Management Accounting: Cost Allocation, Overhead Variance, Transfer Pricing

This document covers topics in management accounting including cost allocation, overhead variance, and transfer pricing. It provides explanations, calculations, and examples for each topic. The document also includes references for further reading.

Management
accounting

Contents
MAIN BODY...................................................................................................................................1
QUESTION 1...............................................................................................................................1
QUESTION 2...............................................................................................................................2
QUESTION 2...............................................................................................................................4
QUESTION 4...............................................................................................................................4
QUESTION 5...............................................................................................................................5
QUESTION 6...............................................................................................................................6
Selling price of A after split cost: ...................................................................................................6
REFERENCES................................................................................................................................7

MAIN BODY
QUESTION 1
Answer 1
(a)
Variable Cost: HAC-LAC/HAUs-LAUSs
Variable cost 80
Fixed cost HAC-(Variable cost*HAUs)
FC 2000
Y=a+bx
a= fixed cost
b= variable cost per unit
x= Hours of Operation
Week Hours of
Operation
Equation Total cost Fixed cost Variable cost
1 55 Y=2000+(80*
55)
6400 2000 4400
2 60 Y=2000+(80*
60)
6800 2000 4800
3 64 Y=2000+(80*
64)
7120 2000 5120
4 70 Y=2000+(80*
70)
7600 2000 5600
5 45 Y=2000+(80*
45)
5600 2000 3600
6 40 Y=2000+(80* 5200 2000 3200

Week Hours of
Operation
Equation Total cost Fixed cost Variable cost
40)
(b)
Y=a+bx
a= 2000
b= 80
x= 49
Y= 2000+(80*49)
5920
(c) (i) total variable cost--> decrease
(ii) Variable cost per unit of activity--> no change
A decrease in level of activity will lead to a decrease of total variable cost (VC per
unit*activity). But the variable cost per unit of activity will still be the same 80$/h.
QUESTION 2
Answer 2
(a) Predetermined overhead rate = MOH/MH
92000/20000 = 46
Therefore

Predetermined overhead rate = 46 per machine hours.
(b)
Particulars Machine hours Overhead rate Overhead applied
a b c=a*b
K1 1,000 46 46,000
K2 600 46 27,600
K3 2,000 46 92,000
Total manufacturing overhead applied. 165,600
(c)
Particulars K1 K3 Total
Reg. Balance 78,000 0 78,000
Direct Material 0 45,000 45,000
Direct Labour 30,000 65,000 95,000
Overhead applied 46,000 92,000 138,000
Cost of Jobs Completed 356,000
(d)
Particulars K2
Direct material 50500
Direct Labour 23,000
Overhead Applied 27,600
Cost of Jobs Still Process 101100
(e)
The term under-applied overhead applies to a condition that happens when overhead costs
amount to more than what a corporation currently spends to manage its activities. Under applied
overhead is typically listed on the balance sheet of a company as a prepaid liability which is
balanced by entering a deduction in the portion on the cost of products sales (COGS) by the end
of the year. The direct expense associated with the manufacture of products produced by a

corporation is the cost of the goods sold. An undesirable difference is considered the quantity of
under applied overhead.
To define the costs associated with operating a business, the word overhead is used. More
precisely, they are costs paid by an organization for its everyday tasks that are not necessarily
related to the production of a good or service. For a variety of factors, like budgeting and how
much to charge their clients to realize a profit, overhead are critical for firms.
In this case, overhead may be under-applied when actual activity level is less than the
budgeted one. The reason may be because most of manufacturing overhead is a fixed amount and
hence not necessarily move with the cost driver used.
QUESTION 2
Answer 2
Activity Cost Driver (activity) Overhead Cost Estimated Units rate
order processing Per order 75000 10000 7.5
machine processing Per machine hour 280000 80 3500
product inspection Per inspection hour 45000 34000 1.32
Activity Chevalier Dame
order processing 6000 4000
machine processing 30 50
product inspection 18000 16000
Activity Chevalier Dame
order processing 45000 30000
machine processing 105000 175000
product inspection 23823.5 21176.5
173823.5 226176.5
QUESTION 4
Answer 4
(a)
direct material price variance: (SP-AP)AQ
-0.13
Direct material quantity variance: (AQ*SP)-(SQ*SP)

Actual quantity: 4.2 per KG
Variance=(4.2*0.78)-(4*0.78)
0.16
Labor rate variance= AH*AR-AH*SR
-3.09
Labor efficiency variance= AH*SR-SH*SR
0.16
(b)
Company's Material Price variance is $6,300 unfavourable.
It means that company's actual purchase price per unit is greater than company's budgeted
material price per unit.
Company's Material Quantity variance is $14,100 unfavourable.
It means that company is using more input per unit ot output fro production than budgeted
input per unit of output.
QUESTION 5
Answer 5
(a)
Transfer price is defining as value which is calculated when value of particular goods &
services is attached with each other during the time of transfer of prices of related products.
Value of price is measured on the basis of identifying the value of price and with it essential
discounts, and other charges of goods. In this case value of price 950.
(b)
(i)

If there is spare capacity available then by general transfer pricing rule the transfer price
for half finished frames will be 900.
(ii)
In this case that is mentioned in the question the transfer price for half finished frames
will be 1050.
(c)
The two non financial performance measures for a hotel industry will be firstly its service
that is if it is giving quality services to its customers or not. Secondly, it will be the customer
review and experience that the share after using the services of the hotel.
QUESTION 6
Answer 6
(a)
Joint
products
Number
of unit
produce
Market
value per
unit
Market
value
Cost after
split of
Hypotheti
cal
market
value
Allocation
of joint
cost
Total
productio
n cost
Product A 2000 10 20000 30000 15 30000 50000
Product B 4000 20 80000 80000 30 60000 140000
1900000
Selling price of A after split cost:
2000*40 = 80000, value of profit = 30000
4000* 50 = 200000, value of profit of product B = 60000
(b)
The product that should be processed further is the Product A since it has low production cost
and can earn good amount of profits in the market simultaneously.

(c)
If the company does as the question mentioned then the profit of the company will be
increase by 90000.

REFERENCES
Books and Journal
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Palgrave Macmillan, Singapore.
Pärl, Ü., 2019. Models for: the relational constructivist Approach to management Accounting
and control (mAc) research. Acta Baltica Historiae et Philosophiae scientiarum. 7(1).
pp.121-134.
Crispim, G., Alberton, L. and Ferreira, C. D., 2019. Opportunity of robust research in
Accounting: a literary analysis on performance indicators in the management of
municipal governments. Contabilidad y Negocios: Revista del Departamento
Académico de Ciencias Administrativas. 14(28). pp.126-142.
Holopainen, R. M., Niskanen, M. and Rissanen, S., 2019. Management Accounting and
Profitability in Private Healthcare SMEs. International Journal of Public and Private
Perspectives on Healthcare, Culture, and the Environment (IJPPPHCE). 3(1). pp.28-
44.
Huseno, T., 2018. The environmental management accounting (EMA) perspective calculation of
environmental management environment in Riau. Jurnal of Applied Management.
16(4). pp.714-721.
Jakobsen, M., Mitchell, F., Nørreklit, H. and Trenca, M., 2019. Educating management
accountants as business partners. Qualitative Research in Accounting & Management.