Concepts of Management Accounting

This article discusses the concepts of management accounting, including quality costs, cost plus pricing, and value-based pricing methods. It also provides answers to questions on KPIs and ethical professional practice. The article is relevant to students studying management accounting and related courses.

Running Head: Concepts of Management Accounting
Management Accounting

Concepts of Management Accounting 1

Concepts of Management Accounting 2
Part 1:
Question 1
In the present case, George has been appointed as the management accountant however he
does not hold the requisite degree for the same profession rather George is the licensed
plumber. Merely because George is having sound knowledge of pipes, he cannot be
appointed as the management accountant of the Fridges-R-Fun.
The institute of management has issued a statement containing the statement of ethical
professional practice that contains certain standards to be complied by all its members. In
hiring George as the management accountant following standards were jeopardise.
Competence:
Since, George is not the certified management accountant; he is not competent to be
appointed at the same designation as he does not hold the required knowledge and skills to
deal with the matters of management accounting.
Confidentiality:
Since George is the relative of the general manager of the company, it will be difficult for
him to keep the sensitive matters confidential. If the management accountant of the company
is related to the managerial personnel of such company it will affect the confidentiality of the
organisation.
Integrity:
The professional relations and personal relations of management accountant with the
managerial person will raise the conflicts of interest (IMA, 2018).
Part 2

Concepts of Management Accounting 3
Question 2.1:
Prevention Costs
System Development
Technical support to suppliers of compressors
Technical support to suppliers of pipes
Appraisal Costs
Inspection on assembling line
Field testing at customer sites
Internal Failures Costs
Rework on assembly line
External Failures Costs
Warranty repairs of fridges
Warranty replacement of fridges
Question 2.2:
Quality costs are majorly four types they are preventive costs, appraisal costs, internal failure
costs and external failures (Hansen, Mowen & Guan, 2007). These costs are incurred by the
firm with the aim of managing the quality of the products that it is dealing in. It generally
happens that if preventive and appraisal costs are incurred at the correct time it will save the
time and cost to work on internal and external failures (Ahmed Al-Dujaili, 2013). Since
preventive measures will minimise the occurrence of defects in the product and the appraisal
costs are related on the activities that helps in maintaining the quality of products or services.

Concepts of Management Accounting 4
Internal failures costs are those costs that are incurred to fix the defects identified before
delivering the final product to the customer. External failure cost is incurred to fix the defect
of the products that are identified by the customers once they receive the project.
In the instant case of Fridges-R-Fun, no preventive and appraisal cost was incurred in the 1st
year and due to this the internal as well as external failures were incurred more in this year. In
the next year the firm implemented new practices under which emphasis was given to the
preventive and appraisal measures therefore the overall quality costs increased in year 2.
However, the quality cost has declined in year 3 since the quality cost is generally a long term
investment and hence it takes time to reap the advantages. Therefore, the incurrence of
preventive and appraisal costs has resulted in reduced chances of internal and external
failures.
Part 3
Question 3.1
John believes that the cost of fixing internal and external failure is less than the cost of taking
preventive and appraisal measures and hence there is no need to incur preventive and
appraisal costs. However, Paul is of the view that quality cost is a sort of long term
investment and it takes time to reap its benefits and the preventive and appraisal cost is
necessary to be incurred to save the products from internal and external failure.
Question 3.2
If Ringo’s decision is used then in year 4, the quality cost will reduce as a result of reduction
in the possibility of internal or external failure because of spending of money on preventive
and appraisal measures which will prevent and detect the product discrepancies on time.

Concepts of Management Accounting 5
If Ringo’s decision is not undertaken then the changes of internal and external failure of
product will again increase in year 4 since no inspection or testing activity will be taken up
before delivering the final product to the customer.
Part 4
Question 4.1
High Low Method
Units Costs
Highest Units delivered 600
$
6,200.00
Lowest Units delivered 350
$
3,700.00
Variable Cost per unit= Change in Cost/Change in Number of Units
=(6200-3700)/(600-350)
=2500/250
Variable cost per unit =$10.00
Variable cost per unit 10
Total number of units sold 600
Total Variable Cost $ 6,000.00
Total Cost incurred $ 6,200.00
Fixed Costs $ 200.00

Concepts of Management Accounting 6
Variable cost per unit 10
Total number of units sold 350
Total Variable Cost $ 3,500.00
Total Cost incurred $ 3,700.00
Fixed Costs $ 200.00
Question 4.2:
Month Units Calculations 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
The differences in actual and expected delivery expense is due to the under absorbed variable
overheads. Using the high low approach, the predetermined variable overhead rate is $ 10 per
unit. However actual overheads are incurred at the high rate.
Part 5
Question 5.1
Predetermined fixed overhead recovery rate= Total Fixed Overhead/Direct Machine Hours
Welding 250000/7500
Fixed manufacturing overhead rate 33.33

Concepts of Management Accounting 7
Variable manufacturing overhead rate 1.5
Total manufacturing overhead rate 34.83
Predetermined 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 * Predetermined Overhead Recovery Rate
Welding 50*34.83
$1741.67
Assembly 40*12
$480
Question 5.3
Total Manufacturing Overhead
Direct Material
Welding $ 500.00
Assembly $ 125.00

Concepts of Management Accounting 8
Direct Labour
Welding $ 250.00
Assembly $ 750.00
Manufacturing Overheads
Welding $ 1,741.67
Assembly $ 480.00
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
Due to the consumption of more machine hours for the welding function in the business, the
overhead recovery rate is determined using the machine hours and the assembly function is
carried more on manual basis as shown by higher labour hours for the same. Hence assembly
overhead is allocated to different jobs on the basis of labour hours consumed.
Question 5.6

Concepts of Management Accounting 9
If the estimated variable overhead is increased for the welding function it would not affect the
overheads in the areas of assembly function as assembly cost is allocated to the units on the
basis of labour hours.
Question 6:
KPIs helps in measuring the performance of the business. From the study of article by
Schrage and Kiron Fridges-R-Fun cannot be said to the advanced user of KPIs as its KPIs are
requires the amended principles to be adopted. They are as follows:
Focus mostly on sales:
The focus of the business must not only be on sales. Rather, it must focus more on quality
management and customer satisfaction that will ultimately increase the sales of business.
May be reviewed by management once a year:
KPIs are to be reviewed as per their sensitiveness and relevance for the business. Some KPIs
are required to be required to be reviewed weekly or monthly while others may require
annual review (Kaplan & Norton, 2001).
Are private information and such information should not be shared among employees:
KPIs are required to be shared with the employees of the organisation so that they can have
idea of what is expected from them and how it is to be achieved (Schrage & Kiron, 2018).
Question 7
Cost plus pricing method is used to price the products and services of the business but this
strategy suffers from certain limitations that are discussed below:
 In stand-alone projects, the control over cost and efficiency is generally discouraged.

Concepts of Management Accounting 10
 Cost plus prices does not guarantee to cover all the costs and not also to earn the
profits.
 Under this method, the willingness of the customer to pay is ignored and also the
competitive prices are ignored and the ignorance of such factors results in completely
off base pricing decisions (Dholakia, 2018).
Benefits of value based pricing:
Value based pricing methods gives due regards to the value offered to the customers to
satisfy their needs through the products dealt by firm. This method emphasises on improving
the quality of products offered to the customers and does not require the price to be based on
cost involved in the production or the historical prices as identified by firm’s competitors
(Hinterhuber, 2004).

Concepts of Management Accounting 11
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.
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: 08.08.2018.
Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A., 2010. Managerial
accounting. Issues in Accounting Education, 25(4), pp.792-793.
Hansen, D., Mowen, M. and Guan, L., 2007. Cost management: accounting and control.
Cengage Learning.
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.
Kaplan, R.S. and Norton, D.P., 2001. Transforming the balanced scorecard from performance
measurement to strategic management: Part I. Accounting horizons, 15(1), pp.87-104.
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.