Management Accounting Assessment Part I – T2 2018

This article discusses the ethical professional practices, quality costs, overhead allocation, KPIs, and pricing methods in the context of Fridges-R-Fun. It also highlights the principles that are not defined by Schrage and Kiron.

Running Head: Management Accounting
MANAGEMENT ACCOUNTING
ASSESSMENT PART I – T2 2018
Name: Yousuf Admani Mohamed Abdullah
Student ID: 218316105

Management Accounting 1
Part 1
Question 1
In order to promote the ethical professional practices, the institute of management accountant
has issued a statement in context of standards to be followed by the members of the institute
while engaging themselves in the professional practices. The hiring of George as the
management accountant of Fridges-R-Fun has jeopardised certain standards which are as
follows:
 Competence:
As George is not holding the professional degree in the field of management accountancy, he
is not competent to be appointed as the management accountant of the company even though
he possesses sound knowledge about the pipes (IMA, 2018).
 Integrity:
As George is the relative of general manager of the company, the appointment of him as the
management accountant will lead to conflict of interests in the company.
Part 2
Question 2.1
System Development Prevention Costs
Technical support to suppliers of
compressors
Prevention Costs
Technical support to suppliers of pipes Prevention Costs
Field testing at customers’ sites Appraisal Costs
Inspection on assembling line Appraisal Costs

Management Accounting 2
Rework on assembling line Internal Failures
Warranty repairs of fridges External Failures
Warranty replacements of fridges External Failures
Question 2.2
In the present case, Fridges-R-Fun has not taken up any activities to prevent or detect the
errors occurred in the products of the company and due to this reason the company had to
face higher quality cost to deal with the internal or external failures of the products. In year 2
the total quality cost has increased further because of implementation of such activities that
could prevent or detect the product errors and failures. However, the quality costs are
generally long term investments that take time to offer the benefits. Therefore, such activities
could not result in sudden decline in the overall quality costs. However, in year 3 the quality
cost again was settled down to the same level as that of year 1 due to reduction in the internal
and external failures.
Part 3
Question 3.1
John believes that it is better to spend cost and time to fix the defects of the products once
they are ready to be delivered or once they are finally delivered to the customers rather than
spending time and money to take up preventive and other actions that facilitates the
identification of product errors or failures. However, Paul supports the view of company’s
management accountant who believes that quality cost is a kind of long term investment that

Management Accounting 3
offers its benefits in sometime and not immediately. According to them, the company must
investment more time and money to prevent and identify the product errors on time rather
than waiting for customers to recognise such errors.
Question 3.2
If Ringo’s decision is executed, it will result in further reduction of changes of occurrence of
internal as well as external failures of the products in year 4 as compared to year 3 as these
failures will be avoided to an acceptable extent through the preventive and appraisal
measures
If Ringo’s decision is not executed then it will amount to increase in the chances of internal
or external failure due to absence of preventive measures such as testing, inspection etc.
Part 4
Question 4.1
Variable Cost per fridge Change in Total Cost/Change in Number of Units
($6200-$3700)
(600-350)
$2500 / 250
Variable cost per fridge $ 10.00
Variable cost per fridge $ 10
Total number of fridges
sold 600
Total Variable Cost $ 6,000.00
Total Cost incurred $ 6,200.00
Fixed Costs $ 200.00
Variable cost per fridge $ 10
Total number of fridges 350

Management Accounting 4
sold
Total Variable Cost $ 3,500.00
Total Cost incurred $ 3,700.00
Fixed Costs $ 200.00
Variable cost per fridge = $ 10
Fixed cost per fridge = $ 200
Question 4.2
The actual delivery expenses are more than the expected expenses because more overheads
are applied to the fridges and this has caused under-absorption of the fridge delivery
expenses. There can be various reasons of differences between the actual and expected
overheads of the company such as wrong estimation of overhead recovery rate (Hoque,
2002).
Month Units of Fridge Workings Expected Actual
January 450 (450*10)+200 $ 4,700.00 $ 4,710.00
March 400 (400*10)+200 $ 4,200.00 $ 4,300.00
May 500 (500*10)+200 $ 5,200.00 $ 5,300.00
June 450 (450*10)+200 $ 4,700.00 $ 4,700.00
Total $ 18,800.00 $ 19,010.00
Part 5
Question 5.1
Welding function
Budgeted fixed overhead rate= Total Fixed Overhead/Direct Machine Hours
$250000 / 7500
Fixed manufacturing overhead rate $33.33

Management Accounting 5
Variable manufacturing overhead rate $1.5
Total manufacturing overhead rate $34.83
Assembly function
Budgeted fixed overhead recovery
rate= Total Fixed Overhead/Direct Labour Hours
Assembly $50000/5000
Fixed overhead rate $10
Variable overhead rate $2
Total manufacturing overhead rate $12.00
Question 5.2
Applied overhead Actual Hours * Budgeted Overhead Recovery Rate
Welding Function 50*34.83
$1741.67
Assembly Function 40*12
$ 480
Total applied overhead for job 232 $ 2221.67
Question 5.3
Total Manufacturing Overhead
Direct Material
Welding $ 500.00
Assembly $ 125.00
Total Direct Material Cost $ 625.00
Direct Labour
Welding $ 250.00
Assembly $ 750.00
Total Direct Labour Cost $ 1000.00
Variable Manufacturing Overheads
Welding $ 75 (50*1.5)
Assembly $ 80 (40*2)
Fixed Manufacturing Overheads
Welding
Assembly $ 1666.67 ( 50*33.34)
$ 400 (40*10)

Management Accounting 6
Total Manufacturing Cost $ 3,846.67
Question 5.4
Product Cost Per Unit =Total Manufacturing Cost / Total Number of units
$ 3846.67/10
$ 384.67
Question 5.5
As in the welding department, more machine hours are consumed for the welding machine, it
is more appropriate to choose machine hours as the suitable basis of overhead allocation.
However, for the assembly functions more labour hours are used and hence it is more
appropriate to choose labour hours for overhead allocation.
Question 5.6
Even if the estimated variable manufacturing overhead for the welding unit is increased, the
overall assembly cost will remain unchanged as the assembly overhead per unit is determined
on the basis of total labour hours consumed by the company and it has nothing to do with the
machine hours consumed per unit
Part 6
Question 6
In the present case of Fridges-R-Fun, the company has set the KPIs for it on the basis of
various principles. However, there are certain principles which are not in the principles
defined by Schrage and Kiron. They are discussed below:
Focus mostly on sales:

Management Accounting 7
The company must focus more on maintaining the high quality of the products and services it
is dealing in rather than merely focusing on the sales maximisation. When the focus on
customer satisfaction is enhanced it automatically enhances the sales of the company.
Are private information and such information should not be shared among employees:
KPIs are meant to gauge the progress of company towards the achieving of its goals and
targets and it is necessary to share the information regarding KPIs with the employees of the
organisation so that they may have proper knowledge of what is exactly they are expected to
achieve and how those goals should be achieved (Schrage & Kiron, 2018).
May be reviewed by management once a year:
The review of KPIs of the company must be based on their sensitiveness, relevance and
nature. Some KPIs are required to be reviewed on weekly basis, while others are required to
be reviewed on monthly, quarterly or annual basis (Wu, H.Y., 2012).
Part 7
Question 7.1
Cost plus pricing:
Under the cost plus pricing method prices of the products are fixed on the basis of adding
sum percentage of profits to the cost of the product.
1. Cost plus pricing method does not take into consideration the competitive prices and
the price demand elasticity of the products.
2. No guarantee is offered under cost plus pricing method for the cost coverage and
profit generation. The cost plus pricing method often leads to too high or too low
pricing of the products.

Management Accounting 8
3. Further the cost plus pricing method discourages the efficiency and cost control
measures of the firm since quoting of lower cost leads to generation of lower profits
and overall revenues (Dholakia, 2018).
Question 7.2
Value based pricing:
Under the value based pricing method products are priced on the basis of the value perceived
by the customers and not on the basis of historical costs and the competitive forces existing in
the market. This method is advantageous because it allows the company to focus more on the
customer satisfaction rather than the wealth maximisation (Hinterhuber, 2004)).

Management Accounting 9
References:
Dholakia, U., 2018. When Cost -Plus Pricing is a good idea. Available at: <
https://hbr.org/2018/07/when-cost-plus-pricing-is-a-good-idea> Accessed on: 06.08.2018.
Hinterhuber, A., 2004. Towards value-based pricing—An integrative framework for decision
making. Industrial Marketing Management, 33(8), pp.765-778.
IMA, 2018. Ethics Centre. Available at: < https://www.imanet.org/career-resources/ethics-
center?ssopc=1> Accessed on: 0.08.2018.
Schrage, M. & Kiron, D., 2018. Leading with next-generation Key Performance Indicators.
Available at: < https://sloanreview.mit.edu/projects/leading-with-next-generation-key-
performance-indicators/> Accessed on: 0.08.2018.
Wu, H.Y., 2012. Constructing a strategy map for banking institutions with key performance
indicators of the balanced scorecard. Evaluation and Program Planning, 35(3), pp.303-320.