Finance Module: Accounting for Managers Report on Proposals

This report, titled "Accounting for Managers," analyzes various financial proposals and cost structures within a company. It begins by evaluating three proposals from senior staff, considering their impact on sales, costs, and profit. The report then delves into detailed cost calculations, including direct materials, labor, and overhead, to determine bid prices for government contracts under different capacity scenarios. Furthermore, it explores the implications of different capacity levels on pricing and profitability. The report also addresses the treatment of costs in a balance sheet and calculates overhead allocation rates and total costs for special orders using both traditional and machine hour rate methods. Finally, it highlights the advantages of segmented overhead cost pools and activity-based costing (ABC) in accurately determining production costs and supporting effective pricing strategies. The report concludes with a bibliography of relevant accounting literature.

Running head: ACCOUNTING FOR MANAGERS
Accounting for Managers
Name of the Student:
Name of the University:
Author’s Note:

1ACCOUNTING FOR MANAGERS
Table of Contents
Answer to Question No.1:...............................................................................................................2
Proposal of Accountant:-.............................................................................................................3
Proposal of Production Manager:................................................................................................4
Proposal of Sales Manager:-........................................................................................................5
Answer to Question No.2:-..............................................................................................................6
a) Capacity of 200000 units:-....................................................................................................7
b) Capacity of 180000 units:-................................................................................................8
Answer to Question 3:-....................................................................................................................9
Answer to Question No.4:-............................................................................................................10
a) Calculation of Overhead Allocation Rate:-........................................................................10
b) Calculation of Total Cost for Special Order:-.................................................................10
c) Calculation of Total Cost for Special Order under Machine Hour Rate:-..........................10
d) Calculation of Minimum Price:-.....................................................................................11
e) Advantages of Segmented Overhead Cost Pool & ABC Costing:-....................................11
Bibliography:-................................................................................................................................13

2ACCOUNTING FOR MANAGERS
Answer to Question No.1:
The directors of the company have received three different proposals from their three
senior staffs. To analyze the effect of the three proposals, it is important to determine the current
and profit structure of the company . The cost & profit of the company, based on the information
of last twelve months, are shown below:
Statement of Cost & Profit:-
Current Structure
Particulars Unit Cost p.u. Amount
Sales 20000 130 2600000
Variable
Manufacturing Cost 20000 50 -1000000
Fixed Maufacturing
Cost -400000
Variable Selling &
Administrative Costs 20000 30 -600000
Fixed Selling &
Administrative Costs -300000
Profit 20000 15 300000
From the above statement, it can be stated that if the company continues with the current
cost & profit structure, then it can earn profit of $3,00,000 in total and $15 per unit. In such
consequences, it will generate sale revenue of $26,00,000 annually.

3ACCOUNTING FOR MANAGERS
Proposal of Accountant:-
Now, if the company considers the proposal of the accountant, the propose cost & profit
structure will be as follows:
Statement of Cost & Profit:-
1st Alternative
Particulars Unit Cost p.u. Amount
Sales 20000 140 2800000
Variable
Manufacturing Cost 20000 50 -1000000
Fixed Maufacturing
Cost -400000
Variable Selling &
Administrative Costs 20000 30 -600000
Fixed Selling &
Administrative Costs -425000
Profit 20000 18.75 375000
The table indicates that the company can be able to increase its annual profit to $375000
from $300000 and the profit per unit will also increase to $18.75 from $15. The accountant has
suggested that the sales volume will not fall if an advertisement campaign will be continued at
national level. However, it has been observed that price and demand always inversely
proportional to each other. Whenever, price of any commodity falls, the demand of the same uses
to increase accordingly and if the price increases, then the demand moves downward. Power drill

4ACCOUNTING FOR MANAGERS
is not a necessary commodity and hence, its price and demand will react as per the general
economic rule. The accountant has proposed for an advertisement campaign to prevent the fall of
the sales, due to increase in price. Therefore, the success of the proposal is fully dependable on
the success of the advertisement campaign. If the campaign fails to maintain the current sales
level, then the sales revenue, as well as, the total profit, will fall and the proposal will not be able
to fulfill the objective.
Proposal of Production Manager:
The production manager has suggested to improve the quality of the product for
increasing the sales volume. The projected cost & profit as per the suggestion and expectations
of the production manager are calculated below:-
2nd Alternative
Particulars Unit Cost p.u. Amount
Sales 25000 130 3250000
Variable
Manufacturing Cost 25000 55 -1375000
Fixed Maufacturing
Cost -400000
Variable Selling &
Administrative Costs 25000 30 -750000
Fixed Selling &
Administrative Costs -350000
Profit 25000 15 375000

5ACCOUNTING FOR MANAGERS
It is quite evident that, by following this proposal, the company can increase its sales
volume to $325000 from $260000. Subsequently, the total profit will also rise to $375000 from
$300000. However, the profit per unit will remain same. If the company wish to earn profit in
volume then the proposal is quite effective. However, it is not sure that the consumers of the
product are interested in improved quality or not. If, the improved quality fails to attract more
consumers, then the sales volume will not increase as per the projection. In that case, the extra
cost for advertisement and production will force the total profit volume to decrease and the profit
per unit will also move downwards accordingly.
Proposal of Sales Manager:-
The sales manager intends to lower down the selling price for first 3 months. The cost &
profit structure for the first 3 months are shown below:
Statement of Cost & Profit:-
3rd Alternative
Particulars Unit Cost p.u. Amount
Sales 10000 120 1200000
Variable
Manufacturing Cost 10000 50 -500000
Fixed Maufacturing
Cost -100000
Variable Selling &
Administrative Costs 10000 30 -300000
Fixed Selling &
Administrative Costs -85000
Profit 10000 21.5 215000

6ACCOUNTING FOR MANAGERS
As the table describes, the company will surely earn higher profit per unit to $21.50 than
the actual profit per unit of $15. It can also increase its total sales revenue comparatively. The
company can sell almost half of last years’ sales volume within first three months in this year.
Moreover, as mentioned above, fall in price can surely increase the demand of the product.
However, when, the price will be increased after three months, that can create negative impact on
the customers. The sales volume may fall down significantly that time, which may result in
decrease of total sales volume. In that case, the additional profit, expected to be earned in the
first 3 months, cannot help the company to earn more profits annually.
Answer to Question No.2:-
The cost & profit structure of the company as per the normal estimations are calculated
below:
Particulars Unit
Cost
p.u. Amount
Direct Material Cost 150000 2.5 375000
Direct Labor Cost 150000 3 450000
Variable Factory Overhead 150000 1.5 225000
Fixed Factory Overhead 150000 2 300000
Manufacturing Cost 150000 9 1350000
Variable Selling &
Administrative Cost 150000 2 300000
Fixed Selling &
Administrative Cost 150000 1.5 225000
Total Cost 150000 12.5 1875000
20% Mark Up 150000 2.5 375000

7ACCOUNTING FOR MANAGERS
Selling Price 150000 15 2250000
a) Capacity of 200000 units:-
Now, if the capacity of the factory is 200000 units, then the cost & profit structure of the
company will as follows:
Particulars Unit
Cost
p.u. Amount
Direct Material Cost 200000 2.5 500000
Direct Labor Cost 200000 3 600000
Variable Factory
Overhead 200000 1.5 300000
Fixed Factory
Overhead 200000 1.5 300000
Manufacturing Cost 200000 8.5 1700000
Variable Selling &
Administrative Cost 200000 2 400000
Fixed Selling &
Administrative Cost 200000 1.13 225000
Total Cost 200000 11.63 2325000
20% Mark Up 200000 2.33 465000
Selling Price 200000 13.95 2790000

8ACCOUNTING FOR MANAGERS
From the above table, it can be stated that the selling price for 200000 units will be
$13.95. Therefore, the bid for the supply to government department will be as per the following
table:
Particulars Unit
Cost
p.u. Amount
Selling Price 40000 13.95 558000
Less : Sales Commission 40000 2 80000
Bid Price 40000 11.95 478000
b) Capacity of 180000 units:-
For the capacity level of 180000 units, the cost & profit structure is calculated below:
Particulars Unit
Cost
p.u. Amount
Direct Material Cost 180000 2.5 450000
Direct Labor Cost 180000 3 540000
Variable Factory Overhead 180000 1.5 270000
Fixed Factory Overhead 180000 1.67 300000
Manufacturing Cost 180000 8.67 1560000
Variable Selling &
Administrative Cost 180000 2 360000
Fixed Selling &
Administrative Cost 180000 1.25 225000
Total Cost 180000 11.92 2145000
20% Mark Up 180000 2.38 429000
Selling Price 180000 14.3 2574000

9ACCOUNTING FOR MANAGERS
According to the above table, the selling price for 180000 units will be $14.30. In that
case, the bid price for the government supply will be as per the following table:
Particulars Unit
Cost
p.u. Amount
Selling Price 40000 14.30 572000
Less : Sales Commission 40000 2 80000
Bid Price 40000 12.30 492000
Answer to Question 3:-
Balance Sheet represents the closing balances of assets and liabilities. As costs are
Nominal A/c. in nature, such financial items are not included in the balance sheet as assets. The
closing balances of several cost related accounts are closed at the end of the year by adjusting it
with Income Statement.
However, some costs can be shown in the asset side of the balance sheet, if the cost is
paid in advance for the current year. Such costs are referred as Prepaid Expenses.
There are many costs, which are revenue expenditure in nature, but provide benefits in
the following years also, i.e, advertisement cost. In that case, the part of the such expenses,
which is attributable to the following years, are shown in the asset side of the balance sheet as
Deferred Revenue Expenditure.
It should be noted that the costs, which are incurred in cash, can only be shown as assets
in the balance sheet, if paid in advance. The non-cash expenses, such as, depreciation or
amortization, cannot be treated as assets in the balance sheet in any circumstances.

10ACCOUNTING FOR MANAGERS
Answer to Question No.4:-
a) Calculation of Overhead Allocation Rate:-
Particulars Amount
Indirect Cost $ 98,400.00
Direct Labor Hour 25795
Machine Hour 9840
Indirect Cost per Labor Hour $ 3.81
b) Calculation of Total Cost for Special Order:-
Particulars Unit
Cost
p.u. Amount
Direct Material 2100 16.1 33810
Direct Labor 1400 12.7 17780
Indirect Overhead 1400 3.81 5334
TOTAL COST 32.61 56924
c) Calculation of Total Cost for Special Order under Machine Hour Rate:-
Particulars Unit
Cost
p.u. Amount
Direct Material 2100 16.1 33810
Direct Labor 1400 12.7 17780
Indirect Overhead 525 10 5250
TOTAL COST 38.8 56840

11ACCOUNTING FOR MANAGERS
d) Calculation of Minimum Price:-
Particulars Amount
Minimum Total Cost $ 56,840.00
Nos. of Trailers 350
Minimum Price per
Trailer $ 162.40
e) Advantages of Segmented Overhead Cost Pool & ABC Costing:-
It is very necessary to ascertain the production cost accurately. Production cost is the most
important factor for pricing purpose. It is the base of any pricing structure. Hence, the business
firms give high focus on accurate production costs and adopt various costing method for
calculating the productions costs properly.
In modern times, the production system has become complicated and advanced. In such
scenario, it has become very tough to allocate the costs properly. Activity based costing is the
most effective method for such accurate allocation of costs. It divides the various costs under
different activity based cost pools and allocates the total costs of different departments into the
different cost pools proportionately.
Any business department is involved with various types of business activities. Hence,
allocation of costs, according to departments, may not provide accurate production costs.
Therefore, ABC costing allocates the costs according to the activities and helps the firm to
identify actual expenses, incurred for various activities.