HND Business: Management Accounting Report for ABC Co. Ltd. 2019

This management accounting report provides a comprehensive analysis of ABC Co. Ltd., focusing on various management accounting techniques. It covers the meaning of management accounting, cost classification, unit cost calculation using absorption and marginal costing, costing methods for special orders using job order costing, optimum product mix determination, breakeven unit calculation, and evaluation of a promotional proposal. The analysis includes calculations and recommendations for ABC Co. Ltd. based on the provided data, ultimately advising against the promotional proposal due to its potential negative impact on overall profit. This report utilizes relevant costing principles and formulas to aid in decision-making and strategic planning.

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Higher National Diploma in Business
Assignment Brief Number 1

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Contents
Section 1: Meaning of Management Accounting, its different types and role of management
accountants......................................................................................................................................3
Section 2: Classification of Costs that would help the Management decision-Making..................4
Section 3: Calculation of unit cost through using absorption costing and marginal costing...........4
Section 4: Costing method for special order....................................................................................5
4.1: Costing method.....................................................................................................................5
4.2: Calculation of cost of special order through using the job order costing.............................6
Section 5: Optimum Product mix....................................................................................................6
Section 6: Calculation of breakeven units.......................................................................................7
Section 7: Evaluation of proposal....................................................................................................7

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Section 1: Meaning of Management Accounting, its different types and role of management
accountants
The concept of management accounting can be described as the process of developing the
management reports for providing accurate and timely financial information to the managers for
taking short and long-term decisions relating to promoting the growth and development of a
company. The concept is significantly different from that of financial accounting that involves
developing financial reports for external users. On the other hand, the field of management
accounting involves developing the financial reports for internal audiences such as department
managers to provide them the stated goals and objectives to be attained. The major type of
information that are developed and provided by the management reports are amount of
availability of cash, sales revenue generated, amount of orders in hand, accounts payable and
receivable, outstanding debts, raw material and inventory information (Ward, 2012).
The different types of management accounting system can be described as follows:
 Inventory Management System: It can be described as a method of management
accounting that involves managing the information related to stocking of goods. This
type of management report is developed for tracking the inventory level, orders, sales and
deliveries.
 Cost Accounting System: This method of management accounting involves estimating
the cost of the business operations involved in developing the products and aligning the
costs with the determined goals and objectives.
 Job Costing System: The method of accounting involves assigning costs for the specific
job incurred and thus developing an estimate of the overall cost incurred in carrying out
job operations (Youngm, 2014).
The management accountants are involved in designing and presenting the financial and
cost control reports to be used at each level of management. As such, the different roles of
management accountant can be stated as follows:
 Planning of Accounting Function: The management accountant is involved in planning
the type of information that should be included within the management report.
 Controlling: This involves measuring the actual performance and comparing with the
standard report developed. The management accountants by identifying the goals in the
performance holds the responsibility of implementing adequate measures for overcoming
the gaps identified.

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 Reporting, Coordinating and Interpreting: The management accountant holds the
responsibility of preparing the report and presenting it to the top management for taking
effective decisions. Also, management accountants are required to co-coordinating the
individual business departments and also interpreting the accounting information and
presenting it before the management for taking strategic decisions.
Section 2: Classification of Costs that would help the Management decision-Making
 Direct Costs: The costs that are directly related with developing the products that include
materials, labour, distribution and other type of expenses involved in the production of a
product.
 Indirect Costs: The costs that can cannot be easily traced in respect to developing a
product or service such as consumption of power
 Fixed Costs: The costs that remains constant and does not change with production of
goods or service such as rent
 Variable Cost: The cost that fluctuates with the volume of production such as materials
or labor required
 Overhead cost: The costs that is incurred for the production of an additional unit
 Opportunity Cost: The benefit that is given up when one decision is preferred over
another and it represents an alternative that is given up when a decision is made
 Sunk Cost: The historical costs that have been incurred and will not have any impact on
the decisions undertaken by the management as these are unavoidable or unrecoverable
Section 3: Calculation of unit cost through using absorption costing and marginal costing
There are two types of products produced ABC Company Limited and these products are
personal computer (PC) & Video Players (VP). Details about selling price, variable cost, and
fixed cost has been provided with regards to this question. Fixed cost of whole year has been
provided and it has been charged on OAR (Overhead allocation rate) basis using labour hours.
So, firstly there is need to predict the overhead rate using the information provided.
Calculation of predetermined overhead rate
Fixed cost of the year $ 2,400,000.00
Estimated number of labour hours 30000
Overhead rate (Fixed Cost)
$
80.00
The main different between absorption and marginal costing is that under marginal
costing variable cost is considered as product cost but under absorption costing both fixed cost

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and variable cost are considered as product cost. Under absorption costing variable overhead cost
is considered as an important element and it is the part of the product cost. On the other hand, all
the overhead cost is treated separately and it is added after all the variable cost has been charged.
It means there is huge difference under both the approached of costing. Cost per unit of both PC
and VP has been calculated using both the approached and has been presented below:
Particulars PC VP
Selling Price 1,200.00$ 1,600.00$
Less:
Direct Material 600.00$ 800.00$
Direct Labour 200.00$ 400.00$
Other variable O/H 200.00$ 200.00$
Variable cost per unit 1,000.00$ 1,400.00$
Fixed Cost (Use of OAR) 80.00$ 80.00$
Profit 120.00$ 120.00$
Statement of absorption costing (Per unit)
Other variable O/H
Variable cost per unit
Fixed Cost (Use of OAR)
Profit
Calculation of predetermined overhead rate
Fixed cost of the year
Estimated number of labour hours
Under both the approach the per unit is almost same as there is no issue related to
opening and closing inventory which change the variable overhead rate under absorption costing.
Section 4: Costing method for special order
4.1: Costing method
There are various costing method that can be applied to predict the cost of this special
order but most suitable method is job order costing as this costing method favors the situation
where there is special order and need to consider different costs particularly for special order
(Warren, 2018).

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4.2: Calculation of cost of special order through using the job order costing
Special order is to supply 10000 units of PC at $1050 per unit. In this case the selling
price is very low as compare to regular selling price but one thing must be noted here is that
fixed cost will not impact the decision as this cost will be occurred despite of special order. So,
the thing that needs to be considered is that sufficient labour hours are available to satisfy the
special order and it will not impact the regular sales. There is needed to make statement of
relevant cost through using the job order costing method.
Particulars Amount Amount
Selling price 1,050.00$
Less: Variable Costs
Direct Material 600.00$
Direct Labour 200.00$
Other variable O/H 200.00$
Total 1,000.00$
Profit 50.00$
Total Units 10000
Total Profit 500,000.00$
Statement of relevant cost (Job Costing)
The selling price offered under special order is sufficient to meet the variable cost and
also provide $ 50 profit. In case if special order requires to shift labour hours from the regular
sales than in that case there is need to consider the loss of opportunity cost and also need to
include the fixed cost.
It is recommended to ABC Limited to accept the special order due to profit of $50 each
unit and $500000 total profit.
Section 5: Optimum Product mix
Optimum product mix refers to the mixture of units of each product type to maximise the
product. In the given situation the maximum labour hours available is 60000 hrs and maximum
demand of PC is 10000 units and VP is 20000 units. In order to determine the optimum product
mix it is highly required to give proper ranking to each product on the basis of contribution per
unit per labour hour as labour hours is the limiting factor in this case.

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Particulars PC VP
Selling Price 1,200.00$ 1,600.00$
Less:
Direct Material 600.00$ 800.00$
Direct Labour 200.00$ 400.00$
Other variable O/H 200.00$ 200.00$
Total Variable cost per unit 1,000.00$ 1,400.00$
Contribution 200.00$ 200.00$
Direct labour hrs for each unit 2 4
Contribution per unit for each
direct labour hr 100.00$ 50.00$
Ranking 1 2
Statement of calculation of contribution per unit per direct labour hour
On the basis of ranking, there is requirement of produce PC than if any labour hours left
than produce VP. It can be seen below:
Product Max Demand Labour hrs consumed Mix
Max: 60000 hrs
PC 10000 10000 units*2=20000 10000
VP 20000
Balance (40000/4) = 10000
units 10000
Statement of optimum product mix
Section 6: Calculation of breakeven units
Breakeven in units can be calculated through using the following formula:
Total Fixed cost/Contribution per unit
In order to calculate the breakeven units when there is target profit is given there is need
to use following formula:
(Target profit + Fixed Cost) /Contribution per unit
The fixed cost given in this case is $2.4 million and contribution per unit of IP is $600
therefore breakeven unit is $2.4 million /$600 = 4000 units. When the target profit is given the
breakeven units are $2.4 million + $1.2 million /$600 = 6000 units (Butz, 2011)
Section 7: Evaluation of proposal
Proposal is to spend the additional $600000 for the promotion of IP that will increase
selling price by $60, hence increasing the contribution to $660. Here we need to calculate the net
profit when there is promotion and when there is not promotion.

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Expected Number of units Sold 6300 units
Old Contrbution before promotion 600.00$
Additional contribution 60.00$
New Contribution 660.00$
Promotional Expenses 600,000.00$
Fixed Cost 2,400,000.00$
Units sold when there is promotion 6300.00 units
Units sold when there is no promotion 6000.00 units
Particulars Calculation Amount
Total Contribution 6300*$660 4,158,000.00$
Less: Fixed Cost (2,400,000.00)$
Less: Promotional Expenses (600,000.00)$
Net Profit 1,158,000.00$
Statement of calculation of profit margin (6300 units) + Promotion
Particulars Calculation Amount
Total Contribution 6000*$600 3,600,000.00$
Less: Fixed Cost (2,400,000.00)$
Less: Promotional Expenses -$
Net Profit 1,200,000.00$
Statement of calculation of profit margin (6000 units) + No Promotion
Here, it can be said that ABC Company Limited should not go for promotion as it will
decrease the overall profit (Weygandt, 2010).

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References
Butz, C. 2011. Role and Effects of Budgeting in Managerial Practice. GRIN Verlag.
Ward, K. 2012. Strategic Management Accounting. UK: Routledge.
Warren, C. 2018. Managerial Accounting. Canada: Cengage Learning.
Weygandt, J. 2010. Managerial Accounting: Tools for Business Decision Making. John Wiley &
Sons.
Youngm D. 2014. Management Accounting in Health Care Organizations. US: John Wiley &
Sons.