Management Accounting Assesment Report

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student:
Name of the University:
Author’s Note:

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Table of Contents
Answer to question 1:.................................................................................................................2
Answer to question 2:.................................................................................................................2
Answer to question 3:.................................................................................................................3
Answer to question 4:.................................................................................................................3
Answer to question 5:.................................................................................................................4
References and bibliography:.....................................................................................................6

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Answer to question 1:
The predetermined overhead rate is the rate of overhead allocation to the products or
service unit which is calculated based on the estimated total overhead and total use of a key
activity. In the given case, the predetermined overhead rate was $47.60 per direct labour
hour. Based on the revised costs and revised labour hour the predetermined overhead rate can
be recalculated as follows.
Statement showing computation of Predetermined overhead
rate
Estimated manufacturing overhead $ 24,75,000
Annual lease cost of the milling machine $ 3,00,000
Technician/programmer's salary $ 45,000
Revised total manufacturing overhead $ 28,20,000
Estimated direct labour hours 52,000
Less: Expected savings in direct labour hour 6,000
Revised total labour hours 46,000
Predetermined overhead rate (2,820,000/46,000) $ 61.30
Answer to question 2:
Based on the given direct materials costs, direct labour costs and taking the revised
overhead allocation rate the total cost of production for the particular job has been calculated
as follows.
Statement showing computation of total production cost of the Job
Direct materials costs $ 45,800
Direct labour costs $ 8,400
Prime costs $ 54,200
Add: Manufacturing overhead (400*61.30) $ 24,522
Total production cost of the job $ 1,32,922

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Answer to question 3:
Analysis of the overhead rate on the cost of Job
Particulars Previous
overhead rate
Revised
overhead rate Difference
Direct materials costs $ 45,800 $ 45,800 $ -
Direct labour costs $ 8,400 $ 8,400 $ -
Prime costs $ 54,200 $ 54,200 $ -
Add: Manufacturing overhead
(400*47.60), (400*61.30) $ 19,040 $ 24,520 $ 5,480
Total production cost $ 73,240 $ 78,720 $ 5,480
The predetermined overhead allocation rate was $47.60 per direct labour hour and
after considering the new automated milling machine the revised overhead rate becomes
$61.30 per direct labour hour. In the above statement the total cost of production of the given
job has been computed considering both the previous overhead rate as well as the revised
overhead allocation rat. It can be observed that, if the new milling machine is used then, the
total cost of production of the job would be $78,720 and if the previous predetermined
overhead rate is used then the total cost of production is $73,240. Therefore, using the revised
predetermined overhead rate, the total cost of production of the job becomes higher by $5,480
(Jiambalvo 2019).
Answer to question 4:
The prime costs of any product or service includes the direct material costs and direct
labour costs. In managing the costs of a product or service it is very important to apply cost
and management techniques to reduce wastage of the direct materials costs and direct labour
costs. On the other hand, the overhead which constitutes all the indirect expenses has a large
scope of applying cost and management technique to reduce total costs. There are various
method of overhead allocation which uses various bases for the allocation and absorption of
the overhead. Plant wide or predetermined overhead rate system is a traditional method of

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calculating the rate of overhead allocation based on a single base. In the given case study, the
production process is labour intensive and hence, the overhead recovery rate has been
computed based on the direct labour hour. The overhead recovery rate has been computed by
dividing the total estimated overhead expense for the year by the total estimated direct labour
hours. It can be observed from the case study that, the predetermined overhead rate was
$47.60 per direct labour hour, which was almost same as it was in the year 2019. Further with
the introduction of a new milling machine the total overhead costs will be increased and but
there will be a savings in labour hour. It can be observed that considering the increased
overhead costs and reduced labour hour, the revised overhead rate per direct labour hour
becomes $61.30. As it has been estimated that there will be a savings of 6,000 labour hours in
where total labour hour required was 52,000 hours, the rate of savings is 11.54%. Increase in
overhead rate per hour is $13.70. As the overhead costs constitutes a significant part of the
total production cost, managers must be considering it for applying the cost and management
techniques and make replacement decision of the new milling machine accordingly
(Jiambalvo 2019).
Answer to question 5:
In the given case study, initially it has been estimated that there will be a savings in
direct labour hour by 6,000 hours. In terms of amount it was expected that the annual savings
in total direct labour costs would be $468,000. After analysing all the possibilities and
associated costs, the manager thinks that the savings in direct labour hour would be only
2,000 hours. Therefore, the amount savings in direct labour hour would be $156,000 only.
The additional or increased overhead expenses for the introduction of the new automated
milling machine are $345,000. Therefore, if the cost savings in annual direct labour costs is
more than the increased costs of overhead then only it is feasible to go for the installation of

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the new automated milling machine. When the, the savings in labour hour is only 2,000
hours, the cost savings is lesser than the increased overhead costs. Hence, it can be
recommended not to go for the installation of the milling machine if it is expected that there
will be only 2,000 hours of savings in direct labour hour (Horngren 2019).

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References and bibliography:
Appelbaum, D., Kogan, A., Vasarhelyi, M., & Yan, Z. (2017). Impact of business analytics
and enterprise systems on managerial accounting. International Journal of Accounting
Information Systems, 25, 29-44.
Brewer, P. C., Garrison, R. H., & Noreen, E. W. (2015). Introduction to managerial
accounting. McGraw-Hill Education.
Horngren, C. T. (2019). Cost accounting: A managerial emphasis, 13/e. Pearson Education
India.
Jiambalvo, J. (2019). Managerial accounting. John Wiley & Sons.
Kim, M., Schmidgall, R. S., & Damitio, J. W. (2017). Key managerial accounting skills for
lodging industry managers: The third phase of a repeated cross-sectional
study. International Journal of Hospitality & Tourism Administration, 18(1), 23-40.
Trkman, P., McCormack, K., De Oliveira, M. P. V., & Ladeira, M. B. (2010). The impact of
business analytics on supply chain performance. Decision Support Systems, 49(3),
318-327.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial and Managerial
Accounting. John Wiley & Sons.
Weygandt, J. J., Kimmel, P. D., Kieso, D. E., & Aly, I. M. (2018). Managerial Accounting:
Tools for Business Decision-making. John Wiley & Sons.