Management Accounting Frameworks and Cost Differentiation

This report discusses management accounting frameworks and cost differentiation. It includes the calculation of profits, investment appraisal, and insights into CAPEX appraisal. It also critically comments on the statement made by the manager and provides illustrations for critique. The subject is AFM020 Management Accounting Frameworks and the course code is not mentioned. The college/university is not mentioned either.

AFM020 Management
Accounting
Frameworks

Table of Contents
INTRODUCTION ..........................................................................................................................3
SCENARIO 1...................................................................................................................................3
(a) Show the calculation of profit for the for years. ...................................................................3
b) Prepare a schedule for annual cash flows and investment appraisal for determining the
efficiency of project....................................................................................................................4
c) Provide insights into the CAPEX appraisal of the project and suggest whether to accept the
proposal or not.............................................................................................................................6
SCENARIO 2...................................................................................................................................7
Critically comment on the statement made by the manager. Provide illustrations for critique
and also gives comments.............................................................................................................7
CONCLUSION .............................................................................................................................11
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting can be defined as a process of preparation of reports related to
the operations of the business. This helps them in the continuing its target by recognising,
measuring, evaluating and interpreting the data which is to be communicated to the mangers.
Through this companies makes their long as well as short term decisions (Nielsen, 2018). The
company chosen in this report is MAF Associates. In the report the country chosen is Loland a
fictitious one. Firm deals in the buying and selling of computer equipments. The report is divided
into two sections. The first part deals in the calculation of profits and analysis of the investment
proposal. The second part discusses about the differentiation in the meaning of cost and the
problems created by it for the mangers along with illustrating it with the help of examples.
SCENARIO 1
(a) Show the calculation of profit for the for years.
Particulars Year 1 Year 2 Year 3 Year 4
Sales 1000000 1050000 1100000 1150000
Less: Variable
Costs
400000 420000 440000 460000
Less: Fixed
Costs (Salary)
100000 100000 100000 100000
Less:
Administration
Costs
200000 200000 200000 200000
Less:
Marketing and
advertising
costs
50000 50000 50000 50000
Depreciation on
Equipment
200000 200000 200000 200000
Surveyors and 100000 100000 100000 100000

legal fees
Profit before
tax
-50000 -20000 10000 40000
Corporation tax 2000 8000
Profit after tax 8000 32000
Calculation of depreciation of equipment
Cost of equipment = $ 1000000
Residual value = $ 200000
Number of years = 4
Value of depreciation = (1000000 – 200000) / 4
= 800000 / 4
= $ 200000
b) Prepare a schedule for annual cash flows and investment appraisal for determining the
efficiency of project.
Particulars Year 0 Year 1 Year 2 Year 3 Year 4
Sales 1000000 1050000 1100000 1150000
Less:
Variable
Costs
400000 420000 440000 460000
Less: Fixed
Costs
(Salary)
100000 100000 100000 100000
Less:
Administrati
on Costs
200000 200000 200000 200000
Less: 50000 50000 50000 50000

Marketing
and
advertising
costs
Purchase of
Equipment
1000000
Residual
value of
equipment
200000
Land and
building
purchased
1000000
Residual
value of
Land and
building
1200000
Working
capital
430000
Corporation
tax
2000 8000
Net cash
flows
-2000000 250000 280000 308000 1302000
Calculation of working capital
Year 1
10 % of sales = 10 % * 1000000 = $ 100000
Year 2
= 10 % * 1050000 = $ 105000
Year 3

= 10 % * 1100000 = $ 110000
Year 4
= 10 % * 1150000 = $ 115000
Total Working capital = 100000 + 105000 + 110000 + 115000 = $ 430000
Calculation of NPV with the help of discounting factor
Cost of capital = 15 %
Year Net cash flows Discounting value @
10 %
Present value of cash
flows
0 -2000000
1 250000 0.870 217500
2 280000 0.756 211680
3 308000 0.658 202664
4 1302000 0.572 744744
Total 1376588
NPV of the project = Total inflows and total outflows
= 1376588 – 2000000 = $ −623412
c) Provide insights into the CAPEX appraisal of the project and suggest whether to accept the
proposal or not.
Pay back period = This method helps in the calculation of time period in which the amount
invested in the business or the project can be reimbursed with the help of money inflowed from
that proposal. This helps in recognising that whether the project should be accepted or not
(Vakhrushina, and et.al., 2018).
Year Net cash flows Cumulative cash flows
0 -2000000 -2000000
1 250000 -1750000
2 280000 -1470000

3 308000 -1162000
4 1302000 140000
Pay back period = Total cash outflow / total cash inflow
= 3 years + 1162000 / 1302000
= 3 + 0.9
= 3. 9 years
With the help of this method, MAF can determine that whether the proposal of investing
in new project is beneficial or not. In addition to this, the offer can be evaluated with the help of
Net present value method. This method is very efficient for checking the true position of the
offer.
Net Present Value – This method of appraisal helps in identifying the actual value of cash that
would be received in the coming years by considering the impact of present value of money
(Kasasbeh, 2018). Through this MAF can ascertain that whether the project is capable of
providing enough returns after the completion of specific time period. This has been calculated
above.
From all the calculations made above, it is analysed that it would not be beneficial for the
organisation to invest its retained earning or savings in this project of creating a retail outlet.
Rather than this, it should be invested in some other beneficial project. This is because the time
period of project is 4 years and according to the pay back time period it is not able to handle the
receive its invested amount in short interval. The reimbursing duration is of 3.9 years which is
almost equal to the whole interval of the investment. This simply means that the firm may have
to face the problem of liquidity. In addition to this the NPV value also shows the negative results
which means that if in future the project is accepted considering that the invested money will be
received in last year even then that figure will not have any value in accordance to the value of
money at that time. So they should not consider the making of investment in this project. The
negative value of NPV attracts the decision towards the rejection of the proposal.
Along with this, by rejecting the proposal of making investment in the offer, MAF can
make redundant of the employees who it feels not suitable for the organisation as being very old
and inefficient for the modern day operations. For this, the business would have to make
payment of $89,988 to each of them as a pay of remuneration.

SCENARIO 2
Critically comment on the statement made by the manager. Provide illustrations for critique and
also gives comments.
According to the managers in the meeting, there is a difference between the definition of
cost for different persons and variant situations. This creates problems in management of costs,
preparation of budgets and taking financial decisions and understanding the true situation of the
cost. Here is the discussion related to the difference in costs and its related issues (Bulgakova,
and et.al., 2018).
Cost can be defined as a value that is incurred in the production of any goods or service
and once consumed it is of no more use. The amount invested on the acquisition of goods or
machinery or any plant is also a part of this cost. Here, money is the mode which is used for
acquiring the goods and thus the cost is always measured in monetary forms. Their are different
types of costs that are been incurred by the organisations at the time of handling any process.
Below are the different kinds of costs related to the companies (Jarwal, 2018).
Types of costs
 Opportunity costs – It refers to the alternative cost of project. It is the objective of the
firms to derive maximum and best from their limited resources. This means that they
avoid the income that could be generated from the next best usage of the material.
Opportunity cost is the profit that could be generated from the second good use of
resource. For instance, there are two projects n which the same amount of $ 50000 is
required to be invested. First one would yield $150000 at last and the other one will bring
$ 100000. Here, the firm will choose first project and the amount of $ 100000 is its
opportunity cost.
 Explicit cost – These are the expenses which is used by the company for the payments
that are made by the employer to buy or own the factors of production. These costs
include payments for raw materials, loan interest, rents for rented buildings or machinery,
and for the payment of taxes to the state. This amount needs to be clearly and separately
visible in the books of accounts (Rahmani, and Ghashghaei, 2018).
 Implicit cost – There are many types of costs that are not regarded as cash outlays in the
records. Such as opportunity cost. In addition to this, many times, the owners of the
organisation bring their own personal asset like land and furniture in the business. This

amount is normally do not included in the costs but becomes a part of capital. Thus, the
companies acquire the asset without making payment for it.
 Accounting costs – It is the expenditure that is used by the company for the acquisition
of the inputs for producing the goods. It involves all the administration, selling and
maintenance costs. This also includes the payment made for buying raw material,
machinery and other operational items.
 Economic costs – It refers to the total amount that is incurred by the company for
acquiring one option over the another one. This involves all kinds of explicit as well as
implicit cost under it. Thus it is the sum total of all the kinds of expenses.
 Business costs – It comprises of all the expenses that are consumed by the entity for
supporting its daily operations. It also consists of all the sorts of payments and the
obligations that are required by the business to be paid. These costs are further used for
the calculation of profits or losses made by it which are further used for payment of
income tax and other related procedures (Gusc, and van Veen-Dirks, 2017).
 Full costs – It is the complete value of expenditure that are made by the business
including business, opportunity and other normal costs. It helps in the ascertaining of
profits generated by the company out of its sales.
 Fixed Costs – It refers the amount that remains fixed through out the year or the level of
output. The business has to bear this amount even If it is not undergoing any production
and that too at the fixed amount. For instance the value of depreciation on land or interest
on loan. These values do not tend to change with the alteration in the quantity of output.
But in the long run, even this value does not remains fixed.
 Variable costs – it can be defined as a cost that is incurred by the business for its
production and acquisition of the raw material and goods. This amount tends to change
with change in the number of units produced. For instance, labour, electricity and many
more. Cost of material is also variable and depends on the number of units a firm requires
for its sales.
 Incremental costs – These are the costs that are additional to the other normal costs if
the business. These occur due to the change in the production level or process. This
expenses could be avoided by the business if it does not produce more than its level or
avoid possible variation in it (Habib, and Hasan, 2019).

Importance of Costs:
1. Calculation of the margins: The margin is the price at which The margin is simply the
price which is asked, subtracted by the cost of the product which is provided. Margin $ /
Unit, and Margin% (Margin / Selling Price) in particular, are probably the most important
analytical metrics that will help you understand a business's profitability and health.
Almost always, a negative margin business is condemned to failure.
2. Classification of various costs: It helps in classifying the different type of cost which may
incur in the business. It assists in allocating the funds and the resources appropriately and
also estimates the budget and the budgeted profit which the company may get in future.
3. Price Determination: It helps in determining and understanding the differentiation
between the costs. By this the company can take the advantage of these costs and arrange
the prices accordingly for the products and service and estimate the profit. Also it will
help in controlling the idle costs which are not necessary for the business and the venture
in incurring (Modell, 2020).
4. Timely Management: The costing helps in the management of the fiscal resources on the
timely basis so can it can manage the uncertain problems which the business may suffer
due to the certain circumstances. Through budget the company may analyse the variance
with the actual expenses and taken the decisions for the development of the organisation
for the future occurrences.
5. Costs in reduction: It might in some cases likewise be a direct result of the public
authority strategies and different elements, for example, assume assembling plant in a
remote are. Because of the climate issue, there is an inaccessibility of natural substance to
be utilized underway. Assuming the equivalent couldn't be made accessible for the
following ten days, then, at that point, the expense of work and different overheads for
such ten days will bring about additional costs that are not thought of while getting ready
spending plans.
6. Setting performance standards: The budget help in setting the standard which assist in
analysing the performance of the business with the actual data. It helps in establishing the
goals and will lead to the development of the company against the benchmark which has
been set.
Challenges faced by the managers in terms of determining the costs:

1. Problem in identifying the hidden costs – It is very difficult for the organisations to detect
the hidden costs in the processes like the cost beard on training the employee at the time
of production. This results in decrease in the production of units. This cost cannot be
detected by the managers which creates difficulty in the setting of price of product. For
instance, depreciation. This amount is not paid in cash but costs the company at the time
of preparation of goods as this reduces the production capacity of company (Li, 2018).
2. At the time of preparation of budget – there are lots of situations, in which the managers
are not able to detect the amount of expenses that can actually occur at the time of real
operations. The impact of economic and external environment changes cannot be
detected by the manager with accuracy while preparing the budget. This creates a lot of
problems when the actual results are driven (Rebele, and Pierre, 2019).
3. Difference in the meaning of definition of expenses – At present, there is no proper
meanings of the costs. The people cannot determine that a particular expense is fixed or
not. There are lots of expenses whose some portion is fixed while the other is flexible.
These costs created difficulties to the managers that the while preparing the report which
portion of the cost is fixed and how much it is changing and to what extent.
4. Problem in reporting – It is difficult to communicate the report as the meaning of expense
differs from person to person. For example, many individuals do not know that the
finance cost is the amount that is been paid as an interest. So while calculating the
interest coverage ratio, such person will not be able to understand that they have to
consider the amount of finance cost under it. This will create a problem to the manager.
5. Usage of different methods for calculation of expenses – Different companies uses
various methods for the determination of the amount of expense. Such as the method of
depreciation is different in all firms which creates problems in conducting comparison
(Sjögren, and Fernler, 2019).
Thus, it is very difficult for the mangers to use the concept of cost in all their processes. It
not only creates problem in making budget but also in making various decisions like cost of
product. Thus, they should keep the facts in mind that the meaning of costs differs for all and
sometimes are hidden so they should be vigilant while dealing in them.

CONCLUSION
From the above report it can be analysed that it can be analysed that the it is necessary for
the organisations to conduct appraisal of all the available investment proposals. This helps in
recognising that whether a particular amount should be invested in the business or not. Through
this the companies can also make comparison among different projects. There are various
techniques that helps in ascertaining that whether the money that is invested today will be worth
enough in future or not. But for this it is important for the companies to make the correct
estimation of figures which is really difficult. It is a complicated process as there is not proper
definition for these cost and it differers from person to person. Also the impact of external factor
on this value is not easy. It is very much challenging to get knowledge about the hidden costs
that are not easy to detect. Thus the company should look at the all the aspects before making
any anticipation.

REFERENCES
Books and Journals
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Sjögren, E. and Fernler, K., 2019. Accounting and professional work in established NPM
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Vakhrushina, M.A., and et.al., 2018. Integrated management accounting in the financial
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