management accounting.........................................................................10
Reference..................................................................................................................................12

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Answer 1 – Manufacturing cost flows

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Answer 2 - Cost Behaviour
Production capacity
Production volume is the units of production that can be produced by the
manufacturing plant by the entity with the available resources for the given time period.
Theoretical capacity is the production level of the manufacturer that can be produced with
optimum efficiency as well as continuous performance of all the resources including the
equipment used for production and the operations required for production (Mishan, 2015). On
the contrary, practical capacity is the production level of the manufacturer based on the
labour hours, machine hours or in terms of pounds or quantity. Generally the practical
capacity level of production is less than the theoretical capacity level of production. Though
theoretical capacity is considered as the perfect picture with optimum utilization of all the
available resources, in reality it is not obtainable. However, the practical capacity is realistic
and is therefore achievable (Mishan, 2015).

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Production capacity constraint
Relevant range is termed as the particular production level that is bounded by the
minimum and maximum limit. Within the specified boundaries, particular revenues or
expenses are expected to take place. If the production level is outside the relevant range, the
actual amount of revenues or expenses will vary from the expected amount. Recognising the
relevant range is not an easy job as it is difficult to know the level of production at which cost
will change is important for the purpose of accounting, budgeting and financial planning
(Seuring & Goldbach, 2013). Different constraints that will have an impact on production
capacity are as follows –
 Equipment – the equipment used for production have various limiting factors
including speed and production capacity
 Storage capacity – if the entity does not have storage facility for storing large number
of stocks, production will be of lower quantity of units (Boulaksil, Fransoo & Tan,
2017).
 Labour – adding or eliminating the labours from production line will have an impact
on production capacity based on their knowledge and experience
 Material – if material is not supplied at right time at right quality it will hamper the
production capacity (Boulaksil, Fransoo & Tan, 2017).
Answer 3 - Comprehensive Manufacturing Budget
(a) Five year budget
(i)

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(ii)
(iii)

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(b) Revised budget

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(c) Strategic management report
From the given scenario, it can be summarized that at present the Kiewa Milk Baby
Formula’s export sales are constrained and the company is not able to make unlimited sales
or meet higher demand as the theoretical limit of its factory is 50 million units per year.
Hence, to recover this constraining the company is planning for converting its existing milk
and yoghurt sections into with which the production capacity will increase by 100%. If the
company goes with the up-gradation it will be completed by the end of the year 2020.
However, the cost of upgrade will be additional $ 1 million per year. It can be observed from
the calculation that if the company makes no up-gradation that if it continues with present
scenario the company will start with a gross loss margin of 55% in 2019 and in 2023 it is
expected to increase it to a profit of 43%. However, if it opts for up-gradation, the company
will start with a gross profit margin of 56% in 2019 and in 2023 it is expected to increase it to
a profit of 68%. The major issue with the current scenario is that even if there is market
demand for more units, due to production capacity constraint it will not be able to produce
and sell more than 50 million units. Hence, it is recommended that short term benefits shall
be ignored by the company and shall go for up-gradation for obtaining long-term benefits.

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Answer 4 – Strategic and International issues in Management Accounting
Part 1
Global demands in dairy products are mainly dominated by China and Australia is
getting benefits from the same. Main reason behind this is the free trade deal that is made
with the country reduced the tariff on the dairy products. Over the next 3-10 years, Chinese
tariff imposed on Australian dairy products will be reduced and the 15% tariff on the infant
formula milk will be withdrawn in next 3 years. Hence, the reduction in the tariff will reduce
the overall cost of the product and more units can be produced for exporting (Douphrate et
al., 2013). Further, as the urbanisation is growing rapidly in China, demand for the high
quality dairy products are increasing. Apart from that, recent shut down of Murray Goulbarn
that engaged many people from Kiewa valley are left with no job after it shut down. Further,
on the basis of budgeted sales as well as profits it is expected that proposed purchase of
Australian milk will be successful as with the recent changes the company will get an
opportunity to sale more in China (Fuller & Beghin, 2015). However, in addition to
opportunities different risk factors are there as follows –
 Tariff reduction will attract more exporters and which in turn will increase the export
competition and the company may have to spend huge amount in advertising or
improving the product quality further to reduce the competition level.
 Due to economic downturn Australian dollar may fall against Chinese Yuan that will
reduce the revenue that will be earned from export sales in china.
 Budget for the expected production and sales are just estimation. In reality, the actual
sales and profit level may vary significantly with the projection (Klychova,
Faskhutdinova & Sadrieva, 2014).

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Part 2
Guanxi is termed as the concept of trust, dedication, reciprocity, loyalty and
connections that assists in developing the interpersonal and familial relationship. This
relationship is built for obtaining any benefits or making the life smoother. In term of
business, the term guanxi asks for ling term approach and describe contract networks. The
contact networks have direct relation with the style in which the business is carried out
(Kaynak, Wong & Leung, 2013).
Power distance, on the other hand, is the approach through which the power is
assigned unequally. For instance, people with some culture accept higher level of unequally
distributed power as compared to the people who come from other cultures. It can be
observed that people from China are supports high power distance as compared to people
from Australia. Hence, the management practices in China support autocratic and
paternalistic decision taken by the leaders (Sriramesh, 2013).
Implementation of Guanxi and power distance is not easy in China owing to the
difference in management accounting system and budgeting system in China as compared to
western system. In China, the accounting profession is headed by the Law of People’s
Republic of China on Certified Public Accounts (Luo, 2013). It does not follow and comply
with the international accounting guidelines and policies. However, as China government has
implemented the reform and has opened up different policies in 1978, numerous western
management accounting concepts are introduced. Major issue in implementing the western
approach is the technical constraint (Hu, Chand & Evans, 2013). Though the required data to
implement MIS has been developed in China for using western technology like activity based
costing, gathering required data is quite impossible under the present scenario (Drury, 2013).
Further, changes in management accounting can be identified only in few areas including

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product’s promotion, usage of responsibility and profitability. Moreover, the Chinese people
generally are comfortable with the grey areas and are not with the black and white areas of
business. Learning of these navigations will require time, observation and patience (Otley,
2016).
Answer 5 - Strategic management accounting
(i) Comparative analysis for Nutty Nut
(ii) Report to the strategic management committee
(a) Cost and profit structure of Neptune Confectionary
Cost and profit of Neptune Confectionary that is dependent on the sales of Nutty Nut
product, sales volume can be increase from 180,00,000 to 216,00,000. However, the
increased sales will be at the cost of additional discount of 0.25 per unit. Hence, it can be
identified that the cost will be increased from 91.67% to 94.85% and hence the profit will be
reduced from 8.33% to 5.15%. Further, the ROTA will be further drop from 15% to 10.20%.

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(b) Changes in cost structure of main competitor N & N
From the above it can be observed that 90% of increase sales of Nutty Nut’s sales will
reduce the sales of N & N. Therefore, as it can be observed the cost will be increased from
91.67% to 99.17%.
(c) Recommendation to committee
It can be observed from the calculation that if the company adopt the planned changes
the profit of Nutty Nut will be reduced from 8.33% to 5.15%. The reason of decrease in profit
margin instead of higher sales volume is the increased sales will be at the cost of additional
discount of 0.25 per unit. Further, the ROTA of the company will be further drop from 15%
to 10.20% that is far below as compared to the required ROTA of 17.50%. Hence, the
company is suggested not to go ahead with the planned changes as it will make the cost and
profit structure of the company furthermore unfavourable.

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Reference
Boulaksil, Y., Fransoo, J. C., & Tan, T. (2017). Capacity reservation and utilization for a
manufacturer with uncertain capacity and demand. OR Spectrum, 39(3), 689-709.
Douphrate, D. I., Hagevoort, G. R., Nonnenmann, M. W., Lunner Kolstrup, C., Reynolds, S.
J., Jakob, M., & Kinsel, M. (2013). The dairy industry: a brief description of
production practices, trends, and farm characteristics around the world. Journal of
agromedicine, 18(3), 187-197.
DRURY, C. M. (2013). Management and cost accounting. Springer.
Fuller, F. H., & Beghin, J. C. (2015). China’s growing market for dairy products. Iowa Ag
Review, 10(3), 5.
Hu, C., Chand, P., & Evans, E. (2013). The effect of national culture, acculturation, and
education on accounting judgments: A comparative study of Australian and Chinese
culture. Journal of International Accounting Research, 12(2), 51-77.
Kaynak, E., Wong, Y. H., & Leung, T. (2013). Guanxi: Relationship marketing in a Chinese
context. Routledge.
Klychova, G.S., Faskhutdinova, М.S. & Sadrieva, E.R., (2014). Budget efficiency for cost
control purposes in management accounting system. Mediterranean journal of social
sciences, 5(24), p.79.
Luo, X. (2013). Guanxi competence as intercultural competence in business contexts: a
Chinese perspective. interculture journal: Online-Zeitschrift für interkulturelle
Studien, 12(20), 69-89.
Mishan, E. J. (2015). Elements of Cost-Benefit Analysis (Routledge Revivals). Routledge.

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Otley, D. (2016). The contingency theory of management accounting and control: 1980–
2014. Management accounting research, 31, 45-62.
Seuring, S., & Goldbach, M. (Eds.). (2013). Cost management in supply chains. Springer
Science & Business Media.
Sriramesh, K. (2013). Power distance and public relations: An ethnographic study of
Southern Indian organizations. In International Public Relations (pp. 181-200).
Routledge.