Management Accounting: High-Low Method, Cost of Goods Sold, Variance Analysis, Relevant Cost and Opportunity Cost

This report covers topics such as High-Low Method, Cost of Goods Sold, Variance Analysis, Relevant Cost and Opportunity Cost in Management Accounting. It includes solved questions and explanations. The subject is not specified, but the report is suitable for students studying Management Accounting. The report is available at Desklib - An online library for study material.

Management
Accounting

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Question 1....................................................................................................................................3
Question 2....................................................................................................................................5
(i)..................................................................................................................................................5
(ii)................................................................................................................................................6
Question 4....................................................................................................................................6
Question 5....................................................................................................................................9
(a).................................................................................................................................................9
(b)...............................................................................................................................................10
(c)...............................................................................................................................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Managerial Accounting is process which includes measuring, interpreting, interpreting,
communicating and identifying the transactions of the management. It further deviates from the
financial accounting which assists in knowing internal information of the company. In the
following report it includes how manager performs account work and opportunity cost. This
accounting helps in growing the business by considering various cost and fixed cost which
includes in the organisation. It is different from the bookkeeping which records financial
transactions of the company and administration accounting of the business concern (Brown and
et.al., 2020).
MAIN BODY
Question 1
With the help of the high-low method, evaluate:
High low method: Cost accounting is a topic which helps in determine the per unit cost of the
product. The high low method of costing helps in knowing the highest level and the lowest level
which will help the management in achieving the goals of the organisation. In this the highest
level of operations is taken and the lowest value of the is considered.
In terms of cost bookkeeping, high and low techniques can be understood as an effort to
separate variable and fixed costs with limited information. The high-low strategy is calculated
including taking the most significant functional motor level and the smallest degree of action,
and further checking in the full cost of completing each level (Cools and Rossing, 2021).
Difference in cost:
Monthly operating cost at 80% occupancy:
550 x 80%= 440 rooms
440 x £32 x 30 days 422,400
Monthly operating cost at 60% occupancy (which is given) 399,300
Difference in cost 23,100
Difference in activity:
80% occupancy (550 x 80% x 30days) 13,200

60% occupancy (550 x 60% x 30days) 9,900
Distinction in activity = 3,300
Change in cost / change in activity = 23,100/3,300 = £7 per room per day
Monthly operating cost at 80% occupancy (above)
Less variable cost:
422,400
440 beds x 30daysx £7 92,400
Fixed operating cost per month 330,000
550 beds x 70%
= 385 beds occupied
(b) The total fixed operating costs per month. (6 marks)
Monthly operating cost at 80% occupancy (above) Less
variable cost:
422,400
440 beds x 30daysx £7 92,400
Fixed operating cost per month 330,000
550 beds x 70%
= 385 beds occupied
2. Assume an occupancy rate of 70% per month. What quantity of total working cost would you
expect the hospital to experience?
Fixed cost 330,000
Variable costs: 385 beds x 30days x £7 80,850
Total expected costs £410,850
3. At an activity level of 6,800 units, Pen Corporation's total variable cost is £125,188 and its
total fixed cost is £164,152. Required for the activity level of 7,100 units, compute:
a) The total variable cost;
 The total fixed cost;
 The total cost;
 The average variable cost per unit;

 The average fixed cost per unit; and
 The average total cost per unit. Assume that this activity level is within the significant
range.
Variable cost = £125,188 / 6800 units =18.41 per unit
Activity level 7,100
Total costs:
Variable cost (a) [7,100 unit’s x £18.41 per unit]£130,711
Fixed cost (b) 164,152
Total (c) £294,863
Cost per unit:
Variable cost (d) £18.41
Fixed cost (e) [£164,152/7100 units] 23.12
Total (f) £41.53
Question 2
(i)
Schedule of cost of goods sold
Particulars Amount
opening stock of raw material -
raw material purchased 310000
(-) raw material closing stock 40000
raw material consumed 270000
Cleaning supplies, factory 6000
Direct labour costs 80000
Indirect labour costs 136000
Maintenance, factory 47000
Rental cost facilities 52000
utilities cost factory 36000
Depreciation, production equipment 75000
Insurance, factory 9000
(-) WIP closing stock 30000
cost of goods manufactured 680000
(20000 units in June quarter)
cost of goods manufactured unit 34000
Cost of goods sold account

Particulars Amount
opening stock of finished goods -
cost of goods manufactured 680000
total goods available for sale 680000
(-) closing stock 4000 units 136000
cost of goods sold 544000
(ii)
Income statement for the quarter ending
june30
Particulars Amount Amount
sales revenue (16000 units) 975000
(-) COGS
opening stock of finished goods -
cost of goods manufactured 680000
total goods available for sale 680000
(-) closing stock of 4000 units 136000
cost of goods sold 544000
gross profit 431000
(-) operating cost
selling and admin salaries 90000
depreciation office equipment 18000
rent selling and admin 13000
utilities selling and admin 4000
advertising 200000
travel sales 60000
total operating cost 385000
net profit 46000
Question 4
(a) Materials Price Variance
SP = £ 10.00 per kg
AP = £ 9.00 per kg
AQ = £ 63000 kg
Thus MPV= (SP – AP) * AQ
(10 – 9) * 63000

Therefore, MPV = £ 63000 F
(b) Materials usage variance
SQ = 1720 Units * 27 kg = 46575 kg
AQ = 63000 Kg
SP = £ 10.00 per kg
MUV = (SQ – AQ) * SP
(46575 – 63000) * 10
MUV = £ 16425 U
(c) Labour Rate Variance
SR= £ 5 per hour
AR= 432000 / 65000 = £ 9.6 per hour
AH = 45000 hours
LRV= (SR – AR) * AH
(5 – 9.6) * 45000
LRV= £ 207000 U
(d) Labour efficiency variance= (standard hour allowed – actual hours taken) * standard rate
per hour
LEV= [(1725 * 20) – 45000] * £73500 U
(e) Variable Overhead rate variance = (Actual hours * standard rate) – (Actual hours * actual
rate)
VORV= (31500 * £ 5.00) - £230000
= £155250 - £ 230000
VORV = £ 74750 U

(f) Variable Overhead efficiency variance= (Standard hour * standard rate) – ( Actual Hours
* standard rate)
VOEV = [(1725 * 15) * £ 5.00] – (31050 * £5.00)
VOEV = £ 25875 U
(2) Causes behind the variances:
(a) Material Usage:
 The change can be a direct result of the wasteful and indiscreet labourers.
 There may be undeveloped specialists who have squandered the materials.
 The devices and hardware are not in the appropriate condition which has prompted
the insufficient creation or there may be a few issues or imperfection in the machines
at the hour of creation.
 Repeating changes in the plan of the item and varieties in the material blend or there
can be the utilization of material blend separated from the standard blend.
(b) Labour efficiency:
 The organization is exploiting the dire properties of unrefined substances, so it will
take time to get the job done.
 Creation components and processes are subject to change.
 Disappointment due to lack of motivation for work.
 The workplace is not very good, and there is stress and conflict between jobs.
Likewise, delays in giving guidelines can lead to timing mishaps that can affect
productivity (da Silva, Fernandez-Feijoo and Gago, 2020).
(3) Description on the variance to be examined in relation to the work performance:
Variance analysis It can be described as a technique for analyzing the difference between an
estimated spending plan and actual execution. Quantitative methods help business associations
better control the organization. The inspection helps companies investigate what is responsible

for the deviation. The reason for the distinction depends on economic conditions, job changes,
the above differences, financial planning guidelines, etc.
The following shall be examined:
 Variable overhead spending: It tends to be done by combining the standard above the unit
cost with the true fee earned and then replicating that with the full result.
 Purchase price variance: This can be estimated by considering the installments paid for
the true cost of the natural substance and deducting standard fees.
 Labour rate variance: It focuses on wages paid to work, and hints at the difference
between real expenses incurred for direct work and costs mentioned in the spending plan.
 Material Yield variance: It is characterized by delimitation between the real and standard
results of the creation cycle (Kim, 2020).
Fix the above spending fluctuations: If something important is ominous, it means that the
appropriate above costs are more than planned. If positive, they are not exactly planned.
Question 5
(a)
Statement of Relevant Cost
Make Buy
Direct Material $210,000 -
Direct Labour $150,000 -
Variable Manufacturing Overhead $45,000 -
Fixed Manufacturing Overhead (Traceable) $30,000 -
(90,000 × 1/3)
Purchase Cost (15,000 units @$35 per unit) - $525,000
Total Relevant Cost $435,000 $525,000
Relevant cost: It is likely to be understood as a term associated with the board of directors
that accounts for avoidable costs incurred in making specific business-related choices. Ideas

related to associated costs are also valuable for dealing with unwanted and redundant data that
can clutter and clutter the selection process. An important fee is the fee associated with a specific
management decision and will change in the future as a result of that decision. The possibility of
a key fee is very useful to eliminate too much information from a clearly strong collaboration.
Furthermore, by managing the cost of bad in decision-making, the board doesn't zero in on
information that could erroneously influence its choices. Significant charges (now aka
fluctuating charges) imply the financial cost of business choices. Charges are certainly not a
uniform measure and will oscillate based on clear decisions. Huge costs are an important
financial metric because it helps associations limit minor or immaterial costs that disrupt
dynamic connections here and there. If something doesn't financially influence your decision, the
fee is meaningless. If a decision is likely to affect compensation, things matter, and the cost of
that decision is worth considering (Liu, 2019).
This idea works well for conference room accounting. It is not used in this case because
the spending selection is not really related to the planning reported by the spending plan.
The motor should be made instead of bought, and the proposal should not be acknowledged as it
would have resulted in a cost increase of $90,000 ($525,000 - $435,000).
(b)
Statement of Relevant Cost
Make Buy
Cost of making $435,000 -
Cost of buying - $525,000
Opportunity Cost - segment margin for the new product $150,000 -
Total Relevant Cost $585,000 $525,000
The engines are suggested to be acquired instead of being produced and the offer must be
acknowledged as it would lead toward saving cost by $60,000($5,85,000 - $5,25,000).
(c)
Incremental costs: They are extra costs incurred to make something extra, it's just looking
at those costs that should change as part of a given condition, too much is considered

unnecessary. This is likely to be understood as an additional expense that the company sees as a
result of changes to the evaluation system related to creation, hardware and innovation upgrades,
or the introduction of reinforcement programs for referenced models. It can also be understood
as a benefit that helps to identify gradual changes in costs under various conditions. For example,
the cost of stabilization on behalf of the purpose would include the cost of additional advantages
given to the individual due to the purpose. Or the steady cost of shutting down a production line,
which includes costs related to local staff, providing unwelcome hardware, and switching offices
entirely for several different purposes (Martin, 2020).
Opportunity cost: When a respective person gives comments regarding “opportunity cost”
of an item, they have been discussing regarding the valuation of the product’s next highest
valued substitute utilisation. If someone is able to devote a bunch of money for attending movies
for instance, you are not able to expend additional time in reading textbooks at home or use the
funds towards something else. If reading such books is next best option considered after
watching a movie is the price of ticket and furthers the fun which would lose out on by not going
through the textbooks. It would present the possible benefits which a respective person, business
misses or investors on when selecting one alternative over other. Because opportunity costs are
unwanted through definition, they can be simply ignored. It can be defined as an economic
terminology which states the value of what you need to give up in related to choose something
else (Modell, 2022).
CONCLUSION
From the above report, it can be concluded that administrative bookkeeping plays an
important role in handling the different functions within a business association. It is critical for
associations to manage their records to understand where they need to contribute and where they
don't. Administrative bookkeeping is happy to incur costs for business purposes. Bookkeeping
plays an important role in promoting the growth of business associations. This is considered the
process of deciphering various viewpoints to deal with the monetary part of business activities.
The chamber of commerce must really manage its own expenses in order to be strong and
effective, and to have business development. There are various costs that need to be controlled in
order to benefit from business efforts.

REFERENCES
Books and Journals
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Cools, M. and Rossing, J.C.P., 2021. International Transfer Pricing: MNE Dependency on
Knowledge of External Tax Consultants. Journal of Management Accounting
Research, 33(1), pp.33-51.
da Silva, A.F., Fernandez-Feijoo, B. and Gago, S., 2020. Accounting information tools in
managerial clinical service decision-making processes: Evidence from Portuguese
public hospitals. International Public Management Journal, 23(4), pp.535-563.
Kim, J., 2020. When Organizational Performance Matters for Personnel Decisions: Executives’
Career Patterns in a Conglomerate. Management Accounting Research, 49, p.100695.
Liu, M., 2019. Accruals, managerial operating decisions, and firm growth: Implications for tests
of earnings management. Journal of Management Accounting Research, 31(1), pp.153-
193.
Martin, M.A., 2020. An evolutionary approach to management control systems research: A
prescription for future research. Accounting, Organizations and Society, 86, p.101186.
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commissioning in horticultural enterprises. Research Journal of Pharmaceutical,
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Accounting, 6 (7), 1403–1410.
Shawver, T.J. and Miller, W.F., 2019. Giving voice to values in accounting. New York:
Routledge.
Svirko, S.V. and Trostenyuk, T.M., 2019. Funktsiyi, zavdannya, elementy ta pryntsypy
upravlinskoho obliku v derzhavnykh zakladakh vyshchoyi osvity [Functions, tasks,
elements and principles of management accounting in public institutions of higher
education]. Ekonomika ta derzhava [Economy and state], 2, pp.41-46.