Management Accounting

This document provides answers to questions on management accounting, including ethics, quality cost, overhead cost, and budget variance. It discusses the importance of professional ethics and the standards set by IMA. It also explains the different types of quality costs and their impact on the company. Additionally, it covers the calculation of overhead costs and the analysis of budget variances. The document offers insights and recommendations for improving the quality and cost structure of the company.

Running head: Management Accounting
Management Accounting
Name of the Student
Name of the University
Author Note

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Management Accounting
Table of Contents
Answer to Question 1.................................................................................................................3
Answer to Question 2.................................................................................................................3
Answer to A...........................................................................................................................3
Answer to B............................................................................................................................6
Answer to C............................................................................................................................6
Answer to question 3:.................................................................................................................8
Answer to A:..........................................................................................................................8
Answer to B:..........................................................................................................................8
Answer to C:..........................................................................................................................8
Answer to D:..........................................................................................................................8
Answer to E:...........................................................................................................................9
Answer to question 4:.................................................................................................................9
Answer to A:..........................................................................................................................9
Answer to B:..........................................................................................................................9
Answer to C:........................................................................................................................10
Answer to question 5:...............................................................................................................10
Answer to A:........................................................................................................................10
Answer to B:........................................................................................................................10
Answer to C:........................................................................................................................11
Answer to Question 6...............................................................................................................11

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Management Accounting
Answer to A:........................................................................................................................11
Answer to B..........................................................................................................................12
References:...............................................................................................................................14

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Management Accounting
Answer to Question 1
Ethics is one of the most important quality, which should be there in each every
individual. Professional ethics should be present in each person working in the organization
as this help the person to run the business smoothly (Remley and Herlihy 2014). IMA is one
of the body which help the business community know about professional ethics as a whole
and how to implement it. The principle, which IMA follows, is very simple it consists of
responsibility, objectivity, honesty and fairness.
The standard which has been jeopardized by the quote which is been given by the Sir
Richard Branson about the ethical standard is the standard of Competence. The standard state
that the professional should have the knowledge and skills about the job and should act
professional regarding the matters (Michaelson et al. 2013). It should be aware of the duties
regarding the job, which it is going to perform. It has to give its decision which should be
supported many information’s and recommendations that should be accurate, timely and
should be clear for the individual.
The justification which show how these standard has been jeopardized is that the
quote states, that the an individual should not loss the opportunity of getting the offer and it
should take it even if it does not know how to perform the job (Scott 2016). The standard
states that the person should know the knowledge and skills regarding the offer so it is clearly
be seen that the quote is damaging the standard of competence which is been laid down IMA.
Answer to Question 2
Answer to A
Quality cost is the cost, which the company had to incur upon to prevent, detecting
and maintaining the quality of the product (Ahmed 2013). These are the cost, which the
company have to incur so that they can maintain the required quality of the product. It

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Management Accounting
involves the creating and developing of the product as per the customers need and
preferences. The quality cost can be divided into four cost. The four-cost can have classified
as below:
1. Prevention Costs – It is maintaining the quality of the product in the
first stage of production (Dale and Plunkett 2017). These cost is being
incurred to maintain the quality of product in the manufacturing unit of
the company. Some example of prevention cost is training of labour,
improvement of the manufacturing process.
2. Appraisal Cost – This cost also known as the inspection cost. These
costs generally done on inspecting the manufacturing process of the
company (Liozu and Hinterhuber 2013). It involves all the process
from the input to the output of the product. Some example of these cost
is supervision cost, damaging the goods for testing purpose.
3. Internal Failure Cost – This cost is generally incurring on the
defective product, which the company had produce (Ruiz-de-Arbulo-
Lopez et al. 2013). These cost is done before the product reaches to it
ultimate customers. Some example of these costs are reworks cost,
scarp and rejected products.
4. External Failure Cost – This cost are generally incur when the
defective product reaches the customers. This cost includes
replacements, warranty related to the product
The company activities classify into four-quality cost as:
Activity Year
1
Year
2
Year
3

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Management Accounting
Prevention cost -
System development, technical support to suppliers of
components and raw materials
0 $485 $325
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
Answer to B
Supervision of testing staff is one of the example of appraisal cost (Nagle and Müller
2017). This activity is termed as appraisal cost as it inspects the process who the product has

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Management Accounting
tested by the staff, how they deal regarding the same. It helps the company where there is
fault in the process and how it can affect the overall quality of the product.
Answer to C
Quality cost are interconnected with each other as prevention cost is minimizing the
defect in the quality in the manufacturing unit, this is done with the help of appraisal cost as
these cost are spend upon the inspection of different process which are required in the
manufacturing unit( Lari and Asllani 2013.). Both internal and external cost interconnected
with each other. Internal is before the product reaches the customer and external when the
product reaches the customer. They both deal with damage and scrap related to the product.
In the given table of the company it be can clearly be seen that in the 1st year the
company does not have spends any amount, upon the prevention and appraisal cost, as in
both they have spent Zero amount. It will result that they have produce low quality product as
result of it they have to spend money upon the internal failure as well as external failure as
they have to do rework of product. It has to spend much money upon the warranty of repairs
as well replacements of the product
In the 2nd year, it can see from the given table they have invested some amount of the
money in Quality cost, this can help the company to reduce their cost. The cost, which they
are spending upon the quality cost in prevention and appraisal, is too low so it can see their
product are not matching the quality of the product needed by the customer. It can be seen it
have to incur the internal failure cost and their product were also damaged as a result of that
they have to spend a high external failure cost which will result of increasing the cost as well
as decreasing the goodwill of the company
In the 3rd year, it can see company has again reduced the quality cost of prevention
cost and appraisal cost from the compare to last year. It can be said that company is trying to

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minimize their cost structure and as result of these, they are not able to maintain the proper
quality, which is require by the customers. The decreasing in quality cost has made a big
impact and comp any product is not able to sustain in the market as a result of it company
have to spend more upon the internal failure as well external failure cost.
After analysing all the 3 years’ quality cost, it can be said that the company should
have to focus upon their prevention and appraisal cost as this will help them to maintain the
quality which is needed by the customers. It will even minimize the cost, which is will be
spend upon the internal failure and external failure of the quality control. It will increase the
brand value of the company, as the quality product will help the company to get more
customer.
If the company give more focus upon the quality of their product, they can minimize
the cost of quality. In internal also they should give more emphasis upon the quality as it is
before the goods send to the customer so if they are being corrected so it will help the
company to maintain a good customer relationship. External Failure cost is the cost which
company should have minimum as these costs include the cost defect in the product, which
detected by the customer. So it shows that the company is unable to meet the quality standard
of the customer as a result of these the goodwill and brand value of the company will get
hamper and it even lose the position which it hold in the market.
Answer to question 3:
Answer to A:
Particulars Details Painting Assembly
Fixed manufacturing overhead cost A 1,99,000$ 55,000$
Direct machine hours/Direct labour hours B 5,000 10,000
Fixed cost rate C=A/B 39.80$ 5.50$
Variable manufacturing overhead per hour D 3$ 2$
Predetermined overhead rate per machine hour/labour hour E=C+D 42.80$ 7.50$

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Management Accounting
Answer to B:
Particulars Details Painting Assembly Total
Predetermined overhead rate A 42.80$ 7.50$
Machine hours/Labour hours B 50 50
Overhead applied 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$
Variable manufacturing overhead per hour C 3$ 2$
Machine hours/Labour hours D 50 50
Total variable overhead E=CxD 150$ 100$ 250$
Fixed cost rate F 39.80$ 5.50$
Total fixed overhead G=DxF 1,990$ 275$ 2,265$
Total manufacturing cost 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
Unit product cost C=A/B 41$
Answer to E:
Particulars Details Units
Direct materials for painting A 510$
Direct labour cost for painting B 250$
Variable manufacturing overhead per hour C 3.50$
Machine hours D 50
Total variable overhead for painting E=CxD 175$
Fixed overhead for painting F 1,990$
Total painting overhead costs G=A+B+E+F 2,925$
Total assembly overhead costs H 1,200$
Total overhead costs I=G+H 4,125$
Number of units J 100
Unit product cost K=I/J 41.25$
If the estimated variable manufacturing overhead for the painting during the year is
amended from $3.00 to $3.50 per year then the total fixed overhead for painting increases to
stand at $2,925. The unit product cost for the painting also goes up to $41.25 per unit.

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Management Accounting
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
Difference in units sold C=A-B 14,400
Highest shipping expenses D 2,46,000$
Lowest shipping expenses E 1,74,000$
Difference in shipping expenses F=D-E 72,000$
Variable cost per unit G=F/C 5$
Fixed cost H=D-(AxG) 24,000$
Cost formula for shipping expense I=H+G*x Y= $24,000 + 5x
Answer to B:
The main reasons for variance between the actual cost and estimated costs is mainly due to
the errors that are created when compiling the budget. This may be due to the faulty use of
mathematics, or using incorrect assumptions and remaining dependent on the poor data.
Changing of the business conditions as well as changes in the overall economy has
potentially resulted in the differences in the actual expenditure for all quarters than the
estimated expenditure. another major factor that have resulted in the differences between the
costs is the cost of materials. This could also be a factor in the budget variance.

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Management Accounting
Answer to C:
Particulars Amount Amount
Sales revenue (37,000 x $55) 20,35,000$
Variable expenses:
Cost of goods sold (37,000 x $27) 9,99,000$
Sales commission ($2,035,000 x 7%) 1,42,450$
Shipping expense (37,000 x $5) 1,85,000$
Total variable expenses 13,26,450$
Contribution margin 7,08,550$
Fixed expenses:
Advertising expense 1,84,000$
Selling and administrative expense 94,000$
Shipping expense 24,000$
Depreciation expense 64,000$
Insurance expense 10,400$
Total fixed expenses 3,76,400$
Net income 3,32,150$
Answer to question 5:
Answer to A:
Particulars Details Units
Estimated total manufacturing overhead cost A 2,18,400$
Estimated machine hours B 12,000
Predetermined overhead rate C=A/B 18.20$
Answer to B:
Particulars Details Units
Actual total machine hours A 11,500
Predetermined overhead rate B 18.20$
Applied overhead C=AxB 2,09,300$
Actual overhead D 2,15,000$
Under-applied overhead E=D-C 5,700$
Answer to C:
The implications of over application and under application of the overhead to the
management decision making of product planning and controlling can result in either positive
or negative impact. When such situations occur the differences are either charged to the cost

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Management Accounting
of goods sold or the differences are applied to the relevant cost of goods sold. While
allocating funds, the managers does not always know the particular cost of labour for such
tasks. They might not know particularly when and what kind of task should be completed.
The managers might overestimate the costs to make sure that each department can meet the
needs while striving to find the best deals. The cost of goods sold may increase for a product
while the under-application of overhead may result in reduction in the net income.
Answer to Question 6
Answer to A:
Cost plus pricing is method of ascertaining the cost of the product (Khataie and
Bulgak 2013). The cost is calculated as the seller includes all the cost which have incurred
upon the product that is both fixed as well as variable cost and it add the mark up, the profit
portion of the seller and by adding all the value the cost of the product is been calculated.
The limitations, which laid by Dholakia about the cost plus pricing, are:
1. Efficiency and low profit- The cost plus pricing involve costing of
each product so it depend upon the project cost. The lower budget cost
project gives the company a low profit and high budget project gives
the company high profit (Fullerton, Kennedy and Widener 2013).
Therefore, it reduces the efficiency of the company, as the company
will not give their proper guidance to the project, which have low
income. Therefore, it will affect the customer of the business.
2. Cover cost of the project – The sale value is only be forecasted value
and on the basic of that the whole calculation of the cost is been done.
It is assume by the managers of the company that they will able to
recover all the cost and will able to get the required profit for the

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company. However, sometimes the company does not able to meet the
forecasted value of sale and as result of it the company unable to meet
the cost, which make them a huge loss business. It can affect the
sustainability of the company.
3. Ignorance of customers and competitors views – The pricing
method just takes the cost side of the product but it does not include
the customers view as how much there are willing to pay. As to run a
successful business a company have to meet their cost requirements as
per the customers need, if they unable to take the need of the customers
than they will not able to survive in the market (Malina 2018). It even
does not take into the consideration about the competitor viewpoint
regarding the price. As the company have to match their price with the
price of its competition. Therefore, the company should take
consideration the competitor view while making the price of their
products.
Answer to B
Value based pricing is a pricing method in which the cost is determined taking respect
the customer perspective but excluded the historical cost method (Drury 2013). Each cost of
the product is different from another. The company can easily earn more profit even by
selling less product as it can charge high price so overall company can make profit from the
products. This method used where the products have made in regard of the customers.
Quality of Conformance the organization products means the company is able to
make the product with high quality of raw material and as a result of it company is able to
make quality of products (Hilton and Platt 2013).

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Management Accounting
The company can treat this as an investment for it as there making product with the
help of the customers need and preferences so they will make as per the quality which the
customer. As results of this company, will able to minimize their actual cost of the quality
testing which they have to do for their quality maintain process. Company can invest the
money, which they save from the quality cost to some projects and can earn some return from
it. Therefore, they are getting double benefits as they able to save the quality cost and able to
earn some interest from the value. So it reduces the expenses and all increase the interest
revenue of the company.

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Management Accounting
References:
Ahmed Al-Dujaili, M.A., 2013. Study of the relation between types of the quality costs and
its impact on productivity and costs: a verification in manufacturing industries. Total Quality
Management & Business Excellence, 24(3-4), pp.397-419. (Ahmed 2013)
Dale, B.G. and Plunkett, J.J., 2017. Quality costing. Routledge.
Drury, C., 2013. Costing: an introduction. Springer.
Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2013. Management accounting and
control practices in a lean manufacturing environment. Accounting, Organizations and
Society, 38(1), pp.50-71.
Hilton, R.W. and Platt, D.E., 2013. Managerial accounting: creating value in a dynamic
business environment. McGraw-Hill Education.
Khataie, A.H. and Bulgak, A.A., 2013. A cost of quality decision support model for lean
manufacturing: activity-based costing application. International Journal of Quality &
Reliability Management, 30(7), pp.751-764.
Lari, A. and Asllani, A., 2013. Quality cost management support system: an effective tool for
organisational performance improvement. Total Quality Management & Business
Excellence, 24(3-4), pp.432-451.
Liozu, S.M. and Hinterhuber, A., 2013. Pricing orientation, pricing capabilities, and firm
performance. Management Decision, 51(3), pp.594-614.
Malina, M.A. ed., 2018. Advances in management accounting. Emerald Publishing Limited.

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Michaelson, C., Pratt, M.G., Grant, A.M. and Dunn, C.P., 2014. Meaningful work:
Connecting business ethics and organization studies. Journal of Business Ethics, 121(1),
pp.77-90.
Nagle, T.T. and Müller, G., 2017. The strategy and tactics of pricing: A guide to growing
more profitably. Routledge.
Remley, T.P. and Herlihy, B., 2014. Ethical, legal, and professional issues in counseling.
Upper Saddle River, NJ: Pearson.
Ruiz-de-Arbulo-Lopez, P., Fortuny-Santos, J. and Cuatrecasas-Arbós, L., 2013. Lean
manufacturing: costing the value stream. Industrial Management & Data Systems, 113(5),
pp.647-668.
Scott, E., 2016. Ethics and human resource management. In Practicing professional ethics in
economics and public policy(pp. 215-221). Springer, Dordrecht.