This article discusses the estimation of contribution per unit, break-even sales revenue, profit, and pricing strategy for Plaistead Plc and Crawford Plc in UGB 106 Introduction to Management Accounting.
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UGB 106 Introduction to management accounting
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Contents Contents................................................................................................................................................2 Part 1.....................................................................................................................................................3 Question 2: Plaistead Plc..................................................................................................................3 Part 2.....................................................................................................................................................8 Question 3: Crawford Plc.................................................................................................................8 Part 3.....................................................................................................................................................3 Question 4:........................................................................................................................................3 REFERENCES...................................................................................................................................10
Part 1 Question 2: Plaistead Plc. Answer to (a) Estimating Contribution per Unit Note: Contribution per unit = (selling price per unit) – (variable costs per unit) Particulars£ Selling Price13 Materials(5.25) Labour(2.95) Variable Overheads(1.85) £2.95 Answer to (b) Estimating Break Even Sales Revenue at the Break-even Point and Margin of Safety: Break Even point is reached when: total contribution = total fixed costs. The break-even point (units) is estimated as: FixedCost/ (𝑠𝑒𝑙𝑙𝑖𝑛𝑔𝑝𝑟𝑖𝑐𝑒𝑝𝑒𝑟𝑢𝑛𝑖𝑡)–(𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑐𝑜𝑠𝑡𝑠𝑝𝑒𝑟𝑢𝑛𝑖𝑡) Note: (selling price per unit) – (variable costs per unit) = Contribution per unit With the information in the question, total fixed costs are estimated as: Production Fixed Costs=£59,000 Selling FixedCosts.=£47,600 £106,600
Applying the formula, the number of electric kettles at break-even (the break-even point (sales):=£106,600 £2.95 = 36,136 electric kettles. Therefore, Revenue at Break-even = 36,136 electric kettles x £13 = £469,768 Margin of Safety (Volumes/Units)= (Planned sales in unit) - (Breakeven sales in unit) = (53, 000 electric kettles) – (36, 136 electric kettles) =16,864 electric kettles Margin of Safety (Revenue)= (Planned sales revenue) - (Breakeven revenue) = £689,000 –£469,768 =£219, 232 OR Margin of safety (revenue) = (Margin of safety (volume/unit)) x (Selling price) = 16,864 electric kettles x £13 =£219, 232 Answer to (c) Estimating profit at 53,000 electric kettles at selling price of £13per electric kettle: Sales(fromquestion)= 53,000 electric kettles Break even number of electric kettles(fromcalculation).= 36,136 electric kettles Therefore, sales are above break-even point by 16,864 electric kettles (53, 000 – 36,136) Contribution per electric kettles =£2.95 Additionalcontribution= 16, 864 x £2.95= £49,749 Answer to (d) Estimating units of electric kettles to produce and sell for a profit of £90,000
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According to the foregoing calculations, producing and selling 36,136 electric kettles will result in neither aloss nor a profit. This is the break-even point. In other words, no profit, no loss (zero profits) would be made as at when 36,136 electric kettles would be produced andsold(Cokins and Căpușneanu, 2020). Each additional electric kettle produced and sold would make £2.95 contribution (from answer (a)above). Therefore, to make £90,000 profit, the number of addition electric kettles (further to 36,136 electric kettles) to produceis: £90,000 £2.95 = 30,508 electric kettles. As a result, the total number of electric kettles to be made and sold in order to achieve a profit of £90,000 would've been: = (36,136 electric kettles) + (30,508 electric kettles =66,644 electric kettles Answer to (e) Recalculation of selling price at which 53,000 electric kettles would be sold for a profit of £90,000. Total contribution = (fixed costs) + (profit) Therefore: Profit = (Total Contribution) – (Fixed Costs) Thereafter: Derive ‘contribution per unit’ of 53, 000 electric kettles. Note that: Contribution per unit = (selling price per unit) – (variable costs per unit) Therefore: Selling Price per unit = (Contribution per unit) + (variable costs per unit) Total Contribution is estimated as: £106,600 (Fixed costs) + £90,000 (Profit desired) =£196, 600
If 53,000 electric kettles are sold, contribution needed per electric kettles is estimated as: £196, 600 53, 000 (electric kettles) = £3.71 Therefore, the estimated selling price = (Contribution per unit) + (variable costs per unit): Contribution per unit£3.71 Materials£5.25 Labour£2.95 Variable Overheads£1.85 New Selling Price£13.76 Answer to (f) Adoption of new pricing strategy: Proposed Strategy’sSellingPrice= £13 x 1.09 (estimating 9% increase in sellingprice) =£14.17 Proposed Strategy’s Contribution(per kettle)= £2.95 + £1.17 (This is theproposed Strategy’s selling price less old selling price) = £4.12 Proposed Strategy’s Sales(inUnits/Volume)= 53, 000 x 1.17 (estimating 17% increasein Salesvolume) =62, 010 electric kettles
Proposed Strategy’sTotalContribution= £4.12 x 62, 010 electrickettles = £255,481 Proposed Strategy’sFixedCosts= £106,600 + £45,000 = £151, 600 ProposedStrategy’sProfit= New Total Contribution – New Fixed Costs = £255, 481 - £151,600 = £103, 881 The profit of £103, 881 under the proposed strategy is greater than the current budgeted profit of £49,749 Consequently (in response (c) above), the proposed plan is a good strategy and must be accepted by Plaistead Plc. Answer to (g) The break-even assessment is based on a set of assumptions, including: All costs (creation, transportation, and assembly) are broken down into permanent and changeable components. The nature of expenses is continuous, which means that if price information is shown on a chart, there will be a line. Thetotalamountofpermanentexpenseswouldstayunchangedateachproduction amount,whereaschangeableexpenseswouldvaryintheproportionalpercentageof production(Gunarathne and Lee, 2018). The merchandise's selling cost would stay static at each selling volume,implying that the cost would not fluctuate in response to changes in finished goods. Equipment, labour, housing, advertising, and other acquired resources would all maintain the same cost. Men's and machines' technological skills and efficiency would not increase. Earnings and expenditures are evaluated using a common manufacturing foundation, such as the marketplace worth of commodities or the number of units produced. Only the amount of manufacturing or selling is thought to be a significant price determining element.
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Part 2 Question 3: Crawford Plc Answer to (a) Allocating cost based on: Number of employees 12:10:3. Direct materials17:8. Floor space3:4:1. Floor space3:4:1. Machinery used in each department50:40:3. Number of employees12:10:3. Kilowatt hours1.5:1.3:2. STEP 1: Allocating costs to departments using a suitable method (ratio) for each department: Total (£)Assembly (£)Joinery (£)Canteen (£) Indirect labour–12:10:328 00013,44011,2003,360 Indirect material – 17:822 00014 9607 040----- Heating & lighting – 3:4:113 0004 8756 5001 625 Rent & rates – 3:4:114 0005 2507 0001 750 Depreciation – 50:40:319 00010 2158 172613 Supervision – 12:10:315 0007 2006 0001 800 Power – 1.5:1.3:29 0002 8132 4383 750 120 00058 75348 35012 898 STEP 2: Allocating service department costs to production departments: Total (£)Assembly (£)Joinery (£)Canteen (£) Balance from Step 1 above120 00058 75348 35012 898 Allocate Canteen to Assembly & Joinery 7 0355 863[12 898] 120 00065 78854 213------ STEP 3: Calculating the overhead recovery rates for Assembly and Joinery Department: The overhead conversion efficiency is determined by the number of "labour hours." The department's overhead expenses are split by the number of direct labour hours for each division in both cases. The following is the overhead recovery rate: 𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡=𝑇𝑜𝑡𝑎𝑙𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝐶𝑜𝑠𝑡𝑜𝑓𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦 𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡Di𝑟𝑒𝑐𝑡𝐿𝑎𝑏𝑜𝑢𝑟𝐻𝑜𝑢𝑟𝑠𝑜𝑓𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛t
= 65,788=£31.33 per labourhour 2 100 hours 𝐽𝑜𝑖𝑛𝑒𝑟𝑦𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡=𝑇𝑜𝑡𝑎𝑙𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝐶𝑜𝑠𝑡𝑜𝑓𝐽𝑜𝑖𝑛𝑒𝑟𝑦𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐷𝑖𝑟𝑒𝑐𝑡𝐿𝑎𝑏𝑜𝑢𝑟𝐻𝑜𝑢𝑟𝑠𝑜𝑓𝐽𝑜𝑖𝑛𝑒𝑟𝑦𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛t =£54,202=38.72 per labourhour 1 400 hours Answer to (b) Special Product Soft Stool:Calculation of full job cost and product cost for 10 units of Soft Stool. ££ Direct costs85 Production overhead: Assembly department (4 labour hours x £31.33)125.32 Joinery department (6 labour hours x £38.72)232.32 Total production overheads357.64 Total production cost for one unit£442.64 Total production for 10 units (£442.64 x 10)£4,426.4 Working of Overhead Costs Allocations Allocation of cost of indirect labour is 12:10:3 (= 25), on the basis of number of employees (28 000) 𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦=12x£28,000=£13,440 25 𝐽𝑜𝑖𝑛𝑒𝑟𝑦=10x £28,000=£11,200 25 𝐶𝑎𝑛𝑡𝑒𝑒𝑛=3x£28,000=£3,360 25 Note: Canteen would not be reimbursed for indirect material costs because they are not manufacturing and do not use the £22,000 in raw - materials. Allocation of cost of indirect materials is 17:8(= 25), in proportion to direct materials
𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦=17x£22,000=£1 𝟒,960 25 𝐽𝑜𝑖𝑛𝑒𝑟𝑦=8x£22,000=£7,4 𝟎 25 Allocation of cost of heating and lighting is 3:4:1(= 8), in proportion to floor space (13 000) 𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦=3x£13,000=£4,875 8 𝐽𝑜𝑖𝑛𝑒𝑟𝑦=4x£13,000=£6,500 8𝐶𝑎𝑛𝑡𝑒𝑒𝑛=1x£13,000=£1,25 8 Allocation of cost of rent and rates is 3:4:1(= 8), in proportion to floor space (14 000) 𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦=3x£14,000=£5,250 8 𝐽𝑜𝑖𝑛𝑒𝑟𝑦.=4x£14,000=£7,000 8 𝐶𝑎𝑛𝑡𝑒𝑒𝑛=1x£14,000=£1,750 8 Allocation of depreciation cost is 50:40:3(= 93), according to the value of machinery used in each department (19 000)
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𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦=50x£19,000=£10,215 93 𝐽𝑜𝑖𝑛𝑒𝑟𝑦=40x£19,000=£8,172 93 𝐶𝑎𝑛𝑡𝑒𝑒𝑛=3x£19,000=£613 93 Allocation of cost of supervision is 12:10:3(= 25), on the basis of number of employees (15,000) 𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦=12𝑋£15,000=£7,200 25 𝐽𝑜𝑖𝑛𝑒𝑟𝑦=10𝑋£15,000=£6,000 25 𝐶𝑎𝑛𝑡𝑒𝑒𝑛=3𝑋£15,000=£1,800 25 Allocation of cost of power is 1.5:1.3:2(= 4.8), on the basis of kilowatt hours (9,000) 𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦=1.5x£9,000=£2,813 4.8 𝐽𝑜𝑖𝑛𝑒𝑟𝑦=1.3x£9,000=£2,438 4.8 𝐶𝑎𝑛𝑡𝑒𝑒𝑛=2x£9,000=£3,750 4.8
Absorption of canteen cost is 12:10(=22), on the basis of kilowatt hours 𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦=12x£12,898=£7,035 22 𝐽𝑜𝑖𝑛𝑒𝑟𝑦=10𝑋£12,898 =£5,863 22 Answer to (c) A single absorption rate is much more productive and likely less expensive to operate (plant-wide rate). Nevertheless, if manufacturing methods in various divisions fluctuate significantly (labor-intensive versus machine-intensive), using a single rate is prone to misrepresentproductioncosts(Bento,MertinsandWhite,2018).Thiscouldbe exacerbated if the outcomes are significantly diverse from one another. Advantages of Absorption Costing: GAAP Compliance–One of the advantages of using absorption costing would be that it conforms to Generally Accepted Accounting Principles (GAAP), which is required for submitting to the Internal Revenue Service (IRS). Accounting for All Production Costs–Thistakes into account all production costs, whereas variable costing just analyses direct costs. Absorption costing accounts for the corporation's permanent operating expenses, such as labour, property leases, and energy bills. This provides a more comprehensive picture of a manufacturer's expense each piece,allowing managers to make superior marketing and revenue decisions. Tracking Profits-Absorption costing delivers a much more realistic financial depiction than variable costing, particularly if all items really aren't supplied over the same accounting cycle. This is a major problem if a corporation increases output in anticipation of a periodic spike in sales(Chaudhry, Asad and Hussain, 2020).
Disadvantages of Absorption Costing: Skewed Profit and Loss-Absorption costing could give the impression that a company is making more money than it actually is throughout any given accounting period. This is due to the fact that all permanent expenditures are not subtracted from the firm's revenue unless all of the corporation's manufactured products are supplied. As a result, the management could be deceived. No influence on operational efficiency-Absorption costing lacks to provide quite a comprehensive a cost assessment as variable costing; hence it has no impact on operating effectiveness.When fixed expenses account for a large portion of total expenses, it's tough to figure out expense variances at various sales volumes, making it harder for managers to take the optimal operating judgments. Not suited to product line comparison–Variable costing, instead of absorption costing, would've been significantly more effective and beneficial in situations when an organisation desires to synchronize the unique revenue of a commodity. This is because it is easier to determine the cost difference between one item and another by properly observing the variable costs of each commodity. Part 3 Question 4: Answer to (a) Estimations of Budgets and Variances: Jayrod Plc Statement of Original Budget, Flexed Budget, Actual Costs and Variances of PK65 Product Cost Original BudgetFlexed BudgetActual CostVariance Unit10 0009 0009 000 ££££ Direct materials600 000540 000579 50039 500A Direct Labour450 000405 000451 40046 400A Variable Production120 000108 000106 0002 000F Overhead200 000200 000202 0002 000A Fixed Production Overhead Total Cost1,370 0001,253 0001,338 90085 900A
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Original Budget Direct materials=(Standard unit cost) x (Original budget’s production units) =£60x10,000 units=£600,000 Direct labour=(Standard unit cost) x (Original budget’s production units) =£45x10,000 units=£450,000 Variable production overheads=(Standard unit cost) x (Original budget’s production units) =£12x10,000 units=£120,000 Fixed production overhead= £200,000 Actual Costs Actual costs are as stated in the question, for the actual production of Product PK65 Workings Flexed Budget Direct materials= (Standard unit cost) x (Flexed Budget’s production units) = £60x9,000=£540,000 Direct labour =(Standard unit cost) x (Flexed budget’s production units) = £45x9,000=£405,000 Variable production overheads =(Standard unit cost) x (Flexed Budget’s production units)
Variance Variance = (Flexed budget costs) – (Actual costs) Direct materials= (£540,000) – (£579,500) =£39,500 A Direct labour= (£405,000) – (£451,400) =46,400 A Variable production overheads= (£108,000) – (£106,000) =£2000 F Fixed production overhead= (£200,000)-(£202,000) =£2000 A MaterialPriceVariance=ActualQuantityx(StandardPrice–ActualPrice) Material Usage Variance= Standard Price x (Standard Quantity –Actual Quantity) Labour Rate Variance= Actual Hours x (Standard Rate –Actual Rate) Labour Efficiency Variance= Standard Rate x (Standard Hours –Actual Hours) Answer to (b) The estimations of the component splits require the application of respective formula thus: Estimation of Total Direct Materials Variance split into: (i) Direct Material Price Variance and (ii) Direct Material Usage Variance (i)Direct Material Price Variance= (Standard Price –Actual Price) x ActualQuantity = (190, 000kg x £3 per/kg) – (£579,500Actual Cost) = (£570, 000) – (£579,500 Actual Cost) = £9,500 A (ii)Direct Material Usage Variance= Standard Price x (Standard Quantity – Actual Quantity) Here, SQ = 9,000 units x 20kg = 180, 000kg Applying formula: SP (SQ –AQ) = £3 x (180, 000kg) – (190, 000kg) = £3x 10,000kg = £30,000A
Direct Material Cost Variance= £39,500 A (Direct Material Price Variance) and (Direct Material Usage Variance) =Total Direct Material Variance Check: (£9,500A) and (£30, 000A) = £39,500A (in our Table in Solution (a) above. Equals Direct Material Price Variance =£9,500A Direct Material Usage Variance =£30,000A The corresponding values generated by the 2 constituent divide variations (£9,500A and £30, 000A) indicate the response to the query;"Who should be held liable for the £39,500A total direct material variance." The direct materials price variance determines the current cost of materials accustomed expense that's been permitted based on the volume utilized. Some other component of direct materials is its use; it was discovered that "extra raw material utilisation" caused an adverse variance, which influenced the overall total direct material variation adversely. Usually, the manufacturing supervisor would've been responsible for this direct material consumption discrepancy. Calculation of Total Direct Labour Variance split into: (i) Direct Labour Rate Variance and Direct Labour EfficiencyVariance Labour Rate Variance= Actual Hours x (Standard Rate –Actual Rate)= or Labour Rate Variance= (Standard Hour x Actual Hours) - (Actual Rate x Actual Hours) Standard Rate (SR) = £15 Actual Hours (AH) = 30,500 hours (SR x AH) – (AR x AH) = (£15x 30,500hours) -£451, 400 = (£457, 500) -£451, 400=£6,100F Labour Efficiency Variance=Standard Rate x (Standard Hours –Actual Hours) =SR (SH–AH) Standard Rate = £15 Standard Hours = (3hours x 9,000 units) = 27, 000 hours.
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Direct Labour Cost Variance = £46,400 A SR (SH –AH) = £15(27, 000 hours–30, 500 hours) = £15 x30,500 hours=£52,500 A (Direct Labour Rate Variance) and (Direct Labour Efficiency Variance) =Total Direct Labour Variance (£6,100F) and (£52,500A) = £46,400(in our Table in Solution (a) above. Equals Direct Labour Rate Variance =£6,100 F Direct Labour Efficiency Variance = £52,500 A The corresponding values generated by the 2 element divide variances (£6,100F and £52, 500A)providethesolutiontothequery;"Whoshouldbeheldliableforthe£46,400 unfavourable total direct labour variations." The direct labour rate variance determines the current and allowable costs of hours performed. The proportional differential in labour efficiency compares the number of hours which should be permitted for the output level generated to the number of hours that were actually used. After then, the difference is compensated at the approved hourly rate. As a result, there seems to be an unfavourable labour efficiency variance of £52, 500 A in the case of Jayrod Plc. As fewer hours were employed than would have been required, the real amount of output was reduced. Performing faster would assist businesses make more money. With relation to variation in labour performance, the manufacturing management is accountable for the number of hours utilized to accomplish a certain volume of output. Answer to (c) Due to the extreme extensive study of departures from standard cost or budgeting, standard pricing is a cost containment platform which provides for even more efficient price management. Its goal is to offer a foundation for establishing goals and monitoring progress, as
well as helpful data for management decision-making and a method for determining the sale value of things. The standard cost allows: Control:This couldbe contrasted to real expenses and any discrepancies looked into. Performance measurement:Any disparities among the benchmark and real expense could be utilised to evaluate expense unit executives' effectiveness. Variances:Standard expenses are used to prepare financial reports, but they're also necessary for computing and evaluating deviations, which give administration 'input' on how well the business has been doing(Abdel-Maksoud, Cheffi and Ghoudi, 2016). To value inventories:Standard cost is an option to LIFO and FIFO methodologies for valuing stocks. Accounting simplification:The standard seems to be the only expense. The significance of variance analysis and the need for it:Administration aims to have lesser variations from projected expenditures, that results to precise and forward-looking policy making, and that is why assessment of variance promotes efficient budgeted operations. The assessment of variation is a control method. The analysis of variations on major goods permits the company to identify the reasons and seek for possible solutions to avoid variations. It allows for the assignment of responsibilities and, when suitable, incorporates agency organisational framework.For example, if labour productivity variation is deemed negative, or if raw material expense variation acquisition is deemed detrimental, administration would tighten supervision over such divisions in order to boost productivity. Limitationsofvarianceanalysis-Companiesbenefitgreatlyfromvariance assessment;although it does have constraints: Marking the termination of quarterly, fiscal information and outcomes are used to do variance evaluation.There could be a laxityin collecting this data that could affect the essentialcorrectivesteps.Furthermore,notallcausesofvariationwould'vebeen available for data collection that could cause problems with actionable variation analysis (Chung and Chen, 2016). If the planning process is not finished, the budgetary activity must be performed haphazardly, taking into consideration the detailed investigation of each aspect, which
would be likely to diverge from the real data, perhaps leading to ineffective variance assessment.
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REFERENCES Books and journals Cokins, G. and Căpușneanu, S., 2020. Management accounting: The sustainable strategy map anditsassociatedsustainabilitybalancedscorecard.InManagementaccounting standards for sustainable business practices(pp. 1-26). IGI Global. Gunarathne, A.N. and Lee, K.H., 2018. Environmental Management Maturity Stages and Environmental Management Accounting. Bento, R.F., Mertins, L. and White, L.F., 2018. Risk management and internal control: A study of management accounting practice. InAdvances in Management Accounting. Emerald Publishing Limited. Chaudhry, N.I., Asad, H. and Hussain, R.I., 2020. Environmental innovation and financial performance: Mediating role of environmental management accounting and firm's environmentalstrategy.PakistanJournalofCommerceandSocialSciences (PJCSS),14(3), pp.715-737. Abdel-Maksoud, A., Cheffi, W. and Ghoudi, K., 2016. The mediating effect of shop-floor involvement on relations between advanced management accounting practices and operational non-financial performance indicators.the british accounting review,48(2), pp.169-184. Chung, S.H. and Chen, K.C., 2016, July. The relationships among personality, management accounting information systems, and customer relationship quality. In2016 5th IIAI International Congress on Advanced Applied Informatics (IIAI-AAI)(pp. 759-763). IEEE.