Management Accounting and Control: Answers to Questions 1 and 2

Running head: MANAGEMENT ACCOUNTING AND CONTROL
MANAGEMENT ACCOUNTING AND CONTROL
Name of the Student
Name of the University
Author Note

MANAGEMENT ACCOUNTING AND CONTROL
1
Table of Contents
Answer to Question 1...................................................................................................................3
Answer to Question 2...................................................................................................................6
Bibliography...............................................................................................................................10
Appendix....................................................................................................................................12

MANAGEMENT ACCOUNTING AND CONTROL
2
Answer to Question 1
(a) In this situation, the production plan of the company has to be prepared by keeping the
constraint of machine hours in consideration. The absorbed fixed costs of the machine
hours should also be allocated to the products accordingly. When contribution is
calculated according to the constraint of machine hours in hand, the leather product
provides the highest amount of contribution. Fixed costs should also be allocated
according to the labour hours in hand (Novak and Popesko 2014). After calculating the
profit provided by a product on the basis of both the variable costs and labour costs, it has
been understood that producing 300 units each of the leather product and the metal
product along with 220 units of the wood product will turn out to be the most profitable
for the company as it provides a profit of 15840 after deducting all the costs. Plastic
chairs should not be produced at all as even though the profit earned from this type of
product is high, the product does not hold well under circumstances with restrictions on
the machine hours and the labour hours. After the allocation of the fixed costs, it is more
evident that the product is not at all profitable due to the high amount of machine hours it
consumes. Hence, after calculating the appropriate combination of products according to
the calculations made and ranking of the products, it has been found that the contribution
of the combination of the products is 41400 and the fixed costs are arrived at 25560.
(b) Economic order quantity (EOQ) is the appropriate amount of quantity that an entity
should procure at once while taking the cost of production, demand rate, holding costs
and other relevant variables into consideration (Sajtiprasert 2014). The main purpose of
applying EOQ is to reduce the costs associated with inventories. However, the theoretical
definition of EOQ is limited. It fails to consider the practical constraints faced by the
business. Utilising Sequential Quadratic Programming (SQP) is helpful in finding the
optimum quantity required for the buyer while taking constraints like budget, space,
ordering and procurement costs into consideration (Pasandideh, Niaki and Gharaei 2015).
This method has also been approved by conducting sensitivity analysis and its
comparison with other methods. In the given case, Lazy King Ltd. can apply the EOQ
model to order sufficient quantities of raw materials required for the manufacturing of the
profitable products in an efficient manner. It can altogether avoid the procurement of raw

MANAGEMENT ACCOUNTING AND CONTROL
3
materials of plastic chairs as the production of those chairs is totally unprofitable. Margin
of safety is a measure which is used to know the revenue that a company can earn over its
breakeven sales. This is calculated after the company meets both its fixed and variable
costs in a given financial year (Walther and Skousen 2017). A lower margin of safety
indicates that a company is likely to incur losses due to a slight change in fixed costs or a
decrease in the selling price. In the given case, the margin of safety of the entity is quite
high and the company can continue manufacturing its products at that level to be able to
maximise its profits under the given constraints (Caprice, Schlippenbach and Wey 2014).
In the given case, the company is not able to meet the entire demand for the wood chairs
and the plastic chairs. Apart from this, it has been found by many manufacturing
companies that lead time is a significant tool to differentiate themselves in the market and
is helpful in positioning themselves profitably. Hence, instead of increasing the labour
hours or providing special discounts to customers, the company can focus on improving
its efficiency by following a vendor-purchaser integrated production model (Vijayashree
and Uthayakumar 2014). These can lead to a decline in the costs incurred by the company
and increase the speed at which it delivers the products while also manufacturing them
quickly.
(c) The balanced scorecard is a financial tool that considers the performance of an entity
using four aspects. These are the financial perspective, customer/stakeholder perspective,
internal process related perspective and the organisational capacity. The main objective
of this tool is to provide the company with a strategy to satisfy all of the above mentioned
guidelines and to help in decision making (Tjader et al., 2014). When considering all of
the perspectives covered under a balanced scorecard and the scenarios faced by the entity,
it is evident that the tool can be used to guide the company in the process of making
decisions related to manufacturing specific products and outsourcing them. Although, the
limitation of the balanced scorecard has been found to be its inability to properly manage
the micro aspects of a business (Susilawati et al. 2013). This limitation is not completely
relevant in the present scenario as the company is not a very big organisation that
operates in a large number of business areas and produces a wide variety of range of
products. As the information about the company’s business and other perspectives is
quite clear, applying balanced scorecard in this case is more relevant (Sundharam,