Management Accounting: Costing and Profit Analysis

This article discusses the costing and profit analysis of an enterprise that sells barbeque and balloons. It covers income statement, activity-based costing, product margin, and more.

MANAGEMENT ACCOUNTING
[Type the document subtitle]
Student Name
[Pick the date]

Part 1
Question 1.1
The requisite calculations for income statement are furnished below.
Net sales
Barbeque selling price = $2.00 per unit
Number of barbeque sold = 2,000
Balloon selling price =$1.00 per unit
Number of balloon sold =1,000
Thus,
Net sales ¿ ( 2000∗$ 2 )+ (1000∗$ 1 )=$ 5,000
Cost of goods sold
Barbeque cost = $0.2 per unit
Number of barbeque sold = 2,000
Balloon cost =$0.05 per unit
Number of balloon sold =1,000
Each partner will get an amount = $400
Number of partners (friends) =4
Thus,
Direct material cost ¿ ( 2000∗$ 0.2 )+ (1000∗$ 0.05 )=$ 450
Further,
1

Direct labour cost ¿ 4∗$ 400=$ 1,600
The other expenses such as expense incurred in the production process will be paid by the
friends. The sum of expenses will be manufacturing overhead.
Leasing a BBQ = $200
Balloon pump = $50
Manufacturing overhead = $50 +$200 =$250
Selling and Administrative Expenses
There are two expenses related to the sales and administrative tasks that are highlighted below.
Leasing a gazebo = $50
Getting permit for setting up shop = $250
Income Statement
Part 2
Question 2.1
2

Four cost pool activities
 Operating BBQ
 Inflating balloons
 Cashier
 Greeting customers
The relevant data information is shown below.
The requisite table for representing the four cost pool activities is highlighted below (Drury,
2016).
‘I’ cell in the table represent the value 400 which is the labour cost. It indicates that the amount
received by every friend is $400. Therefore, the table represents labour cost for per pool activity.
3

The conclusion can be drawn that operating cost for BBQ is $320 and the cost for inflating
balloons is $480.
Question 2.2
Activity rate for each labour cost pool activities is shown below.
Detailed computation tables
4

Question 2.3
It can be seen from the above shown activity rate table that highest activity rate has been
observed for ‘inflating balloons’ with a value of $0.48 per balloon. The reason behind the high
value of inflating balloon is due to the significant high amount of energy and time which is
essential aspect of this task. Further, it is also evident from the fact that time and energy
requirement in other tasks is comparatively lesser which amounts to low activity rate. For
example, time and energy required to greet a customer or working a cashier is less time and
energy consuming and hence, inflating balloon would be most expensive activity.
Question 2.4
Activity based costing product margin for the sale of barbeque and balloon is shown blow.
5

The assigning of costs above is in accordance with the product for which they are incurred.
However, in case of common costs such as cashier, the costs are allocated between the two
products in accordance with the number of items sold which is activity driver (Bhimani et. al.,
2016).
Part 3
Question 3.1
Activity based costing product margin (Barbaque)
The cost with respect to leasing BBQ would purely be assigned to Barbeque only. However, the
common expenses such as administrative and sale expenses would be assigned to both the
products which are barbeque and balloon (Heisinger, 2014).
6

Question 3.2
Activity based costing product margin (Balloons)
The cost with respect to balloon pump would purely be assigned to balloon only. However, the
common expenses such as administrative and sale expenses would be assigned to both the
products which are barbeque and balloon.
Part 4
Question 4.1
The argument of Paul with regards to divide the enterprise income between him and John is not
correct as it cannot be concluded that all the hard work has been done by him and John only.
However, it can be said that John and Paul have played an imperative role in the operation
process of barbeque and inflating balloon but this aspect does not state that other work conducted
by Ringo and George is not essential for running the business. Further, customer service,
collecting payments and maintaining the records of the transactions are equally important tasks.
It is evident from the fact that without these services, business could not be sustained and would
not make significant proceeds from sale. Further, Paul was involved in inflating balloon work
most of his time but the profit contribution from sale of balloon is not significant. Further, Ringo
and George were associated in cashier work and customer inviting process which definitely
contributed in the profit derived from sale of barbeque. Therefore, the claim of Paul is totally
7

wrong and unfair and therefore, the profit derived from barbeque and balloon is from the
contribution of all friends and not from an isolated work of an individual.
Question 4.2
It can be said that idea of selling balloon is not a good idea. The evidence of this aspect can be
seen from the table highlighted in Q 3(2). The table represents that profit derived from balloon
sale was merely $3 which is very insignificant as compared to the profit derived from sale of
barbeque which is about $2,400. Hence, it would have been beneficial if they would have
selected some different product which requires low costs, time and energy and would result in
high profit margin. Further, it can also be seen that selling of balloon did not make any loss
which is a positive factor as selection of any wrong product that would result in losses would be
a serious issue (Petty et. al., 2015). Therefore, it can be said that due to insignificant profit
derived from balloon, it is not a good idea but it is not a worst idea considering that it does not
cause losses.
8

References
Bhimani, A., Horngren, C.T., Datar, S.M. and Foster, G. (2016), Management and Cost
Accounting 4th ed. Harlow: Prentice Hall/Financial Times
Drury, C. (2016) Cost and Management Accounting: An Introduction. 6th ed. New York:
Cengage Learning
Heisinger, K.(2014) Essentials of Managerial Accounting 4th ed. London: Cengage Learning.
Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin J.D. and Burrow, M. (2015), Financial
Management: Principles and Applications 6th ed. Sydney: Pearson Australia
9