Management Accounting: Tools and Techniques for Decision Making

This report covers the different tools and techniques used in management accounting for decision making. It includes the calculation of variable costs, fixed operating costs, income statement evaluation, and variance analysis methods. The report also discusses opportunity cost and incremental costs. Examples and evaluations are provided throughout the report.

MANAGEMENT
ACCOUNTING

Contents
INTRODUCTION.................................................................................................................................3
Main Body.............................................................................................................................................3
QUESTION 1....................................................................................................................................3
QUESTION 3....................................................................................................................................4
QUESTION 4....................................................................................................................................6
QUESTION 5....................................................................................................................................8
CONCLUSION...................................................................................................................................11
References...........................................................................................................................................12

INTRODUCTION
Management accounting is the procedure of identifying, measuring, analyzing and
interpreting the financial statements. It helps the managers of the business enterprise to make
good financial strategies and manage the day – to- day business operations of the company. It
helps the owners to take long – term as well as short – term decisions. The upcoming report
contains the different tools and techniques that are used by the managers to make appropriate
decisions. In addition to this, it consists the calculation of variable costs and fixed operating
cost using the high – low method. Moreover, it holds the evaluation on the income statement
and production per price by the absorption and marginal costing method. Furthermore, it also
encompasses on the different variance analysis method and explanation on opportunity cost,
incremental cost. Moreover, the report also comprises of the purchase and buy decision based
on the computation.
Main Body
QUESTION 1
1.) Using High -Low Method, the calculations for variable cost per unit and total fixed
costs are as following:
High (550 *30
*80%)
13200 13200 * 32 422400
Low (550 * 30 *
60%)
9900 9900 * 32 316800
Difference 3300 105600
(a) Variable cost per occupied bed on the daily basis=
105600 / 3300= £ 32
(b) Total fixed operating costs per month =
399300 - (9900*32)
399300 - 316800
= £ 82500

2.) At an occupancy rate of 70% per month, the total operating costs that an hospital will
have to incur is:
Variable cost (550 * 30 * 70 % *32) = 369600
Fixed cost= 82500
Total Operating cost: 369600+ 82500
= £ 452100
3.) Evaluations:
Variable cost= £ 125188 / 6800 units= £ 18.41 per unit
At an activity level of 7100
(a) Total variable costs= 7100 units * £18.41 per unit= £ 130711
(b) Total fixed cost = Given: £ 164152
(c) Total cost= £130711 + £ 164152= £ 294863
(d) Average Variable costs per unit= Derived from above= £ 18.41
(e) Average Fixed cost per unit= (£ 164152/ 7100 units) = £ 23.12
(f) Total average cost= (£ 18.41 + £ 23.12) = £ 41.53
QUESTION 3
(a) Using absorption method:
 No. of units produced = no. of units sold+ Increase in ending units = 126000
units.
Fixed production overhead per unit= total production overhead costs / no. of
units produced = 1452000 / 126000 units = £ 11.52 per unit.
So, production cost per unit = Direct materials + direct labour + Variable
production overhead + Fixed production Overhead
Production cost per unit = 216 + 108 + 54 + 11.52 = £ 389.52 per unit.
 Income statement
Particulars Amount
Sales (108000 units * 654) £70632000
Less: Manufacturing costs:
Direct Materials (108000 units * 23328000

216)
Direct Labour (108000 * 108) 11664000
Production Overhead (108000 units*
(54 +11.52381)
7076571
Manufacturing margin £ 28563429
Less: Selling and administration
expenses
Variable selling and distribution
overhead (126000 units * 27)
3402000
Fixed selling and distribution 360000
Fixed administration overhead 342000
Operating Income £ 24459429
 Using Marginal Costing:
Production price per unit = Direct materials + direct labour + Variable
production overhead
Production cost per unit = 216 + 108 + 54 = £ 378
 Income statement using marginal costing
Particulars Amount
Sales (108000 units * 654) £70632000
Less: Manufacturing costs:
Direct Materials (108000 units *
216)
23328000
Direct Labour (108000 * 108) 11664000
Production Overhead (108000 units*
(54 +11.52381)
7076571
Manufacturing margin £ 28563429

Less: Selling and administration
expenses
Variable selling and distribution
overhead (126000 units * 27)
3402000
Operating Income £ 43902000
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 because of the inefficient and careless workers
 There might be untrained workers who have wasted the materials.
 The tools and equipment are not in the proper condition which has led to the
ineffective production or there might be some issues or defect in the machines at
the time of production.
 Recurring changes in the design of the product and variations in the material mix
or there can be the use of material mix apart from the standard mix.
(b) Labour efficiency:
 The company is using bad quality of raw materials, so in order to complete the
work lot of time is required.
 There might be changes in the production mechanism and technique.
 Dissatisfaction caused because of the lack of incentives provided to the labour.
 The working environment is not good and there is stress and conflicts among the
labour. Also, the delay in providing the instructions can lead to the time loss
which will affect the labour efficiency.
(3) Description on the variance to be examined in relation to the work performance:
Variance analysis can be defined as the procedure of examining the differences between the
estimated budgets and actual performance. It is a quantitative approach that aids the business
organization to have better control on the company. This analysis helps the firm to investigate
the reasons which are responsible for the deviations. The causes for the differences rely on

the components like market conditions, labour variances, overhead variances, budget
standards. The following shall be examined:
 Variable Overhead spending: It can be done by excluding the standard overhead cost
per unit with the actual cost obtained and then multiplying it with the total quantity of
output.
 Purchase price variance: This can be measured by considering the payment made for
actual price of raw material and subtracting the standard cost.
 Labour rate variance: It centres on the wages that are paid to the labour and is referred
to the difference actual cost incurred for the direct labour and cost that was mentioned
in the budget.
 Material Yield variance: It is defined as the distinction between the actual and
standard output of the production process.
 Fixed overhead spending variance: If the difference is unfavourable then it means that
the fixed overhead expenses are more than the budgeted one. If favourable, then they
are less than the budgeted one.
QUESTION 5
(a) The company shall not go for the outside suppliers and should make the carburettors
itself. The following calculation justifies this:
Cost per Unit (Cost of 15,000
units) MAKE
(Cost of 15,000
units) BUY
Outside purchase
price
£ 35 £ 525000
Direct Materials £ 14 £ 210000
Direct Labour £ 10 £ 150000
Variable
manufacturing
overhead
£ 3 £ 45000
Fixed
manufacturing
£ 6 £ 30000

overhead, traceable
Fixed
manufacturing
overhead, allocated
£ 9
Total Cost £ 42 £ 435000 £ 525000
It can be interpreted from the above table that if the company buys and produce the
carburettors the price is same in both the cases, so it shall make them.
(b)
PRODUCE PURCHASE
Total relevant costs
(15,000 units)
£ 585000 £ 525000
Cost of making £ 435000
Cost of buying £ 525000
Opportunity cost - new
product line segment
margin
£ 150000
Total costs £ 585000 £ 525000
Yes, the Cosi Ltd. should accept to purchase the carburettors.
(c) Definition and explanation on opportunity cost and incremental costs
Opportunity Cost: It can be defined as the amount of capacity gain an investor sacrifice
on when they chose one investment over another. It is the term which refers to the
advantage that a person could have gained, but failed to receive to take another approach.
It is the profit or loss when course of action is selected over another course of action. For
Instance: A company has $2,000,000 and decides to make investment on the product line
which will give a rate of return at 4%. But then the company selects to spend its money
on another investment which will deliver the return of 6.5 %. Here the difference of 2.5 %
between the two investment options is the bygone opportunity. When the business

organization makes any decision then it is not obvious that this concept will always work,
and therefore it becomes tough for a company to make comparison between the two
available choices. Opportunity cost provides with the best results only when the unit of
measure is common like money invested or time used.
Incremental Cost: It refers to the total cost which is obtained because of an additional unit
of a good being produced. This kind of cost is determined by interpreting the additional
expenses that are indulged in the process of production, like raw material etc. By
understanding this concept, the business organisations can increase the efficiency and
profitability of the production. If the incremental cost is more than the incremental
revenue than it may result in the lose of money. This costs aways consists of the variable
costs, because it is the cost which variates with the volume of production. It comprises of
raw material, additional electricity units required to power the tool, direct labour and
wages which are directly associated with the production, shipping and packaging costs. It
absolutely relies on the production volume. Fixed cost like rent are not involves in the
cost of this kind. For example: A business organization is planning to increase the
production of their goods, so it shall understand the how much incremental cost will be
incurred. The current production level and added cost of additional units are:
 20000 units has a total cost of $ 600000 that means $ 30 per unit
 22000 units has a total cost of $ 605000 which is $27.5
Thus, it is seen that for producing the extra 2000 units is $5000. Hence, the incremental
cost per unit is $2.5 (5000 / 2000). The reason behind the low incremental cost is because
the factors like rent, fixed cost have not change and are constant.

CONCLUSION
From the above report it can be concluded that the management accounting provides
with the different mechanisms to make appropriate decisions. Labour efficiency and material
usage are affected by the disruptions in machinery, inefficient workforce etc are the causes
behind the variations. It also gives the clear representation that opportunity cost is the amount
sacrificed to choose one product over another and incremental analysis does not involve the
fixed cost factor.

References
Books & Journals
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research. Journal of Management Accounting Research. 30(2). pp.59-79.
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Johnstone, L., 2018. Theorising and modelling social control in environmental management
accounting research. Social and Environmental Accountability Journal. 38(1). pp.30-
48.
Mariina, E. and Tjahjadi, B., 2020. Strategic management accounting and university performance:
a critical review. Academy of Strategic Management Journal. 19(2). pp.1-5.
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