Management Accounting

This document provides comprehensive study material on Management Accounting. It includes answers to various questions related to ethics, quality costs, overhead costs, and pricing strategies. The document discusses the importance of professional ethics, classification of quality costs, calculation of overhead costs, and limitations of cost plus pricing. It also explores the concept of value-based pricing. The study material is suitable for students studying management accounting. Download now to enhance your understanding of these concepts.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Answer to Question 1:................................................................................................................2
Answer to Question 2.................................................................................................................2
Answer to A:..........................................................................................................................2
Answer to B:..........................................................................................................................4
Answer to C:..........................................................................................................................4
Answer to question 3:.................................................................................................................5
Answer to A:..........................................................................................................................5
Answer to B:..........................................................................................................................5
Answer to C:..........................................................................................................................5
Answer to D:..........................................................................................................................5
Answer to E:...........................................................................................................................6
Answer to question 4:.................................................................................................................6
Answer to A:..........................................................................................................................6
Answer to B:..........................................................................................................................7
Answer to C:..........................................................................................................................7
Answer to question 5:.................................................................................................................7
Answer to A:..........................................................................................................................7
Answer to B:..........................................................................................................................8
Answer to C:..........................................................................................................................8
Answer to question 6:.................................................................................................................8

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Answer to A:..........................................................................................................................8
Answer to B:..........................................................................................................................9
References:...............................................................................................................................10

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Answer to Question 1:
Ethics is of utmost importance every organization. For an effective running of the
business an individual is required to possess professional ethics. IMA is regarded as the
professional business community that are having overall understanding of professional ethics
and how the same should be implemented (Chell et al. 2016). IMA follows a simple principle
that comprises of accountability, objectivity, honesty and fairness.
The statement made by Sir Richard Branson puts the standard of competence under
jeopardy. As per the standard, the professional are required to possess adequate knowledge
and skill regarding occupation and must act with professional integrity relating to subject in
issue (Pearson 2017). They must be aware of duties relating to work and must support in the
information through appropriate recommendations, accuracy and clarity.
The quotes made by Richard Branson is a breach of professional competence and the
standard requires the person to have ethical understanding and knowledge relating to
unlawful practice (Cooper 2017). The quote made clearly breaches the standard of
Competence laid down under the IMA.
Answer to Question 2
Answer to A:
Quality costs refers to cost that is occurred by an organization for preventing and
maintaining the product quality (Kaplan and Atkinson 2015). On the basis of above stated
eight activities the costs are classified below;
Activity Year
1
Year
2
Year
3
Prevention cost - 0 $485 $325

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System development, technical support to suppliers of
components and raw materials
Appraisal cost – Inspection on assembling line 0 $500 $500
Internal Failure Cost – Field testing at customers site and rework
on assembly line
$450 $320 $295
External Failure Cost – Warranty repairs of delivered products
and Warranty replacements for products
$2450 $1800 $1400
Prevention costs:
a. System Development
b. Technical support to suppliers of components
c. Technical support to suppliers of raw materials
Appraisal Costs
a. Field testing at customer’s sites
b. Inspection on assembling line
Internal Failure Costs:

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a. Rework on assembling line
External Failure Costs:
a. Warranty repairs of delivered products
b. Warranty replacements for products
Answer to B:
An example of appraisal costs that is different from the above stated activities is the
quality engineering. The quality engineering costs has been considered as the new activity
under the appraisal costs because it can significantly enhance the productivity and lower the
costs (Collis and Hussey 2017). The quality engineering analysis represents the analysis,
management, development and maintaining the different system that are in compliance with
the high standard.
Answer to C:
The quality cost is interconnected with the prevention cost. These costs are
interconnected with each other to reduce the quality defects at manufacturing unit (Ward
2014). This is carried out through appraisal costs as these costs are occurred for the purpose
of inspection of several different procedures employed in manufacturing unit. The external
costs and internal costs are also interrelated to each other. The internal costs happen when the
product reaches the customers while the external costs occurs when the product reaches to
consumers.
In the first year of operation the table signifies that the company did not occurred
much of the spending on appraisal and prevention costs while in the second year of operation
the company has made spending on quality costs for the quality control and prevention
(Cadez and Guilding 2018). While in third year there is a reduction in cost of prevention as
the attempt to reduce their costs structure. Following the analysis of three years the company

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must emphasis on the prevention and appraisal costs as this would help in maintaining the
quality of product and customers as well.
Answer to question 3:
Answer to A:
Particulars Details Painting Assembly
Fixedmanufacturing overheadcost A 1,99,000$ 55,000$
Direct machinehours/Direct labourhours B 5,000 10,000
Fixedcost rate C=A/B 39.80$ 5.50$
Variablemanufacturing overheadper hour D 3$ 2$
Predeterminedoverheadrateper machinehour/labour hour E=C+D 42.80$ 7.50$
Answer to B:
Particulars Details Painting Assembly Total
Predeterminedoverheadrate A 42.80$ 7.50$
Machinehours/Labourhours B 50 50
Overheadapplied C=AxB 2,140$ 375$ 2,515$
Answer to C:
Particulars Details Painting Assembly Total
Direct materials A 510$ 125$ 635$
Direct labour cost B 250$ 700$ 950$
Variablemanufacturing overheadperhour C 3$ 2$
Machinehours/Labourhours D 50 50
Total variableoverhead E=CxD 150$ 100$ 250$
Fixedcost rate F 39.80$ 5.50$
Total fixedoverhead G=DxF 1,990$ 275$ 2,265$
Total manufacturingcost H=A+B+E+G 2,900$ 1,200$ 4,100$
Answer to D:
Particulars Details Units
Total manufacturing cost A 4,100$
Number of units B 100
Unitproductcost C=A/B 41$

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Answer to E:
Particulars Details Units
Direct materials for painting A 510$
Direct labour cost forpainting B 250$
Variablemanufacturing overheadper hour C 3.50$
Machinehours D 50
Total variableoverheadfor painting E=CxD 175$
Fixedoverheadforpainting F 1,990$
Total paintingoverheadcosts G=A+B+E+F 2,925$
Total assembly overheadcosts H 1,200$
Total overheadcosts I=G+H 4,125$
Number of units J 100
Unitproductcost K=I/J 41.25$
If the projected variable manufacturing overhead for painting for the year is amended
to $3.50 each year then it would result in increase in the total fixed overhead of the painting
to $2.93. This would lead to an increase in the product costs for painting to $41.25 per unit.
Answer to question 4:
Answer to A:
Particulars Details Units
Highest number of units sold A 44,400
Lowest number of units sold B 30,000
Differencein units sold C=A-B 14,400
Highest shipping expenses D 2,46,000$
Lowest shipping expenses E 1,74,000$
Differencein shipping expenses F=D-E 72,000$
Variablecost per unit G=F/C 5$
Fixedcost H=D-(AxG) 24,000$
Costformulafor shippingexpense I=H+G*x Y=$24,000+5x

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Answer to B:
The differences amid the actual and estimated costs is because of errors occurred
while compiling budget. This happens because of incorrect mathematics, assumptions and
relying on inferior data (Ax and Greve 2017). Varying business conditions also results in
differences between the actual overhead and estimated overhead which thereby contributes to
different cost of materials and ultimately results in budget variance.
Answer to C:
Particulars Amount($) Amount($)
Sales revenue(37,000x $55) 20,35,000$
Variableexpenses:
Cost of goods sold(37,000x $27) 9,99,000$
Sales commission($2,035,000x 7%) 1,42,450$
Shipping expense(37,000x $5) 1,85,000$
Total variableexpenses 13,26,450$
Contributionmargin 7,08,550$
Fixedexpenses:
Advertising expense 1,84,000$
Selling andadministrativeexpense 94,000$
Shipping expense 24,000$
Depreciationexpense 64,000$
Insuranceexpense 10,400$
Total fixedexpenses 3,76,400$
Netincome 3,32,150$
Answer to question 5:
Answer to A:
Particulars Details Units
Estimatedtotal manufacturing overheadcost A 2,18,400$
Estimatedmachinehours B 12,000
Predeterminedoverheadrate C=A/B 18.20$

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Answer to B:
Particulars Details Units
Actual total machinehours A 11,500
Predeterminedoverhead rate B 18.20$
Appliedoverhead C=AxB 2,09,300$
Actual overhead D 2,15,000$
Under-appliedoverhead E=D-C 5,700$
Answer to C:
The effects of over and under application of overhead can affect the managerial
decision making of product planning and controlling (Salako and Yusuf 2016). Over
application and under application of overhead can lead to differences in cost of sales and the
managers may apply the overhead to relevant costs of sales. Under application of overhead
can lead to incorrect cost of sales and under application of overhead may lead to lowering of
net income.
Answer to question 6:
Answer to A:
The limitations of costs plus pricing stated by Dholakia include the following;
a. Cost plus pricing reduces the efficiency of a project and contains costs (Vanderbeck
and Mitchell 2015). When a company quotes lower costs then it earns a lower revenue
and total profit while an overfed structure of costs would increase the product price
and increase profits.
b. Another limitation is the fallacy that the costs plus price provides a guaranteed cover
costs (Gitman, Juchau and Flanagan 2015). This may lead managers to false
complacent since the volume of sales is based on guess. It does not provide any
guarantee of covering costs or earning profits.

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c. It overlooks the consumer willingness to pay and competitors price. This may lead to
a completely off base pricing decision.
Answer to B:
Value based pricing can relate to investment in quality conformance by making
products based on the needs and preference of customers (Hermason, Edwards and Maher
2016). This would enable the company to make products based on the required quality. An
organization would be able to reduce the original costs of quality testing and can
simultaneously invest in projects that would yield higher profit.

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References:
Ax, C. and Greve, J., 2017. Adoption of management accounting innovations: Organizational
culture compatibility and perceived outcomes. Management Accounting Research, 34, pp.59-
74.
Cadez, S. and Guilding, C., 2018. An exploratory investigation of an integrated contingency
model of strategic management accounting. Accounting, organizations and society, 33(7-8),
pp.836-863.
Chell, E., Spence, L.J., Perrini, F. and Harris, J.D., 2016. Social entrepreneurship and
business ethics: Does social equal ethical?. Journal of business ethics, 133(4), pp.619-625.
Collis, J. and Hussey, R., 2017. Cost and Management Accounting. Macmillan International
Higher Education.
Cooper, S., 2017. Corporate social performance: A stakeholder approach. Routledge.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Hermason, R., Edwards, J. and Maher, M., 2016. Accounting Principles: Managerial
Accounting.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Pearson, R., 2017. Business ethics as communication ethics: Public relations practice and the
idea of dialogue. In Public relations theory (pp. 111-131). Routledge.
Salako, M.A. and Yusuf, S.A., 2016. Cost Accounting: A Pivotal Factor of Entrepreneurial
Success.
Vanderbeck, E.J. and Mitchell, M.R., 2015. Principles of cost accounting. Cengage Learning.

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Ward, K., 2014. Strategic management accounting. Routledge.