ACCM4100 - Management Accounting Assignment Solution

This document presents a comprehensive solution to a management accounting assignment, addressing key concepts such as budgeting, variance analysis, and costing methods. The solution begins by outlining the benefits of budgeting, including performance evaluation, planning, and communication/control. It then delves into variance analysis, calculating and interpreting direct material, direct labor, and overhead variances, highlighting favorable and unfavorable outcomes. The assignment further explores cost estimation using high-low method, break-even analysis, and activity-based costing (ABC) versus traditional costing, with detailed calculations and explanations. The document concludes with a discussion on the advantages of ABC and the importance of accurate costing for informed decision-making. The solution provides a detailed breakdown of each question, including formulas, calculations, and interpretations, making it a valuable resource for students studying management accounting.

MANAGEMENT ACCOUNTING
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Question 2
a) The various benefits the budgeting are as highlighted below.
 Evaluation of performance – The performance of the various departments can be
evaluated based on the comparison between the actual performance and the budgeted
performance. The budgetary estimates tend to act as a yardstick for comparison.
 Planning – During the budgeting exercise, typically the management makes future
estimates of performance and the potential targets which provide a futuristic growth
trajectory of the company.
 Communication & Control Tool – Budgeting acts as a communication tool with
regards to the priorities of the organisation considering the allocation of the funding.
Further, it can also be used as a control activity since through resource allocation
control of different projects, activities and department may be done.
b) The budgeted income statement for the year ending December 31, 2016 is indicated below.
Question 4
A) i) Direct material price variance = Actual quantity * Actual price –Standard quantity *
Standard Price = 23100*2.6 – 23400*2.5 = $ 1,560
The positive value represents unfavourable variance.

Direct material efficiency variance = (Actual quantity – Budgeted Quantity)* Standard price
= (23100-23400)*2.5 = - $ 750
The negative value represents favourable variance.
ii) Direct labour price variance = Actual hours * Actual rate – Actual hours* Standard Price =
40100*18 – 40100*17 = $ 40,100
The positive value represents unfavourable variance.
Direct labour efficiency variance = (Actual hours – Budgeted hours )* Standard Rate =
(40100- 46800)*17 = -$ 113,900
The negative value represents favourable variance.
(iii) Variable overhead spending variance = (Standard overhead rate – Actual overhead
rate)*Actual Units = (23-(960000/40100))*40100 = - $ 37,700
The negative value shows unfavourable variance.
Variable overhead efficiency variance = Actual hours * Standard overhead rate - Actual
overhead cost = 40100*23 – 960000 = - $ 37,700
The negative value shows unfavourable variance.
(iv) Fixed overhead appending variance = Actual fixed overheads – Budgeted fixed
overheads = 291000 – 300000 = -$ 9,000
The negative value represents favourable variance.
Fixed overhead volume variance = (Actual activity – normal activity) * Fixed overhead rate =
(7800-7700)*(300000/7700) = $ 3,896
The negative value represents unfavourable variance.
B) The total overhead variance amount would be debited and the same amount would be
credited from the COGS.
C) It is apparent that there are significant variances particularly with regards to direct labour.
Such huge variances on either sides are not considered positive and hence analysis must be

conducted on the precise reason for these variances. Of concern is the fact that majority of the
variances are negative and hence critical analysis of the budgeting process is required.
D) Management by exception implies that the managers ought to pay interest on those aspects
that tend to deviate from the planned level. In this regards, variance analysis is a useful tool
since it highlights the various deviations from the budgeting values and thereby brings to
notice the key aspects that managers need to analyse while the rest can be ignored as they are
running properly.
Question 5
a) The formula for estimation of variable costs is indicated below.
Based on the given data,
Highest activity unit = 151916
Lowest activity unit = 101396
Total cost of highest activity = $ 350,162
Total cost of lowest activity = $244,070
Hence, variable cost = (350162-244070)/(151916-101396) = $ 2.1
Total fixed costs = 350162 – 2.1*151916 = $ 31,138.4
b) Selling price per unit = $ 2.5
Variable cost per unit = $ 2.1
Contribution margin per unit = 2.5 -2.1 = $ 0.4
Fixed costs = $ 31,138.4
Desired profit level post tax = 23,800
Hence, pre-tax profit = 23800/(1-0.3) = $ 34,000

Therefore, requisite sale volume = (34000+31138.4)/0.4 = 162846
Question 6
(A) (i) Direct material cost per unit = $45
Total machine hours for manufacturing 10,000 components of IY2 = 3300
Cost associated with each machine hour = $ 125
Hence, total overhead costs = 3300*125 = $412,500
Overhead cost per unit = 412500/10000 = $41.25
Hence, unit cost under conventional costing system = $ 45 + $41.25 = $ 86.25
(ii) Direct material cost per unit = $45
The overhead costs for 10000 IY2 components are computed as follows.
Activity cost = Cost per unit * Activity Level
Overhead cost per unit = 883400/10000 = $88.3
Hence, unit cost under conventional costing system = $ 45 + $88.3 = $ 133.3
(B) The decision on the part of Indigo Limited to change from conventional costing to
activity based costing is indeed a wise one considering the fact that there is wide discrepancy

between the cost per unit compute by the two methodologies. Obviously, the more accurate
method is activity based costing and the migration to this costing method would allow the
company to competitively price the model.