Management Accounting: Cash Cycle, Existing System and Capacity Analysis

This article discusses the concepts of management accounting including cash cycle, existing system and capacity analysis. It covers topics such as spare capacity, breakeven point, profitability, and contribution per unit. The article also includes a case study on Telesmart Ltd. and FreeWheels Ltd.

Running Head: Concepts of Management Accounting
Management Accounting

Concepts of Management Accounting 1
QUESTION 1
Cash cycle
2017 2016 2015 2014 2013
Inventory Days 61 68 70 67 68
Add: Collection Days 46 40 37 36 36
Less: Payable Days 55 52 56 60 57
Cash Cycle (Days) 52 56 51 43 47
Workings:
Days Inventory Outstanding Average Inventory
COGS /365
Days Receivables Outstanding Average Receivables
Net sales /365
Days Payables Outstanding Average Payables
COGS /365
Days
Inventory
Outstanding
Average
Inventory 180148 193643.5 189528 173597 162848
COGS /365 2938.18 2856.42 2716.54 2582.07 2397.15
Days 61 68 70 67 68
Days
Receivables
Average
Receivables/
156104.5 131590.5 113084 105481.5 100035

Concepts of Management Accounting 2
Outstanding Net sales/365
3360.72 3276.62 3048.30 2929.84 2767.36
Days 46 40 37 36 36
Days
Payables
Outstanding
Average
Payables 162684 147562.5 151616.5 154546 137695
COGS /365 2938.18 2856.42 2716.54 2582.07 2397.15
Days 55 52 56 60 57
Year 2017 2016 2015 2014 2013 2012
Inventory 167898 192398 194889 184167 163027 162669
Receivables 168536 143673 119508 106660 104303 95767
Payables 169324 156044 139081 164152 144940 130450
COGS 1072436 1042595 991538 942455 874961
Sales 1226663 1195967 1112630 1069392 1010086
Average
inventory 180148 193643.5 189528 173597 162848
Average
Receivables 156104.5 131590.5 113084 105481.5 100035
Average
Payables 162684 147562.5 151616.5 154546 137695
Cash flow changes:

Concepts of Management Accounting 3
$
2,017.00
$
2,016.00 Change Comment
Overall Cash Flows
Cash flow from operating
activities
$
57,074.00
$
58,980.00
-$
1,906.00
Decrease in cash
inflow
Cash flow from investing
activities
$
151,257.00
-$
39,634.00
$
190,891.00 Increase in cash in flow
Cash flow from financing
activities
$
257,544.00
-$
19,972.00
$
277,516.00 Increase in cash in flow
$
468,875.00
-$
626.00
$
469,501.00 Increase in cash in flow
Cash flow from operating
activities
Receipts from customers
$
1,274,872.00
$
1,241,063.00
$
33,809.00 Increase in cash in flow
Payment to suppliers
$
1,203,845.00
$
1,174,917.00
$
28,928.00
Increase in cash
outflow
Interest and other expenses
$
3,226.00
$
3,835.00
-$
609.00
Decrease in cash
outflow
Income Taxes
$
10,727.00
$
3,331.00
$
7,396.00
Increase in cash
outflow
Total
$
57,074.00
$
58,980.00
-$
1,906.00
Decrease in cash
outflow

Concepts of Management Accounting 4
The overall in cash flows of the Bega Cheese Limited have increased by $ 469501 in 2017 as
a result of total inflow of cash in 2017 was $ 468875 and total cash flow of 2016 was -$626
i.e. the outflow of cash. This variation in overall cash flow of the company in last two
reported years is due to the change in the cash flow from operating activities, investing
activities and financing activities. There is a decrease in the cash inflow of operating
activities of $ 1906 from 2017 to 2016. Further, there is a change of $ 190981 in respect of
cash flow from investing activities from 2017 to 2016 and this change is on positive side i.e.
the inflow of cash in 2017 has resulted in such a change. Moreover, there is change of $
277516 in respect of financing activities from 2017 to 2016. This means that the firm has
taken those investing and financing activities more which have contributed positively to its
cash flows (Bhat, 2008).
Further, in respect of operating activities, cash flow from receipts from customers has
increased in 2017 as compared to 2016 and have resulted an increase of cash inflow of $
33809 in 2017 from 2016. Cash outflow from payment to creditors and payment of income
tax has increased in 2017 as compared to 2016 and have resulted an increase of cash in out of
$ 36324 in 2017 from 2016. However, there is a decline in the cash outflow in respect of
interest expenses in 2017 and this has reduced the overall cash outflow from operating
activities by $ 609 ( Bega Cheese, 2017).
QUESTION 2
Existing System
Selling Price per unit
$
420.00
Less: Variable Cost per unit
Manufacturing cost $ 144.00

Concepts of Management Accounting 5
Selling and Administrative cost
$
36.00
$
180.00
Contribution per unit
$
240.00
Total number of units sold 5000
Total Contribution
$
1,200,000.00
Less: Fixed Cost
Fixed manufacturing costs $ 460,000.00
Fixed selling and administrative costs $ 500,000.00
$
960,000.00
Profit
$
240,000.00
Ist PROPOSAL
Selling Price per unit $ 420.00
Number of units 6500
Sales $ 2,730,000.00
Less Variable cost $ 1,352,000.00
Contribution $ 1,378,000.00
Less Fixed cost $ 990,000.00
Profit $ 388,000.00
Breakeven units Total Fixed Cost
Contribution per unit

Concepts of Management Accounting 6
$ 990,000.00
$ 212.00
Breakeven units 4670
Breakeven units 4670 72%
Margin of Safety 1830 28%
Total Sales Units 6500 100%
2nd PROPOSAL
Selling Price per unit $ 480.00
Number of units 4500
Sales $ 2,160,000.00
Less Variable cost $ 810,000.00
Contribution $ 1,350,000.00
Less Fixed cost $ 1,010,000.00
Profit $ 340,000.00
Breakeven units Total Fixed Cost
Contribution per unit
$ 1,010,000.00
$ 300.00
Breakeven units 3367
Breakeven units 3367 75%

Concepts of Management Accounting 7
Margin of Safety 1133 25%
Total Sales Units 4500 100%
3rd PROPOSAL
Selling price for 1st 1500 units $ 390.00
Selling price for next 4500 units
(5000+1000-1500) $ 420.00
Variable cost per unit $ 180.00 Proportion
Contribution per unit on 1st 1500 units $ 210.00 25%
Contribution per unit on next 4500 units $ 240.00 75%
100%
Sales $ 2,475,000.00
Less Variable cost $ 1,080,000.00
Contribution $ 1,395,000.00
Less Fixed Cost $ 1,020,000.00
Profit $ 375,000.00
Breakeven units Total Fixed Cost
Contribution per unit
$ 1,020,000.00
$ 232.50
4387
Breakeven units 4387 73%

Concepts of Management Accounting 8
Margin of Safety 1613 27%
Total Sales Units 6000 100%
While evaluating all the three proposals, it has been observed that among all the three
proposals and existing system, proposal 1 will entail maximum profitability i.e. $ 388,000 for
the business of Telesmart Ltd. because this proposal involves lowest fixed cost in relation to
advertisement among all the suggested proposals. Further, breakeven point and point of
margin of safety have been calculated to evaluate all the proposals on the basis of these
grounds. Breakeven point is that point where firm incurs no losses and earns no profit.
Beyond breakeven point the firm starts generating profits and below breakeven point the firm
has to incur losses (Drury, 2013). Lower the sales than the breakeven point, higher will be the
losses and higher the sales than the breakeven point, higher will be the profits. Therefore,
firm must have lower breakeven point so that after achieving the BEP, it can achieve higher
profits. The proposal 1 has the breakeven point at the lowest level of its sales i.e. 72% as
compared to other two proposals and hence it is advisable for Telesmart Ltd. to choose
proposal 1 as it is the most profitable one. The only weakness of proposal one is that it will
involve increase in the variable cost per unit by $ 28.
QUESTION 3
Annual Capacity 100000 90000
Monthly Capacity 8333 7500
Current Demand per month 6000 6000
Spare Capacity 2333 1500
Annual Spare Capacity 28000 18000

Concepts of Management Accounting 9
Special order demand 25000 25000
Spare Capacity (Units) 3000
Lack of capacity (Units) 7000
Capacity 100000 units
Direct Material Cost $ 75.00
Direct Labour Cost $ 35.00
Variable Factory Overhead $ 10.00
Fixed Factory Overhead $ 20.00
Total Cost $ 140.00
Profit percentage 100%
Selling Price $ 280.00
Number of Bikes 25000
Contract price $ 7,000,000.00
Profitability
Contract price $ 7,000,000.00
Cost of 25000 bikes $ 3,500,000.00
Profitability $ 3,500,000.00
Capacity 90000 units
Contribution lost on normal
sales

Concepts of Management Accounting 10
Selling price per unit $ 370.00
Less Variable cost $ 140.00
Contribution on normal
sales $ 230.00
Number of units lost 7000
Total Contribution Lost -$ 1,610,000.00
Cost of remaining units $ 4,480,000.00
Total cost to be recovered $ 2,870,000.00
Contract price $ 5,740,000.00
If the capacity of FreeWheels Ltd. is 100000 units, then it would be beneficial for the firm to
accept the special order as the order will only consume the spare capacity of the company and
would not affect the normal supply of the business. Even after producing 25000 bikes of
special order, the firm will still remain with the capacity to produce 3000 additional bikes as
it has the spare capacity for such quantity (Hansen, Mowen & Guan, 2007). However, the
special order is from the overseas firm, so FreeWheels Ltd. will have to incur the cost of
obtaining the permits and licenses to export its goods to China and India. However, because
of the special order, the total cost of $ 45 will be ignored and the profitability of business will
also be increased by $ 3,500,000.

Concepts of Management Accounting 11
References:
Bega Cheese Ltd., 2017. Annual Report. Available at:
http://www.annualreports.com/HostedData/AnnualReportArchive/b/ASX_BGA_2013.pdf
Accessed on: 10.09.2018.
Bhat, S. 2008. Financial management: Principles and practice 2nd ed. India: Excel Books.
Drury, C.M. 2013. Management and cost accounting 3rd ed. Germany: Springer.
Hansen, D., Mowen, M. and Guan, L. 2007. Cost management: accounting and control 6th
ed. U.S: Cengage Learning.