1 MANAGERIAL ACCOUNTING Table of Contents Question No 1..................................................................................................................................3 Requirement 1a............................................................................................................................3 Requirement 1b............................................................................................................................4 Requirement 1c............................................................................................................................6 Question No 2..................................................................................................................................7 Requirement 2a............................................................................................................................7 Requirement 2a............................................................................................................................8 Requirement 2c............................................................................................................................9 Requirement 2d............................................................................................................................9 Requirement 2e..........................................................................................................................10 Question 3:.....................................................................................................................................12 Part A:........................................................................................................................................12 Requirement a:.......................................................................................................................13 Requirement b:.......................................................................................................................14 Part B:........................................................................................................................................15 Question 4:.....................................................................................................................................15 Requirement a:...........................................................................................................................15 Requirement b:...........................................................................................................................16 Question 5:.....................................................................................................................................19
2 MANAGERIAL ACCOUNTING Requirement a:...........................................................................................................................19 Part (i):...................................................................................................................................19 Part (ii):..................................................................................................................................19 Requirement b:...........................................................................................................................20 Requirement c:...........................................................................................................................21 References:....................................................................................................................................23
3 MANAGERIAL ACCOUNTING Question No 1 Requirement 1a The computation which is shown in this part is related to computation of total costs of the business considering different methods for allocation of overheads of the business. Overhead costs are related to the operations of the business are indirect expenses in nature. Overhead costs of the business are of two types variable overheads and fixed overheads. The computation considers the business of Megah Company which is engaged in the business of producing televisions and the company basically produces two different models for televisions which are basic model and Premium model. The computation considers different machine hours for allocation of overheads in one of the methods. ParticularsDetails Basic Model Premium Model General Cost Prime CostA $ 40.00 $ 80.00 Machine hoursB25002500 Number of OutputC2000010000 Machine hour rate(B/C) $ 0.13 $ 0.25 Total Overhead costD332000 Total machine hourE5000 Overhead per machine hour(D/E)66.4 Overhead cost for each product (D/E)*(B/ C) $ 8.30 $ 16.60 Total Cost48.396.6 Formula View
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4 MANAGERIAL ACCOUNTING It can be seen from the above calculation that company cost for its product are different. The total cost of the product has been determined by adding prime cost and overhead cost. The overhead cost is calculated by total productive machine hours.The overhead costs which is computed has an important part in computing the totals costs of the business and also deciding how much profits can be generated by the business. Requirement 1b The calculation of unit cost of each model with the help of four activity driver ActivityCost Driver Estimated Overhead Cost Estimated Cost Driver Activity Predetermined Cost Overhead Purchasing Material Purchase Requisitions87000200043.5 Maintaining Equipment Maintaince Hour220000800027.5 Setting up EquipmentSet up time112000402800 Below we can see the total cost of the product under activity based costing ParticularDetails Basic Model Premium ModelGeneral Prime CostA $ 40.00 $ 80.00 Number of RequisitionsB5001500 Maintaince HourC20006000 Set up timeD832 Overhead on MaintanceE27.5 Overhead on PurchaseF43.5
5 MANAGERIAL ACCOUNTING Overhead on Set upG2800 overhead chareged for all productH $ 99,150.00 $ 3,19,850.00 Number of unit producedI2000010000 Overhead per product(H/I)4.957531.985 Total cost $ 44.96 $ 111.99 Formula View Activity based costing refers to the costing which allocate the overhead as per the activity perform. It sees the relation of the overhead, the cost and the manufacturing and through the relationship it allocates the overhead cost. Activity based costing is considered to be one of the most useful techniques for the purpose of identifying and accurately allocating the costs of the business to the products. The costing technique is used in major businesses for computing anf allocating costs of the business. As there some expenses which are of high costly nature so this help the organization about the level of increasing the cost of the product. As there are many costs which cannot be allocated through cost accounting method so to remove the barrier these costs came into the picture.
6 MANAGERIAL ACCOUNTING Requirement 1c Costing is a process which help the company to evaluate the cost of its business and help them to get an overview of the market. Each company follow the different method of costing. The process of computing the costs of the business is considered to be very important as they have direct impact on the revenue and profits which is generated by the business. In addition to this, the costs of the business also have an important role in determination of the price for the products which is offered by the business. There are different costing techniques which are available to the management of the company for computing total costs of the business and also allocation of the indirect costs of the business. In the above it has been seen that company has used two different method of costing one is Plant Wide Rate and another one is Activity Based Costing. Plant wide rate–It is the rate which assign all the company manufacturing overhead cost to its production cost. It is a simple concept as it allocates at one rate so the costing of the overhead become very easy and no complex method is used. The method is followed by businesses as the method does not involve any complexities and it is much easier to understand while conducting a review of the system. Activity based costing– Under this method the cost is allocate as per the activity. It is done for different overhead different rates are being used. The allocation of indirect costs of the business are done on the basis of the activities which are carried out by the business. This is considered to be the most popular and effective method for allocation and computation of costs of the business and in most of the situation, the method is known to provide the most accurate estimates.
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7 MANAGERIAL ACCOUNTING Activity based costing is better method than plant wide method as in activity costing the overhead are allocated as per the activity so it helps the organization to know how the product price is rising. The main advantage of activity-based costing is that it gives an accurate estimation of costs and appropriate allocation of overhead costs on the basis of activities which is carried out by businesses. Therefore, it can be clearly indicated that if the business follows activity-based costing techniques than it would give a better presentation of the total cost and also assist in the determination of prices for the business. Question No 2 Requirement 2a Breakevenanalysisisawidelyusedtechniquebymanagementaccountantsand production manager. It is based on the production costs which are divided into two parts one is variable cost which varies with the production unit and another one is fixed cost which remain same in respect of production unit. Both cost is combined than it is compared with sales revenue to get the position where by selling certain amount of goods company is earning neither profit nor loss and that point is termed as break-even point. In other words, breakeven analysis is very useful tool for taking vital decisions of the business. The breakeven analysis tells the management the required units or revenue which the management of the company needs to generate in order to at least cover the costs of the business and reach a no profit no loss situation. On the basis of breakeven analysis, the management of the company decide what prices are to be set for the products and what quantity of products the management needs to sell in order to reach a no profit no loss situation. In addition to this, breakeven point needs to be achieved by the business in order to ensure that the business
8 MANAGERIAL ACCOUNTING continues its operations for a long period of time. The requirement of the part is to undertake breakeven and sensitivity analysis for AzamJuta which is engaged in production process. Management of a company uses breakeven analysis for the purpose of taking important decisions relating to the business. Requirement 2a Calculation of break-even point in unit as well in sales revenue. Break-even point in units = (Total fixed cost / Contribution per unit) ParticularDetailsAmountUnit ContributionA $ 3,50,000.00 No of unitB100000 Contribution per unit(A/B) $ 3.50 ParticularDetailsAmountUNIT Total Fixed CostA $ 2,10,000.00 Contribution per unitB $ 3.50 Break even in units(A/B)60000 Break-even point in sales revenue = (Break-even in units * Sales per unit) ParticularDetailsAmountUnit SalesA $ 7,50,000.00 No of unit soldB100000 Sales per unit(A/B) $ 7.50 Break- even unitD60000 Break-even in sales(A/B)*D $ 4,50,000.00
9 MANAGERIAL ACCOUNTING Requirement 2c Calculation of margin of safety in both units as well as sale revenue Margin of safety in units = (Total profit / Contribution per unit) ParticularDetailsAmountUnit Total profitA $ 1,40,000.00 Contribution per unitB $ 3.50 MOS in unit(A/B)40000 Margin of safety in sales revenue = (Total Sales – Break-Even sales) ParticularDetailsAmount Total SalesA $ 7,50,000.00 Break-even salesB $ 4,50,000.00 MOS in sales(A-B) $ 3,00,000.00 Requirement 2d As the company want to increase their sales from 8000 units and for that the company is ready to incur for advertisement expenses. The estimation of the sales manager is that increase in the sales of the business would be enhancing the revenue of the business. The calculations which
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10 MANAGERIAL ACCOUNTING is presented below shows the extra expenses which the management of the company is willing to undertake for the purpose of enhancing the sales of the business. Calculation as per company new proposal ParticularDetailsAmountUnit Sales in unitA108000 Sales per unitB $ 7.50 Total sales(A*B) $ 8,10,000.00 Variable cost per unitD $ 4.00 Total variable cost(D*A) $ 4,32,000.00 Total fixed costE $ 2,10,000.00 Advertisement costF $ 22,000.00 Total cost(D*A)+E+F $ 6,64,000.00 Total profit(A*B)-{(D*A)+E+F} $ 1,46,000.00 It can be seen from the above calculation that previously the company was earning $140000 when they were selling 100000 units but when they did advertisement expense of $22000 than they able to sell 108000 and then the profit was $146000 so it can be said that by the new proposal which company is thinking for implement than they will able to earn (146000- 140000) profit that is more $6000 profit they will able to earn if they invest $22000 on advertisement so there income will increase by $6000. Requirement 2e The maximum amount which the company can invest on advertisement to increase their sale by 8000 units and not by affecting the current profit. The amount which can be invested is
11 MANAGERIAL ACCOUNTING (22000+6000) = 28000 so till $28000 company can invest in advertisement and this will not make any impact on their current profit which is $140000.
12 MANAGERIAL ACCOUNTING Question 3: Part A: For computing the relevant and irrelevant costs and benefits of expanding into new space, the following calculation has been performed: ParticularsDetailsAmount Benefits: Increase in sales per monthA$ 10,000 Total benefitsB=A$ 10,000 Relevant costs: Increase in variable cost per monthC=Ax40%$4,000 Increase in rent per monthD$ 12,000 Refrigerators and counters costsE$ 25,000 Cost of cash registersF=$1,500x2$3,000 Total relevant costsG=C+D+E+F$ 44,000 Irrelevant cost: Depreciation of current cash registerH$250 Total irrelevant costH=I$250
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13 MANAGERIAL ACCOUNTING Requirement a: With the help of relevant costing, it is possible to ascertain the objective cost of a business decision (Benson et al., 2015). An objective measure of the business decision cost is the degree of cash outflows, which would result from its implementation. The identification of relevant costing techniques would help in making appropriate strategies for the business. In addition to this, the management of the company can effectively identify relevant costs and formulate strategies for eliminating the non-relevant costs of the business. The focus of relevant costing is only on undertaking sound business decisions and it does not take into consideration the other costs, which have no impact on future cash flows (Braun et al., 2014). From the provided information, it has been identified that Masha Mekar has to bear certain relevant costs. These costs mainly include the following: Increase in variable cost per month by $4,000 Increase in rent per month by $12,000 Cost of new refrigerators and counters amounting to $25,000 Cost of two new cash registers costing $1,500 each By expanding into a new space, Masha Mekar would be able to serve additional customers and it is anticipated that there would be increase in sales revenue by $10,000 each month. Moreover, it becomes possible to diversify the products and services as well. One product might not be popular in a region; however, the situation might be different in other regions (Butler & Ghosh, 2015). Thus, with the help of multiple locations, Always Blooming could buffer its business from losses.
14 MANAGERIAL ACCOUNTING The benefits of business growth are not limited to business diversification, as expansion into new areas provides the opportunity for increased brand recognition. In addition to this, this also means that the business would be able to generate more sales for the business and also reach out to more customers. When Always Blooming has planned to expand its business, it implies the chances of arriving at a broader audience by enforcing marketing tactics to increase the awareness of the organisation among the current and prospective customers. This will help the management of the company in creating a brand name for itself and also enhancing the level of operations of the business. Moreover, the revenue which is generated by the management of the company would also enhance significantly. Requirement b: In the words of Dopson and Hayes (2016), sunk cost is an expense that has been incurred already in the past. This cost is deemed to be not relevant, since it has no impact on the future business cash flows. In case of the provided case study, the old refrigerator and cash register could be categorised under sunk cost, since they have been purchased two years ago. Moreover, the depreciation cost of the current cash register is not relevant, since they do not have impact on the cash flows of the organisation. The other irrelevant costs for Always Blooming include the following: Current rental cost of $1,000 per month Purchase price of the two refrigerators bought two years ago for $6,000 each Purchase price of the existing cash register bought two years back for $1,000 Existing sales volume Existing variable costs
15 MANAGERIAL ACCOUNTING Therefore, it could be said that irrelevant costs are the costs, which are not influenced by the final decision. More precisely, these costs have to be incurred in all considered managerial incentives (Gitman, Juchau & Flanagan, 2015). Since these costs stay same in all alternatives, they are irrelevant and they need not be considered in computations conducted for managerial analysis. The management only needs to consider the relevant costs of the business in decision making process and provide all efforts in reducing the costs of the business for enhancing the profitability of the business. Part B: The costs that would be incurred irrespective of accepting or rejecting a special order decision are deemed to be irrelevant for special order decisions. On certain occasions, the recurring fixed costs of an organisation would stay the same in total; in case of acceptance of a special order (Horngren & Harrison, 2015). Moreover, when a special order is accepted, it might lead to additional fixed expenses. In such cases, relevance could be found in these excess fixed costs and therefore, consideration needs to be made in incremental analysis. However, there is no relevance of sunk costs with any process of special order decision. Special order decisions are considered only when an organisation is running below capacity. As a result, there would be existence of fixed overhead cost regardless of accepting or rejecting an order (Kaplan & Atkinson, 2015). Since fixed overhead is classified as sunk cost, it could be ignored at the time of undertaking special order decisions. Question 4: Requirement a: Production budget of Allison Company for the months March to May:
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16 MANAGERIAL ACCOUNTING ParticularsMarchAprilMayJune Budgeted unit sales (A)25,000 34,00 0 50,00 0 70,00 0 Desired ending inventory (20% of next month's sales) (B)6,800 10,00 0 14,00 0 Total needs (C) = (A) + (B)31,800 44,00 0 64,00 0 Less: Opening inventory3,100 6,80 0 10,00 0 Total production units (E) = (C) - (D)28,700 37,20 0 54,00 0 Requirement b: Budgeting plays a crucial role for any business organisation. The preparation of a master budget needs the preparation of financial budgets and operating budgets, which include a number of components like sales budget, production budget, cost of goods sold budget and others (Kravet, 2014). Production budget could be defined as the element of the operating budget, which ascertains the units of production for meeting sales and closing inventory needs. This budget is utilised to prepare other elements of the operating budget constituting of direct material purchases budget, direct labour budget and others.The different forms of budgets which are utilised in a business are done for the process of decision making and also controlling the activities of the business. The budgets which are prepared by the management of the company
17 MANAGERIAL ACCOUNTING arealsousedforcommunicatingtheobjectivesandgoalsofthebusinesstodifferent departments. Production budget is denoted in terms of physical units and not costs. The period of production budget varies on the product cycle and the operating environment of the organisation. Due to this, it differs in quarter, length, year, product cycle, product year and others (Krstevski & Mancheski, 2016). For instance, during tough economic conditions, it would be feasible to shorten the period of production budget owing to increased uncertainty about product demand or sales. This budget takes into account both budgeted sales data as well as estimated closing levels f inventory. At the time of ascertaining the needed levels of inventory, both benefits and costs have to be taken into consideration. There might be effect of product demand on estimated levels of production. The increased product demand could lead to rise in product manufacturing, while falling demand levels could need the organisation in cutting back production (Narayanaswamy, 2017). A production budget assists the organisation in estimating production levels for periods at the time of fluctuating demand. In case, an organisation knows its demand and low production levels in a month, it could use downtime to manufacture additional product in hand for the upcoming period with rise in demand. This assists the organisation in avoiding a situation, in which it needs to manufacture or have on hand, more of a product; however, it lacks the manufacturing capacity in fulfilling that demand (Otley, 2016). A production budget projects the costs of producing a product irrespective of whether it’s foranorganisationmanufacturingproductsin-houseoranorganisationoutsourcingthe manufacturing a product to a third party. With the help of production budget, it becomes possible
18 MANAGERIAL ACCOUNTING to estimate the cost of having the goods produced by other (Park & Jang, 2014). This could constitute of making the products along with the costs of the third-party producer charges for labour and time. A production budget provides a projection, which might change depending upon changes outside the organisation. For instance, manufacturing needs the use of raw materials. As a result, rise in the price of raw materials, rise in the price of raw materials could increase the costs requiredformanufacturingaproduct(Parker&Fleischman,2017).Inaddition,the unavailability of raw material or any ingredient could need an organisation to outsource a new material for usage in the manufacturing of the product. This might result in increased costs; however, it could result in cost savings as well; if the organisation could obtain the new ingredient for lower than the original cost. Itisnecessarytobudgetproductionexpensesforestimationofworkingcapital requirements and for projecting future impact on inventory levels and cash position. The production budget is a comprehensive plan, which takes into consideration all manufacturing jobs to be worked on during a provided financial year along with revealing timing and expenditure amount on such projects. It is not possible to forecast the cost of goods sold in operating budget and inventory in a pro-forma balance sheet before the completion of the production budget.
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19 MANAGERIAL ACCOUNTING Question 5: Requirement a: Part (i): Material Price and Quantity Variance:- ParticularsDetailsUnitsComment Standard priceA$1.20 Actual priceB$1.23 Quantity (in yards)C150,000 Direct material variance D=(C x B)-(C x A)4,500Unfavourable Part (ii): Labour Rate and Efficiency Variance:- ParticularsDetailsUnitsComment Standard direct labour cost per hourA$9.00 Actual direct labour cost per hourB$9.25 Actual direct labour hoursC36,800 Direct labour variance D=(C x B)-(C x A)9,200 Unfavourabl e
20 MANAGERIAL ACCOUNTING Requirement b: Any unfavourable quantity variance denotes additional use of direct materials. Such additional usage of direct materials could be due to a number of reasons including the following: Untrained or inexperienced staffs Lack of adequate supervision Lack of motivation Usage of outdated machinery Faulty equipment Frequent power failures (there might be wastage owing to unscheduled stop and start of equipment and machinery) Purchase of substandard or unsuitable materials Generally, the change in labour rates does not lead to labour rate variance, since they are normally predictable. An inherent cause of an unfavourable labour rate variance is ineffective us of labour by the production supervisors (Ponisciakova, Gogolova & Ivankova, 2015). All tasks do not like identically skilled staffs. Some tasks are more complex and they need additional experienced staffs than others. It needs to be borne in mind when the tasks are allocated to the staffs. In case; the tasks that are less complex are allocated to the experienced staffs, there might be unfavourable labour rate variance. This is because the experienced staffs receive higher wages. On the contrary, if poorly trained workers are allocated tasks needing high expertise level, there might be favourable labour rate variance. The reason is that these workers receive lower wages. However, the efficiency of these workers might not be sufficient.
21 MANAGERIAL ACCOUNTING Requirement c: One method to set standards is the evaluation of historical data. The data associated with historical cost provides an indication of future costs. The methods to analyse cost behaviour are utilised for estimating future costs by using the historical cost basis. Such estimations form the basis for setting standards. Historical experience often acts as a poor basis in order to set standards, since historical data might include additional inefficiencies than required. In the past, it might occur that an organisation was not performing at complete efficiency. There might be change in managerial positions or new standards that the management has set for optimum resource utilisation. These all impact the guidelines for setting standards (Shields, 2015). In addition, there might be some external factors to the organisation that might change standards. This might constitute of the introduction of research methodology, change in government rules and policies, new market and others. The economical and geographical changes might have impact on the standard setting of the organisation as well. Another method of setting standards is the engineering method. In this method, the manufacturing process is analysed for ascertaining the costs to manufacture a particular product. The emphasis converts from the historical cost of the product to the future estimated cost of the product. An instance of engineering method is time and motion study carried out for ascertaining the time taken by direct labour for performing each step. The analysis pertaining to historical data is less costly compared to the engineering method. Therefore, historical cost method might be preferred by many business organisations. However, when there are new processes or products, accurate standards could not be obtained with the assistance of historical data. Under such situations, it is possible to utilise the engineering methods.
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22 MANAGERIAL ACCOUNTING The standards to be regarded include ideal standards demanding a maximum efficiency and this could be accomplished only; in case, there have been perfect operations of all aspects. There is no room for machine breakdown and momentary slack of skills. In addition, the other standard includes the currently attainable standards that could be accomplished under effective working conditions. However, there is allowance for normal interruptions, breakdowns and lower than perfect skills. For responding to these factors, it is necessary to consider all the aspects along with preparing budget and estimating yearly depending on the existing market scenario, aligning with the mission of the organisation and existing performance of the competitors. There needs to be projections based on financial parameters, economic and political scenario. Moreover, there needs to be revision of operational allowance and setting up standards in accordance with the available efficiency and technology (Weygandt, Kimmel & Kieso, 2015). Therefore, the new standard developed by considering the above aspects are deemed to be more useful than those based on historical data.In other words, historical cost method contains certain loopholes that might hamper the process of setting standards for any business organisation in formulation of standards for undertaking final decisions and thus, it needs to be exercised with utmost caution.
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