Management Accounting Report: Analysis of Divine Denim Case Study

This report presents a comprehensive analysis of the Divine Denim case study, a growing company specializing in made-to-measure and ready-to-wear denim clothing. The report begins with an application of Porter's Five Forces to assess the competitive landscape, differentiating between the made-to-measure and ready-to-wear segments. It then delves into cost allocation methods, including direct, step-down, and reciprocal methods, to determine departmental costs. The report further examines cost accounting using the weighted average cost method to calculate unit costs and work-in-progress valuation. Finally, it analyzes cash flow projections, identifies potential financial challenges, and recommends strategies to improve cash management through borrowing and budgeting, highlighting the importance of budgets in business decision-making. The analysis aims to provide insights into the financial and strategic challenges faced by Divine Denim and propose solutions for sustainable growth.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student
Name of the University
Author Note

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MANAGEMENT ACCOUNTING
Table of Contents
Answer to Question 1...................................................................................................................2
Answer to Question 2...................................................................................................................3
Answer to Question 3...................................................................................................................5
Answer to Question 4...................................................................................................................8
Part B..........................................................................................................................................10
Bibliography...............................................................................................................................12

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MANAGEMENT ACCOUNTING
Answer to Question 1
Porter's Five Forces
and Organisational
Strategies (PFFOS)
Summary
How PFFOS affect the
made to measure
business
How PFFOS affect the
RTW business
The Porter’s five forces
analysis is an analytical
tool which consists of five
competitive forces which
are essential in determining
the strengths and
weaknesses of an industry.
It is useful in thoroughly
understanding the structure
of an industry and in
determining the corporate
strategy of any unit
conducting business within
the industry. The major
forces as stated by Michael
E. Porter are the
competition in an industry,
potential of new entrants in
the industry, power of
suppliers, power of
The PFFOS affect the
made to measure
business in the manner
that there is a threat
from the substitutes and
other related aspects to
the business. The
company be facing
extreme competition
from the existing
players and hence, the
costs are not under
control to face this
competition. Similarly,
the bargaining power of
the suppliers may be
very high and hence the
costs incurred in
purchasing the material
may be high. The
materials required for
the manufacture of the
products is extremely
specific with specialised
designs and needs in
terms of weight and the
quality of the product.
There are not many
suppliers producing the
same. Hence, the
business may suffer
from any disputes
caused with the
suppliers in the short
and the long run.
Similarly, the
competition in the
industry may be
In case of the RTW
business, the level of
competition prevalent
in the industry is not
very high. Hence, there
is no significant threat
of companies cutting
down the entry of a
new player. Similarly,
the potential for new
entrants is not very
high because of the
increased costs
involved in establishing
a business in the
particular industry. The
power of suppliers in
the industry is not very
high as most of the
production is
dependent on the use
of machines. Hence,
the suppliers producing
the products do not
have any special say in
determining the
strategy of the
business. The power of
customers is very high
as they can easily shift
to a competitor if they
are not satisfied with
the product. Hence, it
is imperative to keep
them happy. The threat
of substitutes is high as
the existing players in
the market are

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MANAGEMENT ACCOUNTING
customers and the threat of
substitute products. While
using this model can cause
a significant increase in the
profits of the entity, the
amendments to the strategy
also need to be made in a
timely manner to ensure
that the business continues
to remain competitive in
the industry. Other
significant benefit of using
this particular model is that
it ensures the long-term
profitability of an entity.
increasing the emphasis
on maintaining the level
of production. This may
be preventing the
business from
innovations. The power
of customers is very
high. Hence, it is
essential to meet the
requirements of them to
ensure that the business
survives in the long run.
Similarly, other aspects
include the potential of
new entrants into the
business. There is a lack
of new entrants because
of the high level of
restrictions prevalent in
the industry. However,
as the cost of switching
is not very high, there
may still be an influx of
new businesses
operating within the
industry. Hence, there is
a need to diversify the
business to remain
competent.
extremely profitable
and they have
significant resources to
overcome the threat of
the new businesses. On
an overall basis, this is
a relatively new
industry with relatively
high costs. Hence, the
initial period of
conducting the
business would be
crucial for the business.
Answer to Question 2
i. Cost Allocation Using the Direct Method

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Particulars Basis Total Cutting Machinin
g
Administration Costs Number of
Employees
65000 5417 43333
IT Costs No. of Computers 42500 3542 38958
Design Costs 50% each 55000 27500 27500
Total Supporting Costs 36458 109792
ii. Cost Allocation Using the Stepdown Method
Particulars Administration IT Design Cutting Machinin
g
Departmental Costs before
allocation
65000 42500 55000 57500 425000
Administration costs (65000) 5909 5909 5909 47273
Design Costs (60909) 30455 30455
IT department cost (48409) 4840.91 43568.18
Total Cost after Allocation 0 0 0 98705 546295

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iii. Cost Using Reciprocal Method
Direct costs Administratio
n
IT Design Cutting Machining
Materials & Labour 55000 35000 45000 50000 400000
Indirect costs 10000 7500 10000 7500 25000
Total 65000 42500 55000 57500 425000
Allocation base 38722 123778
No of computers 1 1 1 9
Designs 0.5 0.5
No. of employees 1 1 1 1 8
Total Support Dept.
Cost
162500
Answer to Question 3
i. Cost Using the Weighted Average Cost Method
Particulars Cutting
Department
Machining
Department
Started in Process 100
Received from Cutting Department 135
Transferred to finished goods room 200
Units in Process at the end of March 35

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Particulars Units Amount
Beginning WIP (75% Complete) 100
Cutting Costs Transferred in 3300
Direct Labour 32000
Overhead Costs 40000
Total Costs 75300
Units received from cutting department Units Amount
Material 135 6007.5
Direct Labour Costs 32000
Overhead Costs 40000
Total Costs 78007.5
Total Weighted Average Cost per unit
Direct Material 40
Direct Labour 664
Overhead per unit 830
Total Cost per unit 1533
Cost of Worked Completed on 31.3.2020 306588
Cost of WIP on 31.3.2020 24144

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ii.
Particulars 100
Units
Amount
Cutting Costs Transferred in 3300
Direct Labour 32000
Overhead Costs 40000
Total Costs 75300
Cost per unit
Material 33
Labour 240
Overhead Costs 300
Total Cost per unit 573
Unit Cost of later Units Units Amount
Direct Material 44.5
Direct Labour Costs 320
Overhead Costs 400
Total Cost per unit 764.5
Cost of Work Completed Using FIFO 133750
Cost of WIP Using FIFO 12041

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Answer to Question 4
i.
Particulars March April May June
Opening Cash Balance -18400 -67300 -136000 -177100
Cash Sales during the month 42000 78000 126000 156000
Amount collected from creditors for the months
credit's sales
7000 13000 21000 26000
Amount collected from previous month's sales 15000 21000 39000 63000
Total Inflow of Funds 64000 11200
0
186000 245000
Less: Outflow of Funds
Payment for purchases 75000 13500
0
170000 175000
Payment of Expenses for the month 30800 38000 47600 53600
Previous month expenses 7100 7700 9500 13400
Closing Cash Balance -67300 -
13600
0
-177100 -174100
The following notes have been used in completing the question:
Opening Cash Balance for February 40000
Cash Sales during the month 30000

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Amount collected from creditors for the months credit's
sales
5000
Amount collected from previous month's sales -
Less: Outflow of Funds
Payments for purchases 65000
Payment of Expenses for the month 28400
Closing Balance -18400
From the above situation, it is evident that the cash flows of the business are negative for
an extended period of time. Hence, it is not good for the business as the entity is not able to
generate sufficient cash flows to maintain a safe amount of liquidity. This makes it difficult for
the business to make its daily payments and run the business in an efficient manner. The lack of
cash flows for a long period of time can also result in the business going bankrupt in the long
run. Hence, the business needs to have sufficient cash balances in the short and long run to
ensure that it establishes itself in the short term. This can be done with the help of loan funds.
These funds can then be used to make the business have positive cash balances. Ultimately, this
will result in the increased profitability and an improved liquidity of the business.
ii.
Particulars March April May June
Opening Cash Balance -18400 10000 10000 10000
Cash Sales during the month 42000 78000 126000 156000
Amount collected from creditors for the months credit's 7000 13000 21000 26000

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sales
Amount collected from previous month's sales 15000 21000 39000 63000
Amount of funds borrowed 77300 68700 41100 -
Total Inflow of Funds 12290
0
190700 237100 255000
Less: Outflow of Funds
Payment for purchases 75000 135000 170000 175000
Payment of Expenses for the month 30800 38000 47600 53600
Previous month expenses 7100 7700 9500 13400
Closing Cash Balance 10000 10000 10000 13000
Part B
In the modern day businesses, budget is an extremely relevant tool in the process of
decision making by the business. It is no longer a clerical tool which helps the business in
making decisions based on their past performances. In the modern day business, it is an
analytical tool which helps them in making extremely complex decisions about the allocation of
funds available with it. Having sufficient cash ensures that Helen does not miss out on any new
investment opportunity which is available within a short span to the business. Similarly, it also
makes sure that the business does not suffer from any unnecessary burden caused due to the lack
of sufficient cash flows. The payments to the suppliers can be made in a timely manner to ensure
that the business does not suffer from losing them. The expansion using the loans is also
necessary in funding the growth of the business. However, a cash budget will be necessary to
ensure that the business pays the loans in a timely manner without any default on its part. It also

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suggests the time which the business may take to become profitable in the short run. Apart from
these, the other benefits of preparing a budget is that it helps the business in the process of
decision making and in improving the performance of the entity. The other business processes
undertaken by the entity can be coordinated with the help of the cash budget allocated by the
business. There is no under allocation or over allocation of the resources available with the
business.