Management Accounting - Desklib

This article covers topics such as cost accounting, financial analysis, direct material price variance, direct material usage variance, direct labour rate variance, direct labour efficiency variance, and more in Management Accounting.

MANAGEMENT ACCOUNTING
STUDENT ID:
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Question 1
a) The addition of the costs incurred in each of the two departments i.e. mixing and bottling
would provide an estimate of the total costs. This process is conducted as highlighted below.
Mixing department (Total costs) = $113,000 + $15,000 + $32,000 = $ 160,000
Bottling department (Total costs) = $17,000 + $6,000 + $9,000 = $ 32,000
Production costs for March 2013 comprising of both departments = $ 160,000 + $ 32,000 = $
192,000
Also, it is known that in March 2013, the number of bottles produced were 160,000.
The cost of each bottle would be the total production costs divided by the total quantity of
production i.e. (192000/160000) which would yield cost per bottle as $ 1.2.
b) The following journal entries have been prepared considering that the work in process is
different for the two departments (Bhimani, Horngren, Datar & Foster, 2017).

Question 2
a) The formula for direct material price variance is as highlighted below (Damodaran, 2015).
Direct Material Price Variance (SP-AP)*AQ
Based on the given information, SP = $7.2/kg, AP = $7.4/kg and AQ = ($31.080/7.4) = 4,200
kg
The variance computed above is unfavourable owing to the fact that the actual price per unit
material exceeded the budgeted or standard price per unit material.
b) The formula for direct material usage variance is as highlighted below (Parrino & Kidwell,
2014).
Direct Material Usage Variance = (AQ-SQ)*SP
Based on the given information, SP = $ 7.2 per kg, SQ = 2*2000 = 4,000 kg, AQ =
($31.080/7.4) = 4,200 kg
The variance computed above is unfavourable owing to the fact that the actual consumption
of quantity has exceeded the expected or budgeted quantity consumption.
c) The formula for direct labour rate variance is as highlighted below (Drury, 2016).
Direct labour rate variance = (AR-SR)*AH
Based on the given information, AR = $18.30/hr, SR =$18/hr, AH= ($118,035/18.3) = 6,450
hours
The variance computed above is unfavourable owing to the fact that the actual labour cost
exceeded the budgeted or standard labour cost per hour.

d) The formula for direct labour efficiency variance is as highlighted below (Damodaran,
2015).
Direct labour efficiency variance = (AH-SH)*SR
Based on the given information, SR =$18 per hour, SH = 3.5*2000 = 7,000 hours, AH =
($118,035/18.3) = 6,450 hours
The variance computed above is favourable owing to the fact that the actual hours consumed
for production are lower than the standard or budgeted hours expected for the production at
the standard rate.
Question 3
a) The financial analysis that Sam has conducted in regards to the fruit juice business is not
correct as the costs considered for computing profit are not limited to only the incremental
costs that have been incurred because of the juice business. Taking into consideration the
costs which were present to the same quantum before the business was established leads to
over estimation of the costs and under estimation of the actual profitability of the business
operations which is taking place for the juice business (Brealey, Myers & Allen, 2014).
b) The appropriate financial analysis for the juice corner business is summarised below.
It is noteworthy that the above analysis does not include the following costs (Petty et. al.,
2015).

 Building Depreciation – This was being incurred to the same even when juice counter
had not been established and hence no contribution from the same should be
attributed to this business.
 Manager Salary – The salary of the manager existed before the establishing of the
juice counter and owing to the setting of this business, there has not been any
incremental rise in the manager’s salary. Hence, incremental effect of the juice
business on salary of manager is zero.
It is noteworthy that utility costs attributed to the business have been included owing to
incremental utility consumption by the business.
Question 4
(a) It is noteworthy that the fixed manufacturing overhead cost detail is present @ $20/hr.
Taking into consideration the given data on total manufacturing overhead and the fixed
manufacturing overhead, the variable overhead cost per unit can be estimated. The
computation of the contribution margin per unit for Standard and Deluxe product is carried
out below (Damodaran, 2015).
Considering that the fixed expenses associated with both the above products are the same,
hence Deluxe model is more profitable in comparison with the Standard model (Parrino &
Kidwell, 2014).
Owing to limited availability of machine hours and the objective of maximising the profit, it
is essential that the production of that model ought to be maximised which deliver a higher
profit per machine hour consumed. The superior model in this context can be identified from
the following table (Drury, 2016).

Hence, it is apparent that for the month of June, superior option is Standard model.
b) It is known that standard model monthly demand is 40,000 units which would need to b
fulfilled on priority. Since every unit of standard model consumes 1 hour of machine hour,
thus 40,000 machine hours would be consumed. Since, 60000 machine hours were available
at the beginning of June, hence 20,000 machine hours would be left which would be used for
production of the Deluxe model. As Deluxe model consumer two machine hour for producing
one unit, hence number of units produced for this model would be (20000/2) = 10,000 units
In the month of June, the company should produce 40,000 and 10,000 units of standard and
deluxe model respectively for maximising profits.

References
Bhimani, A., Horngren, C.T., Datar, S.M. & Foster, G. (2017), Management and Cost
Accounting 4th ed. Harlow: Prentice Hall/Financial Times
Brealey, R. A., Myers, S. C. & Allen, F. (2014) Principles of corporate finance, 6th ed. New
York: McGraw-Hill Publications
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York:
Wiley, John & Sons.
Drury, C. (2016) Cost and Management Accounting: An Introduction. 6th ed. New York:
Cengage Learning
Parrino, R. & Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London:
Wiley Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M. & Nguyen, H. (2015).
Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education,
French Forest Australia