Management Accounting for Costs and Control

Running head: MANAGEMENT ACCOUNTING FOR COSTS AND CONTROL
Management accounting for costs and control
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MANAGEMENT ACCOUNTING FOR COSTS AND CONTROL
Table of Contents
Question 1..................................................................................................................................2
Question 2..................................................................................................................................9
Question 3................................................................................................................................12
Question 4................................................................................................................................16
Question 5................................................................................................................................21
Reference..................................................................................................................................24
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MANAGEMENT ACCOUNTING FOR COSTS AND CONTROL
Question 1
A. Job costing
Raw Material Account
Particular Amount Particular Amount
Opening balance $ 28,698.00 Work-in-progress $ 3,620.00
Purchase of Raw
material $ 4,922.00
Closing Stock of Raw
material $ 30,000.00
Total $ 33,620.00 Total $ 33,620.00
Work-in-Process Account
Particular Amount Particular Amount
Op balance $ 9,700.00 Cost of goods manufactured $ 61,120.00
Raw material $ 3,620.00
Direct Labour $ 29,600.00
Manufacturing OH $ 29,600.00 Closing balance $ 11,400.00
Total $ 72,520.00 Total $ 72,520.00
Accounts payable
Particular Amount Particular Amount
Bank account $ 8,700.00 Op balance $ 5,678.00
Closing balance $ 1,900.00 Raw Material purchased $ 4,922.00
Total $ 10,600.00 Total $ 10,600.00
Finished Goods
Particular Amount Particular Amount
Op balance $ 12,780.00 Cost of goods sold $ 55,000.00
Cost of goods manufactured $ 61,120.00 closing balance $ 18,900.00
Total $ 73,900.00 Total $ 73,900.00
Cost of goods sold
Particular Amount Particular Amount
Finished Goods $ 55,000.00 Cost of sales $ 55,000.00
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Total $ 55,000.00 Total $ 55,000.00
Calculation of Closing WIP
Particulars Amount
Material $ 9,000.00
labour $ 2,400.00
Closing WIP $ 11,400.00
calculation of Labour hour rate
Particulars Amount
Labour amount $ 2,400.00
Labour hours 300
Labour hour Rate 8.00
Calculation of Overhead absorption rate
Particulars Amount
Overhead (Budgeted) $ 24,000.00
Budgeted Labour hours 3000
Overhead Absorption rate $ 8.00
Formula view
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MANAGEMENT ACCOUNTING FOR COSTS AND CONTROL
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MANAGEMENT ACCOUNTING FOR COSTS AND CONTROL
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MANAGEMENT ACCOUNTING FOR COSTS AND CONTROL
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MANAGEMENT ACCOUNTING FOR COSTS AND CONTROL
Manual solution –
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MANAGEMENT ACCOUNTING FOR COSTS AND CONTROL
B. Management accounting and history
Roman Coliseum is the load bearing structure that was built around in 1900. The main
reason that no one builds any structure this way now as the structure involved lot of labour
hour that was approximately 2/3rd of total cost and only 1/3rd of total expenses were towards
material cost (Braun, Tietz & Harrison, 2013). Therefore, if modern management accounting
approach is used to recreate the structure it can be built using the job costing approach. Job
costing involves accumulation of costs of overhead, labour and materials. This method can be
used to track the particular cost with regard to individual jobs and recognising them to check
whether there is any scope to reduce the cost in any particular area (Corum, Vayvay &
Bayraktar, 2014). Further, it can be used to track if any excess costs is incurred and the
measure to minimize the extra cost. Further, the job costing system is appropriate for
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constructing building or any structure like Roman Coliseum. Under the job costing approach
the accounting activities will be carried out as follows –
 Materials – the cost components are accumulated and thereby allocated to the project
or product when the components are used (Kerzner, 2013).
 Labour – workers charge time to particular jobs that are allocated thereafter to the
jobs on the basis of employee’s labour cost
 Overhead – the overhead costs are accumulated in the cost pools and then are
assigned based on the job cost (Matsumura, Mattison & Miller-Nobles, 2014).
Therefore, if the Roman Coliseum is restructured using the modern cost management
accounting like jib cost it will minimize the cost required to complete the project and the cost
will be allocated on systematic basis.
Question 2
a. Production cost report for May
Calculation of Equivalent Units
Particulars Direct Material Direct Labour Overhead Physical units
Units Completed 32800 32800 32800 32800
Closing WIP 18400 5520 5520 18400
Total 51200 38320 38320 51200
Calculation of Costs per equivalent unit
Particulars
Direct
Material Direct Labour Overhead Total
Cost in the Beginning $ 27,000.00 $ 44,307.69 $ 13,292.31 $ 84,600.00
Costs incurred during the
year $ 118,700.00 $ 187,000.00
$
56,100.00 $ 361,800.00
Total $ 145,700.00 $ 231,307.69
$
69,392.31 $ 446,400.00
Cost per equivalent unit 2.85 6.04 1.81 10.69
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Statement showing assigning the cost to units transferred
Particulars
Direct
Material Direct Labour Overhead Total
Cost of units transferred
$
93,339.06
$
197,987.80 $ 59,396.34
$
350,723.20
Closing WIP
$
52,360.94
$
33,319.90 $ 9,995.97
$
95,676.80
Total $ 145,700.00 $ 231,307.69 $ 69,392.31 $ 446,400.00
Units to be Accounted for
Particulars Amount
Units at the beginning WIP 5600
Units started during the month 45600
Total Units 51200
Formula view –
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b. Work-in-process T-accounts
Work in Process Account
Particulars Units Amount Particulars Units Amount
Opening balance 5600
$
84,600.00 Transfer to next process
3280
0
$
350,723.20
Material Introduced
4560
0
$
118,700.00
Labour
$
187,000.00
overhead
$
56,100.00 Closing balance
1840
0
$
95,676.80
Total
5120
0 $ 446,400.00 Total
5120
0 $ 446,400.00
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Manual solution –
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Question 3
a. Price of D
Statement showing profit for Grade C products
Particulars Amount
Cost for Product A $ 187,500.00
Extra cost for product C $ 45,000.00
Total cost for product C $ 232,500.00
Selling price of Product C $ 270,000.00
Gross Profit $ 37,500.00
Statement showing profit for Grade D products
Particulars Amount
Cost for Product B $ 163,000.00
Extra cost for product D $ 25,000.00
Total cost for product D $ 188,000.00
Selling price of Product D per kg $ 4.70
Formula view
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b. Decisions for A
Statement showing profit for A at split-off point
Particulars Amount
Cost for Product A $ 187,500.00
Unit produced 60000
Selling price of Product A per kg $ 2.00
Sales revenue $ 120,000.00
Profit / (Loss) $ (67,500.00)
Formula view –
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Manual solution –
It is identified that if product A is sold at the split-off point at the rate of $ 2 per kg the
amount of loss will be $ 67,500. On the other hand, if product A is further processed to
produce C at the cost of $ 45,000, then C can be sold at $ 4.50 per kg and the resulting profit
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will be $ 37,500. Therefore, the difference in profit will be = 37,500 – (- 67,500) = $ 105,000.
Hence, product A shall be further processed to produce product C and shall not be sold at
split-off point.
Question 4
a. Variance analysis
Material price variance
Statement showing calculation of material price variance
Particulars Amount
Standard unit price of material $ 7.00
Actual Quantity purchased price $ 2,036,000.00
Standard price allowed for actual production $ 1,848,000.00
Material Purchase price variance (unfavourable) (UF) $ 188,000.00
Formula view
Material usage variance
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MANAGEMENT ACCOUNTING FOR COSTS AND CONTROL
Statement showing calculation of material usage variance
Particulars Kg
Standard quantity for material per unit 12
Unit produced 22000
Standard quantity allowed for actual production 264000
Actual quantity used for actual production 203000
Material usage variance (Favourable) 61000
Formula view
Actual direct labour rate per hour
Calculation showing actual direct labour rate
Particulars Amount
Standard Direct Labour Rate $ 30.00
Standard direct labour hour 3
Actual units produced 22000
Standard labour expenses allowed $ 1,980,000.00
Direct labour variance (Unfavourable) $ 2,378.00
Actual labour expenses $ 1,982,378.00
Actual labour worked (hours) 60000
Actual labour rate per hour $ 33.04
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Formula view
IF Function –
Statement showing calculation of material price variance
Unfavourabl
e
Particulars Amount
Standard unit price of material $ 7.00
Actual Quantity purchased price
$
2,036,000.00
Standard price allowed for actual production
$
1,848,000.00
Material Purchase price variance $ 188,000.00
Statement showing calculation of material usage variance
Favourable
Particulars Kg
Standard quantity for material per unit 12
Unit produced 22000
Standard quantity allowed for actual production 264000
Actual quantity used for actual production 203000
Material usage variance 61000
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Manual solution –
Answer (b)
Introduction – variance analysis involves the study on deviations among the actual
behaviour and planned or standards behaviour with regard to the management accounting or
budgeting (Schmeisser et al., 2014). Mainly this is concerned about the way in which actual
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and standard behaviour signifies the impact on the performance of the business. The main
objective of variance analysis is to calculate and record individual variances and
understanding the reason behind every variance.
Discussion – variance can be favourable that is the actual costs are lower as compared to
standard costs as well as unfavourable that is the actual costs are higher as compared to the
standard costs (Whitecotton, Libby & Phillips, 2013). Positive as well as negative both the
variances have negative impact on the budget unless it is caused by the extreme events. The
main purposes of variance analysis are as follows –
 It helps in preparing efficient budget as the management will prefer to experience
lower level of deviation with the budget (Xia & Walker, 2015). Preferring the lower
deviations will lead the managers to prepare more accurate budgets and take
decisions based on the budget
 The variance analysis act as the control mechanism. Analysing the large difference
based on major items will assist in evaluating the causes and it will eventually help
the management to search for the possible methods to minimize the differences
 The analysis of variances assists in allocating the responsibility and establishing the
control mechanism on various departments, wherever required. For instance, if it is
found out that the labour efficiency variable is not favourable or the raw material
procurement cost variance is not favourable, the management can improve the control
system to enhance efficiency.
Variance analysis can be used in the financial and operational areas of the business. It
can be used to analyse the variance among the standard and actual budget, forecasting,
materiality and the business planning.
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The difference among the incurred overhead and absorbed overhead is known as the
overhead variance. The overhead variance helps in analysing the cost incurred as compared to
the plan. However, it does not provide any scope to pinpoint the reason for the variance and
thus corrective actions are taken as far as possible. It is not possible to recognize whether the
reason behind the overhead variance is the inefficiency of the labours or expenses has been
incurred more or less. Therefore, total variance in overhead cost further analysed into parts to
get an idea regarding the overhead variance from various angles (Maas, Schaltegger &
Crutzen, 2016).
Conclusion – it is identified from the above analysis that the variance analysis under cost
accounting indicates gain or loss. However, it is the loss or gain owing to the actual activity
that is actually planned. It pays important role in analysing the actual expenses as compared
to the plan or budget and thereby makes to management more efficient in controlling costs
and plan the expenses in more efficient and exact way. It further helps in forecasting the costs
and profits for the future years.
Question 5
a. Budget
Calculation of Budget
Particulars Mar-31 Jun-30 Sep-30 Total
Opening inventory 47890 42000 42000 131890
Purchase 76610 65607.6 71673.6 213891.2
Closing Inventory 42000 42000 42000 126000
Cost of goods sold 82500 65607.6 71673.6 219781.2
Sales ( Cash + Credit) 137500 109346 119456 366302
Gross Profit 55000 43738.4 47782.4 146520.8
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Formula view
Manual solution –
b. Budget as a choice process
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Budget in the various businesses are used to analyse the cost actually incurred with
the plan made in advance. Different aspects are taken into consideration while preparing the
budget (Klychova, Faskhutdinova & Sadrieva, 2014). Though the views of different
companies are different, it is mainly influenced by the past records and various preference
and plans of the company (Drury, 2013). Further, while preparing the budget, the interest of
various group of people like employees, management and stakeholders are taken into
consideration (Hilton & Platt, 2013).
In the above shown cartoon image one person is telling his boss that he has completed
the project on time and within the amount allocated for the project. The other person is
replaying that he will get less amount and time next time for the same project (Williams,
2014). Therefore, the 2nd person is challenging the 1st person to complete the next project in
less time and money.
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Reference
Braun, K. W., Tietz, W. M., & Harrison, W. T. (2013). Managerial accounting. Pearson.
Corum, A., Vayvay, Ö., & Bayraktar, E. (2014). The impact of remanufacturing on total
inventory cost and order variance. Journal of Cleaner Production, 85, 442-452.
DRURY, C. M. (2013). Management and cost accounting. Springer.
Hilton, R. W., & Platt, D. E. (2013). Managerial accounting: creating value in a dynamic
business environment. McGraw-Hill Education.
Kerzner, H. (2013). Project management: a systems approach to planning, scheduling, and
controlling. John Wiley & Sons.
Klychova, G. S., Faskhutdinova, М. S., & Sadrieva, E. R. (2014). Budget efficiency for cost
control purposes in management accounting system. Mediterranean journal of social
sciences, 5(24), 79.
Maas, K., Schaltegger, S., & Crutzen, N. (2016). Integrating corporate sustainability
assessment, management accounting, control, and reporting. Journal of Cleaner
Production, 136, 237-248.
Matsumura, E. M., Mattison, B. L., & Miller-Nobles, T. L. (2014). Horngren's Financial &
Managerial Accounting. Pearson Education Limited.
Schmeisser, W., Mohnkopf, H., Hartmann, M., & Metze, G. (2014). Innovation Performance
Accounting. Springer.
Whitecotton, S., Libby, R., & Phillips, F. (2013). Managerial accounting. McGraw-Hill
Higher Education.
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Williams, J. (2014). Financial accounting. McGraw-Hill Higher Education.
Xia, F., & Walker, G. (2015). How much does owner type matter for firm performance?
Manufacturing firms in China 1998–2007. Strategic Management Journal, 36(4),
576-585.
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