MANAGERIAL ACCOUNTING.

Running head: MANAGERIAL ACCOUNTING
Managerial Accounting
Name of the Student:
Name of the University:
Author’s Note

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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

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Requirement a:...........................................................................................................................19
Part (i):...................................................................................................................................19
Part (ii):..................................................................................................................................19
Requirement b:...........................................................................................................................20
Requirement c:...........................................................................................................................21
References:....................................................................................................................................23

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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.
Particulars Details
Basic
Model
Premium
Model
General
Cost
Prime Cost A
$
40.00
$
80.00
Machine hours B 2500 2500
Number of Output C 20000 10000
Machine hour rate (B/C)
$
0.13
$
0.25
Total Overhead cost D 332000
Total machine hour E 5000
Overhead per machine hour (D/E) 66.4
Overhead cost for each
product
(D/E)*(B/
C)
$
8.30
$
16.60
Total Cost 48.3 96.6
Formula View

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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
Activity Cost Driver
Estimated
Overhead Cost
Estimated Cost Driver
Activity
Predetermined Cost
Overhead
Purchasing
Material
Purchase
Requisitions 87000 2000 43.5
Maintaining
Equipment
Maintaince
Hour 220000 8000 27.5
Setting up
Equipment Set up time 112000 40 2800
Below we can see the total cost of the product under activity based costing
Particular Details
Basic
Model
Premium
Model General
Prime Cost A
$
40.00
$
80.00
Number of Requisitions B 500 1500
Maintaince Hour C 2000 6000
Set up time D 8 32
Overhead on Maintance E 27.5
Overhead on Purchase F 43.5

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Overhead on Set up G 2800
overhead chareged for all product H
$
99,150.00
$
3,19,850.00
Number of unit produced I 20000 10000
Overhead per product (H/I) 4.9575 31.985
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.

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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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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
Break even analysis is a widely used technique by management accountants and
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

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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)
Particular Details Amount Unit
Contribution A
$
3,50,000.00
No of unit B 100000
Contribution per
unit (A/B)
$
3.50
Particular Details Amount UNIT
Total Fixed Cost A
$
2,10,000.00
Contribution per unit B
$
3.50
Break even in units (A/B) 60000
Break-even point in sales revenue = (Break-even in units * Sales per unit)
Particular Details Amount Unit
Sales A
$
7,50,000.00
No of unit sold B 100000
Sales per unit (A/B)
$
7.50
Break- even unit D 60000
Break-even in sales (A/B)*D
$
4,50,000.00

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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)
Particular Details Amount Unit
Total profit A
$
1,40,000.00
Contribution per
unit B
$
3.50
MOS in unit (A/B) 40000
Margin of safety in sales revenue = (Total Sales – Break-Even sales)
Particular Details Amount
Total Sales A
$
7,50,000.00
Break-even sales B
$
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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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
Particular Details Amount Unit
Sales in unit A 108000
Sales per unit B
$
7.50
Total sales (A*B)
$
8,10,000.00
Variable cost per unit D
$
4.00
Total variable cost (D*A)
$
4,32,000.00
Total fixed cost E
$
2,10,000.00
Advertisement cost F
$
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

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(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.

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Question 3:
Part A:
For computing the relevant and irrelevant costs and benefits of expanding into new space,
the following calculation has been performed:
Particulars Details Amount
Benefits:
Increase in sales per month A $ 10,000
Total benefits B=A $ 10,000
Relevant costs:
Increase in variable cost per
month C=Ax40% $ 4,000
Increase in rent per month D $ 12,000
Refrigerators and counters costs E $ 25,000
Cost of cash registers F=$1,500x2 $ 3,000
Total relevant costs G=C+D+E+F $ 44,000
Irrelevant cost:
Depreciation of current cash
register H $ 250
Total irrelevant cost H=I $ 250

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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.

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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

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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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Particulars March April May June
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 inventory 3,100
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

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are also used for communicating the objectives and goals of the business to different
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
for an organisation manufacturing products in-house or an organisation outsourcing the
manufacturing a product to a third party. With the help of production budget, it becomes possible

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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
required for manufacturing a product (Parker & Fleischman, 2017). In addition, 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.
It is necessary to budget production expenses for estimation of working capital
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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Question 5:
Requirement a:
Part (i):
Material Price and Quantity Variance:-
Particulars Details Units Comment
Standard price A $ 1.20
Actual price B $ 1.23
Quantity (in yards) C 150,000
Direct material variance
D=(C x B)-(C x
A) 4,500 Unfavourable
Part (ii):
Labour Rate and Efficiency Variance:-
Particulars Details Units Comment
Standard direct labour cost per
hour A $ 9.00
Actual direct labour cost per hour B $ 9.25
Actual direct labour hours C 36,800
Direct labour variance
D=(C x B)-(C
x A) 9,200
Unfavourabl
e

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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.

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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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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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