Management Accounting: Income Statement, Cost Computation, Activity-Based Costing

This article explains the income statement, cost computation, and activity-based costing in management accounting. It includes solved assignments, essays, and dissertations. The article covers topics such as sales computation, cost of goods sold computation, selling and administrative expenses computation, activity rate computation, and activity-based costing product margin. It also discusses the importance of each friend's role in running the business and the profitability of selling balloons. The article cites references from various authors and is relevant for students studying management accounting.

MANAGEMENT ACCOUNTING
STUDENT ID:
[Pick the date]

PART 1
Question 1
The relevant computations for the income statement are as highlighted below.
Sales Computation
Unit selling price of barbecue = $ 2
Unit selling price of balloon = $ 1
Volume sales of barbecue = 2000
Volume sale of balloon = 1000
Total sales = 2000*2 + 1000*1 = $ 5,000
Cost of goods sold computation
Unit cost of barbecue = $ 0.2
Unit cost of balloon = $ 0.05
Volume sales of barbecue = 2000
Volume sale of balloon = 1000
Direct material cost = 0.2*2000 + 0.05*1000 = $ 450
Direct labour cost = 400*4 = $ 1,600
Manufacturing overhead has been borne by the friends in the form of leasing a BBQ and a
balloon pump.
Cost of leasing a BBQ = $ 200
Cost of balloon pump = $ 50
Total manufacturing overhead = 200 + 50 = $ 250

Selling and Administrative Expenses Computation
Leasing a gazebo = $50
Permit for standing outside of the shopping centre = $ 250
Based on the above computations, the income statement is as indicated below (Drury, 2014).
PART 2
Question 2.1
The requisite table is indicated below.
From the above, it is apparent that the total cost for operating the BBQ was $ 320. Similarly,
cost for inflating balloons was $ 480.
The above computation has been obtained by considering the following table.

It is known that the total labour cost for each of the friend is $ 400. For instance consider
John, 70% of time was spent in operating the BBQ, hence corresponding cost = 0.7*400 = $
280. Similarly, the costs for the other activities and the other three friends has been computed
and summarised in the table highlighting the labour cost per activity pool and also the total
labour cost (Emmauel and Otley, 2016).
Question 2.2
The requisite activity rate computation is highlighted as follows.
Activity Rate = Total costs/Total Activity
Question 2.3
It is apparent from the above computation of activity rate that the most expensive of the four
activities is inflating balloons which costs $ 0.48 per balloon. The highest activity cost could
be attributed to the given activity since a high amount of time and energy is required in this
task. This is in sharp contrast with the other tasks where the amount of labour and time would
be comparatively less. Consider for example the time and energy to act as a cashier or greet a
customer. The time and energy required in these tasks would be significantly lesser. As a
result, it does not come as any surprise that the cost of inflating balloon is the highest.

Question 2.4
The relevant computation is as shown below.
In the above computations, the various costs are assigned to the two products based on the
computations performed in the above parts. For instance, there are some costs that are
associated with only one of the products such as operating the BBQ and also inflation
balloons and hence these are associated with particular products. However, with regards to
common costs such as cashier and greeting customer, the cost allocation across the two
products is in accordance with the activity level. For instance, with regards to barbeque, the
number of units sold is 2000, hence the cost of greeting the customers would be $0.13* 2000.
The corresponding cost in case of balloons would be $ 0.13*1000 since the number of units
of balloons sold is 1000. Similarly, the cost of cashier has been divided between the two
products (Bhimani et. al., 2016).
PART 3
Question 3.1
The activity-based costing product margin for barbeque is indicated as follows.

In the above case, the cost related to leasing a BBQ has been entirely allocated to the
barbeque. Further, the administrative and selling expenses are equally allocated across the
two products i.e. barbeque and balloon.
Question 3.2
The activity-based costing product margin for balloon is indicated as follows.
In the above case, the cost related to the balloon pump is entirely allocated to the balloon
product. Further, the administrative and selling expenses are equally allocated across the two
products i.e. barbeque and balloon.

Part 4
Question 4.1
Paul is not correct in his statement about his friends as it would not be correct to conclude
that most of the work has been done by John and himself. While a major role in operating the
barbeque and inflating balloons has been done by John and Paul but it does not imply that the
work done by the two other friends i.e. Ringo and George not important. It is imperative that
in order to run the given business, not only making the product is important but also customer
service and taking cash both are also critical. In the absence of these key factors, the sales and
efficiency would be adversely impacted (Heisinger, 2014). Also, it is noteworthy that profits
have been negligible in case of balloons sale and hence Paul should not claim about lesser
contribution from others. Paul devoted majority of his time to inflating balloons but the
balloon business did not make any profit. On the other hand, Ringo and George on account of
their role as cashier and customer greeting have contributed to the sale of barbeque which has
made significant profits. Hence, it would be incorrect on part of Paul to undermine the efforts
put by any of his friends as the various activities are complementary and do not function in
isolation.
Question 4.2
Ringo is correct about selling of balloons not being a good ides which is apparent from the
output in Q3.2 where it is highlighted that the total amount of profit made on balloons is just
$ 3. This is in sharp contrast with the corresponding profit made on barbeque which is about
$ 2,400. It would have been better if the friends would have considered some other product
which could have lower associated costs, higher demand and higher margins. However a
positive aspect of choosing balloons as the product is that atleast it is able to cover all the
costs including the fixed costs and no loss is being made. It would have been much worse if
the friends would have lost money on selling balloons. Thus, it would be correct to concur
that while selling balloons was not a good idea, it sure was not the worst idea as in the worst
case the product would have made losses which would have reduced the overall profits made
by the friends (Petty et. al., 2015).

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
Emmauel, R.C. and Otley, T.D. (2015) Accounting for Management Control. 8th ed. London:
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