Management of Accounting Fundamental

This document provides study material and solved assignments for Management of Accounting Fundamental. It includes analysis for number of clocks, uncertainties about CVP calculations, bias between revenues and cost estimates, uncertainties affecting break even analysis, and more.

MANAGEMENT OF
ACCOUNTING
FUNDAMENTAL

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................1
a) Analysis for number of clocks.................................................................................................1
b) Identify the uncertainties about the CVP calculations ............................................................2
c) Bias between revenues and cost estimates ..............................................................................4
d) Uncertainties affecting break even analysis ...........................................................................4
QUESTION 3...................................................................................................................................4
1. Calculate the missing amount .................................................................................................4
2. July Production report for coating department .......................................................................5

QUESTION 1
a) Analysis for number of clocks
I)
List of all costs
Plan for 1st clock 300
Equipment 3000
Materials 30
Rent 2500
Utility bills 500
Salary 3000
Sales man Salary 1000
Sales commission per clock 7
ii)
Contribution margin per unit
Sales 225
Materials 30
Contribution per unit 195
Contribution margin ratio 86.67%
iii)
Total cost function
Clock sales per month* 200
Cost Function
C(x) = FC + V(x)
C(x) = 7000+200(30+7)
Cost to produce 200 14400
Break even
Fixed cost per month 7000
FC per year 84000
Selling price 225
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Variable cost 30
Break even in units FC/ SP-VC
84000/(225-30)
In units 431
Break even in revenues
FC per year 84000
Contribution margin 86.00%
Break even in revenues
FC/ Contribution
margin
84000/86%
in revenues 97674.42
iv
Calculating number of clocks
Unit contribution 195
Desired profit volume
FC + Desired profit 7000+4000
11000
Unit contribution 195
Desired profit volume 11000/195
56.41
To earn $4000 it would require to
sell 56 clocks per month
b) Identify the uncertainties about the CVP calculations
i) Reasons why Joe cannot estimate actual costs
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There are various issues that might be faced when deciding about the actual costs that can
cause deviations from the estimates.
Cost of materials – Cost of wood could be higher than the estimates made by the Joe as prices of
woods keeps on changing. There could be also other materials required for making of clocks that
have not been included in estimates
Rent – The rent may be taken as for normal use where the rent is higher where the place is to be
used for commercial purposes. Therefore has to evaluate the rent prices prevailing in location.
Utilities – The expenses for utilities could not be made accurately as the rates will be increasing
with the usage where minimum will be required to be paid even at zero production.
Salary – The salary for Joe may be required higher as all the functions will be performed alone.
Also the salary might not be enough to meet monthly expenses due to which it could increase
salary.
Sales salary – It could be availed at less price than estimates as sales person are available at
lower rate as commission is also paid.
ii) Possible costs not identified
Joe has identified all the main costs but there are still many costs that are not yet identified such
as
 Labour cost as with the increase in production it could not be performed all alone
 Variable overheads are not considered
 Administration cost
 Stationary expenses
 Advertising cost
 Marketing costs
 Depreciation
iii) Joe not able to estimate sales
Joe is not able to estimated exactly about the sales as the clocks are carved clocks are not
necessity product. This makes it difficult to estimate the sales. The demand and perceptions of
the customers might change. If promoted adequately it could also receive higher demand for
clocks. Sale over online platforms could increase demand. The increase in competition could
also decrease the demand. Entrance of new and better clocks in market. Likewise there are many
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uncertainties and also Joe is new in business due to which might not be able to draw accurate
estimated and conclusions.
c) Bias between revenues and cost estimates
Joe could be said bias between the revenues and the estimates as the cost of clocks are
proposed to be kept at $225 where the variable cost is only $30. This shows that the prices kept
of the clock are very high against the cost. On the other if fixed cost are considered they in total
amounts to $7000 only. Total profit left with the Joe after meeting all the expenses is much
higher than the estimates of $4000. If it could sell the proposed number of clocks than the prices
of clocks is very high as against the clock. It reflects a monopoly market where seller has power
to sell the product at premium prices.
d) Uncertainties affecting break even analysis
The uncertainties and bias will affect the break even analysis results as the variable cost
will be changed units and contribution will change. Every uncertainty will be affecting one of the
element of break even analysis and affecting the results both in units and revenues.
QUESTION 3
1. Calculate the missing amount
Unit data
Work in process, 1 July (in units) 21000
Units started during July 99000
Total units to account for 120000
Units completed and transferred out during
July 70000
Work in process, 31 July (in units) 50000
Total equivalent units: direct material 50000
Total equivalent units: conversion 20000
New equivalent units accomplished in July:
direct material 80000
New equivalent units accomplished in July:
conversion 32000
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Cost data
Work in process, 1 July: direct material 608000
Work in process, 1 July: conversion 272000.0
Costs incurred during July: direct material 1224000
Costs incurred during July: conversion 1762800
Work in process, 1 July: total cost 880000
Total costs incurred during July 2986800
Total costs to account for 3866800
Cost per equivalent unit: direct material 15.27
Cost per equivalent unit: conversion 22.61
Total cost per equivalent unit 37.88
Costs of good completed and transferred out
during July 2651600
Cost remaining in ending work in process
inventory:
Direct material 763500
Conversion 452200
Total cost of 31 July work in process 1215700
2. July Production report for coating department
Production Cost Report
40%
Units accounted for Materials
Conversion
units Total
Completed and transferred out 70000 70000 70000
Ending work in progress 50000 20000 50000
Total units to account for 120000 90000 120000
Cost accounted for Materials Conversion Total
30.00%
Beg WIP 608000 272000 880000
Incurred during period 1224000 1762800 2986800
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Total cost to account for 1832000 2034800 3866800
Equivalent units 120000 90000
Cost per equivalent units 15.27 22.61 37.88
Materials Conversion Total
Value of ending WIP 763500 452200 1215700
Completed and transferred out 1068500 1582600 2651600
Total costs 31 July 1832000 2034800 3866800
Working Notes
Transferred out costs
(70000*15.27)+(70
000*22.61) 2651600
Ending WIP :materials (50000*15.27) 763500
Ending WIP :conversion (20000*22.61) 452200
Ending WIP :Total 1215700
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