Accounting for Managers: Cost Analysis and Overhead Allocation Report

This report, titled "Accounting for Managers," analyzes the financial performance and cost structures of Bonza Handtools. It begins with an evaluation of three distinct proposals for increasing sales and profit, comparing their projected financial outcomes based on different strategies such as increased advertising, improved product quality, and promotional campaigns. The report then delves into a scenario-based analysis, assessing the impact of increased sales volume and reduced per-unit costs on overall profitability. Furthermore, the report examines overhead allocation methods, including the estimation of over-allocation rates and the application of Activity-Based Costing (ABC) for segmented overhead costs. Finally, the report explores the importance of overhead segmentation and allocation, emphasizing the use of consistent allocation methods and the identification of cost drivers to accurately reflect the costs associated with various services and jobs. The report uses examples to illustrate key concepts and provides references to support its findings.

Running head: ACCOUNTING FOR MANAGERS
Accounting for managers
Name of the student
Name of the university
Author note

1ACCOUNTING FOR MANAGERS
Table of Contents
Question 1..................................................................................................................................2
Question 2..................................................................................................................................4
Question 3..................................................................................................................................5
Question 4..................................................................................................................................7
Reference....................................................................................................................................9

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Question 1
Proposal 1- view of Jan Rossi
Particulars Amount
Sales $ 2,800,000.00
Less: Costs
Variable cost $ 1,000,000.00
Fixed cost $ 400,000.00
Fixed selling and administrative cost $ 425,000.00
Variable selling and administrative costs $ 600,000.00
Total costs $ 2,425,000.00
Profit $ 375,000.00
It can be identified from the above calculation that the profit of Bonza Handtools can
go up to the amount of $ 375,000 that is increase by 25%. Further, if the advertising cost is
increased it will increase the financial burden on the company (Horngren, Datar and Rajan
2012). As per Jan Rossi, sales can go up by 8% approximately as compared to the last year if
the advertising cost as well as the selling price is increased.
Proposal 2 – view of Tom Tune
Particulars Amount
Sales $ 3,250,000.00
Less: Costs
Variable cost $ 1,375,000.00
Fixed cost $ 400,000.00
Fixed selling and administrative cost $ 300,000.00
Variable selling and administrative costs $ 750,000.00
Advertising cost $ 50,000.00
Total costs $ 2,875,000.00
Profit $ 375,000.00
As per the view of Tom Tune, the company can increase their sales by 25% if the
selling price is maintained at same price that is $ 130. However, it is found from the above
calculation that improving the quality of the product may generate higher level of sales but

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the profit will not be more than the proposal of Jan Rossi. In fact the profit will be at the same
level. On the contrary, if the advertising cost and per unit cost for variable manufacturing is
increased, the profit can go up by $ 75,000.
Proposal 3 – View of Mary Watson
Particulars For 1st 3 months For rest of the time
Sales $ 1,200,000.00 $ 1,820,000.00
Less: Costs
Variable cost $ 500,000.00 $ 700,000.00
Fixed selling and administrative cost $ 300,000.00
Variable selling and administrative
costs $ 300,000.00 $ 420,000.00
Fixed manufacturing cost $ 400,000.00
Total costs $ 1,500,000.00 $ 1,120,000.00
Profit $ (300,000.00) $ 700,000.00
Total profit $ 400,000.00
As per the proposal of Mary Watson the company can increase the profit by 33% and
it can increase sales for the rest 9 months by $ 182,000. Thus, among the all 3 proposals,
promotional campaign is beneficial for Bonza Handtools.

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Question 2
Particulars Amount
Sales (units) 150000
Selling price (per unit) $ 15.00
Revenue $ 2,250,000.00
Total cost (per unit) $ 12.50
Total cost $ 1,875,000.00
Profit $ 375,000.00
Situation 1
Particulars Existing Additional
Sales (units) 150000 40000
Selling price (per unit) $ 15.00 $ 15.00
Revenue $ 2,250,000.00 $ 600,000.00
Total cost (per unit) $ 12.50 $ 10.50
Total cost $ 1,875,000.00 $ 420,000.00
Profit $ 375,000.00 $ 180,000.00
Total profit $ 555,000.00
Situation 2
Particulars Existing Additional
Sales (units) 150000 30000
Selling price (per unit) $ 15.00 $ 15.00
Revenue $ 2,250,000.00 $ 450,000.00
Total cost (per unit) $ 12.50 $ 10.50
Total cost $ 1,875,000.00 $ 315,000.00
Profit $ 375,000.00 $ 135,000.00
Total profit $ 510,000.00
It can be seen from the above calculation that under case 1, the company can enhance
the profit by 48% while in the 2nd case it cam increase the profit by 36%. Therefore, the profit
in 1st case is more as compared to 2nd.

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Question 3
1. Over allocation rate estimation
Particulars Amount
Labour hour rate $ 12.70
Indirect cost $ 98,400.00
Labour cost $ 17,780.19
Material cost $ 33,810.00
Other cost $ 6,667.57
Overhead allocation rate $ 5.53
2. Total cost of special order
Particulars Amount
Labour cost $ 17,780.19
Material cost $ 33,810.00
Other cost $ 6,667.57
Total cost $ 58,257.76
3. Cost of special order after using machine time as overhead
Particulars Amount
Overhead rate per hour $ 10.00
Material cost $ 33,810.00
Labour cost $ 14,000.00
Other cost $ 5,250.00
Total cost $ 53,060.00
4. Minimum price per trailer
Total cost $ 58,257.76
Total unit 350
Minimum cost per unit $ 166.45
5. ABC and segmented overhead cost

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The segmented costs pools for overheads can be useful for total cost analysis of the
overhead costs that can be associated with the material purchase, packaging, machine setup,
cleaning, testing and maintenance (Xu et al. 2013). Thus, the costs pool is helpful for
identification of the cost drivers that can be used for analysing the unit cost and total cost for
each of the cost drivers like containers, purchase orders and tests. On the other hand, after
analysis of the cost per unit, the activity cost shall be assigned to each product so that the
activity based costing can be used (Shephard 2012). Moreover, while cost can be determined
as per the ABC method, then the overhead cost per unit can be projected that can be assigned
to each of the product. Thus, this method can be used for identifying per unit cost of each
product that will assist in generating higher levels of sales and profit (Fenrick and Getachew
2012).

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Question 4
No specific rules are there for overhead allocation and each company allocates its
overhead in the way that suits it the most. However, the allocation method shall be
consistently applied by the company (Nekarda and Ramey 2013). The reason behind this is
that if the company uses different methods for different jibs, then some of the jobs will be
overcharged with the overhead costs and some of the jobs will be undercharged with regard
to overheads. Overhead segmentation is the important part for overhead allocation as it helps
in recognizing the cost associated with each job like material handling cost, material purchase
cost, product inspection cost (Özkan and Karaibrahimoğlu 2013). Segmenting also assists in
analysing the entire costs and sources for the same and it identifies the division that incurs the
highest cost and the division with lowest cost (Drury 2013). It also recognize the most
profitable division and it assists the accountant to identify the particular overhead that can
make the changes to the profit of the product either in positive way or negative way
(University.uog.edu 2015). Overheads can segregated based on different expense which in
turn helps in determining cost for particular services or jobs as follows –
Variable overhead Administrative
overhead
Manufacturing
overhead
Indirect overhead
 Production
supplies and
equipment
utilities
 Wages for
the handling
of material
 Administration
and sales
utilities
 Audit fees and
outside legal
fees
 Commission or
wages
 Expenses for
front office
 Office supplies
 Factory
utilities
 Rent for
factory
building
 Property
taxes
 Wages for
junior
staffs
 Salaries
for
 Administrative
salaries
 Accounting and
auditing
expenses
 Office and
telephone
expenses
 Research and
the development

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maintenan
ce
personnel
and
managers
The segmentation of overheads can be explained through the example of Melbourne
Private Hospital, Australia. It is found that in case of the hospital, the treatment time was
ordered by physicians through the computer system at the station of the nurses. The orders for
the treatment and materials were requisitioned and various charges and costs were recorded
on the basis of the patient’s staying duration in hospital (Melbourneprivatehospital.com.au
2018). Further, the associated costs for meals of the patient, bed charges, X-Ray report and
medicine were considered while the total costs were calculated. Therefore, after the patients
gets cured authorities send the bills that were inclusive of medicine charges, fees of the
doctors and other indirect as well as direct overhead costs (Öker and Adıgüzel 2016).
Therefore, the costs were properly recorded under the subsidiary ledger that includes the
episode number and medical number of the patient.

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Reference
Drury, C.M., 2013. Management and cost accounting. Springer.
Fenrick, S. and Getachew, L., 2012. Cost and reliability comparisons of underground and
overhead power lines. Utilities Policy, 20(1), pp.31-37.
Horngren, C., Datar, S. and Rajan, M., 2012. Cost accounting. Upper Saddle River, N.J.:
Pearson/Prentice Hall.
Melbourneprivatehospital.com.au., 2018. Melbourneprivatehospital.com.au. [online]
Available at: http://www.melbourneprivatehospital.com.au/ [Accessed 9 Jan. 2018].
Nekarda, C.J. and Ramey, V.A., 2013. The cyclical behavior of the price-cost markup (No.
w19099). National Bureau of Economic Research.
Öker, F. and Adıgüzel, H., 2016. Time‐driven activity‐based costing: An implementation in a
manufacturing company. Journal of Corporate Accounting & Finance, 27(3), pp.39-56.
Özkan, S. and Karaibrahimoğlu, Y.Z., 2013. Activity-based costing approach in the
measurement of cost of quality in SMEs: a case study. Total Quality Management & Business
Excellence, 24(3-4), pp.420-431.
Shephard, R.W., 2012. Cost and production functions (Vol. 194). Springer Science &
Business Media.
University.uog.edu., 2015. Understanding, Allocating, and Controlling Overhead Costs.
[online] Available at: https://university.uog.edu/cals/people/pubs/mgt/f217.pdf [Accessed 9
Jan. 2018].

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Xu, C., Song, L., Han, Z., Zhao, Q., Wang, X., Cheng, X. and Jiao, B., 2013. Efficiency
resource allocation for device-to-device underlay communication systems: A reverse iterative
combinatorial auction based approach. IEEE Journal on Selected Areas in
Communications, 31(9), pp.348-358.