Deakin University MAA262 Assignment: Managerial Costing Analysis

This assignment delves into various aspects of managerial accounting, beginning with ethical considerations for management accountants, specifically addressing competence, confidentiality, integrity, and credibility. It then analyzes quality costs, differentiating between prevention, appraisal, internal failure, and external failure costs, and evaluates the impact of preventive measures on reducing overall quality costs. The assignment explores the High-Low method for estimating fixed and variable costs, followed by an examination of overhead allocation using predetermined rates for both welding and assembly functions. It then assesses key performance indicators (KPIs) and their alignment with business objectives, contrasting cost-plus and value-based pricing strategies. The solution offers detailed calculations, interpretations, and recommendations based on the provided case study of Fridges-R-Fun, including discussions on ethical dilemmas, cost analysis, and strategic decision-making.

Running Head: Importance of Managerial Costing
MANAGERIAL ACCOUNTING

Importance of Managerial Costing 1
PART 1
Question: 1
The institute of management accountants has issued a statement of ethical professional
practice to be followed by the individuals carrying a certified degree of management
accountancy. As per this statement, the members of IMA must act in the most ethical manner
while discharging their professional duties. It primarily covers four ethical standards to be
followed by the management accountants. They are: competence, confidentiality, integrity
and credibility (IMA, 2017).
In the present case, George has been appointed as the management accountant of Fridges-R-
Fun. George is the licensed plumber and is also the relative of the general manager of the
company. Therefore appointment of George as a management accountant of the company
will jeopardise following ethical standards:
Competence: This standard requires the management accountant to perform those
professional duties that are necessary as per the laws and regulations and technical standards
of the profession. Since, George is a licensed plumber and not the holder of degree of
management accounting, he cannot be appointed as the management accountant. It cannot be
expected from the member of other profession to provide appropriate and accurate
information to the management in the areas of management accounting due to lack of proper
knowledge in this particular field (IMA, 2005).
Integrity: This standard requires the management accountant to resolve any conflicts of
interest arising in the organisation in which he is appointed as the management accountant
(IMA, 2018). In the present case, George is the brother in law of Paul, the general manager of

Importance of Managerial Costing 2
company. Therefore, there are chances that George may discredit the professional obligations
to protect the personal relation with the manager of company.
PART 2
Question 2.1
Appraisal Costs Prevention Costs
Internal
Failures External Failures
Inspection on
assembling line System Development
Rework on
assembly line
Warranty repairs of
fridges
Field testing at
customer sites
Technical support to
suppliers of compressors
Warranty
replacement of
fridges
Technical support to
suppliers of pipes
Question 2.2
The quality management focuses on creation of high quality and high performing product and
services which can meet the expectations of the customer. Quality management in any firm
requires spending of majorly two sorts of quality costs i.e. prevention cost and appraisal costs
(Ahmed Al-Dujaili, 2013). Such costs are incurred by the firm in order to reduce the two
other types of quality costs which are internal failure costs and the external failure costs. It is
more important to prevent the defects instead of identifying and fixing them out of the
products and services. For the purpose of achieving quality management the firm has incurred
these costs. In year 1 the firm did not take up any preventive measures and hence it did not

Importance of Managerial Costing 3
incur any preventive costs. Also, in the first year no appraisal costs were incurred. The firm,
therefore, had to face few internal and external failures. To deal with quality failures firm had
to carry certain reworks for the internal failures. However, certain failures and defects were
encountered by the customers after such products were shipped to them. These failures were
the external failures and costs warranty repairs and warranty replacement costs were incurred
to satisfy the customers who experienced the product failures or defects while using them.
The appraisal cost of the business has increased since year 1 to year 3 from nil to $ 750 and
this shows that the firm is taking necessary steps to identify the defects of the products. This
practice of the firm has enabled it to face less internal as well as external failures. Therefore,
the cost of internal failures has decreased from year 1 to year 3 by $ 450 and also the cost of
external failures has declined by $ 500 in year 3 since year 1.
PART 3
Question 3.1:
As per John who is the owner of Fridges-R-Fun, it is better to incur costs to deal with the
internal and external failures rather than spending monies on reworking on the defective
products and on repairing and replacing the defective products as a part of warranty scheme.
However, as per Ringo, the qualified management accountant, company must take up
preventive measures to prevent the occurrence of failures and to identify and fix the reported
errors before shipping them to the customers. This practice will reduce the excessive
spending on warranty and replacement costs. Paul, the general manager, is in the favour of
Ringo’s recommendations. They believe that though the implementing practices like
inspection, testing, system development and technical support will increase the preventive
and appraisal cost for some time but in the long run, it will amount to reduction in the overall
quality costs by reducing the chances of internal or external failure.

Importance of Managerial Costing 4
Question 3.2:
If Fridges-R-Fun continues with Ringo's suggestion in year 4, it will result in further
reduction of overall quality costs as the chances internal and external failure will be reduced
with the adoption of preventive and other measures to prevent and detect the product defects
on the right time.
If Fridges-R-Fun stops accepting Ringo's suggestion in year 4, it will result in increase in the
changes of internal and external failure costs as now preventive and other measures will be
taken up to prevent and detect the product errors and defects on the right time. Though, this
practice will nullify the preventive and appraisal cost but the warranty and reworking cost
will increase significantly.
PART 4
Question 4:1
High Low Method to estimate variable and fixed costs:
Units Costs
Highest Units delivered 600
$
6,200.00
Lowest Units delivered 350
$
3,700.00
Variable Cost per unit= Change in Cost
Change in Number of
Units

Importance of Managerial Costing 5
= $6200-$3700
600-350
=$2500
250
=$10
Variable cost per unit 10
Total number of units sold 600
Total Variable Cost 6000
Total Cost incurred in April 6200
Fixed Costs 200
Variable cost per unit 10
Total number of units sold 350
Total Variable Cost 3500
Total Cost incurred in February 3700
Fixed Costs 200
Question 4:2

Importance of Managerial Costing 6
The difference between the actual expenses as reported by the business of Fridges-R-Fun and
the estimated expenses under High Low Approach is due to under absorption of overheads.
Using the high low approach, the predetermined variable overhead rate is $ 10 and the
expected overheads are determined using this rate only. Therefore, lesser amount of variable
overheads is applied to the productions units than the delivery expenses that were actually
incurred.
Month Units Expected Actual
Januar
y 450 $ 4,700.00
$
4,710.00
March 400 $ 4,200.00
$
4,300.00
May 500 $ 5,200.00
$
5,300.00
June 450 $ 4,700.00
$
4,700.00
Total $ 18,800.00
$
19,010.00
PART 5
Question 5.1:
Predetermined overhead recovery
rate= Total Fixed Overhead
Direct Machine Hours

Importance of Managerial Costing 7
Welding Function $250000
7500
Fixed overhead rate $33.33
Variable overhead rate $1.5
$34.83
Predetermined overhead recovery
rate= Total Fixed Overhead
Direct Labour Hours
Assembly Function $50000
5000
Fixed overhead rate $10
Variable overhead rate $2
$12
Question 5.2:
Total Overhead Cost Applied
Welding Formula Workings Amounts
Fixed
Actual Machine Hours * Predetermined
fixed overhead rate (50*33.33) $ 1,666.67
Variable Actual Machine Hours * Estimated (50*1.5) $ 75.00

Importance of Managerial Costing 8
variable overhead rate
Total $ 1,741.67
Assembl
y
Fixed
Actual Labour Hours * Predetermined
fixed overhead rate (40*10) $ 400.00
Variable
Actual Labour Hours * Estimated
variable overhead rate (40*2) $ 80.00
Total $ 480.00
Question 5.3:
Manufacturing Cost Recorded for Job 262
Welding Assembly
Direct Material $ 500.00 $ 125.00
Direct Labour $ 250.00 $ 750.00
Manufacturing Overheads
Variable $ 75.00 $ 80.00
Fixed $ 1,666.67 $ 400.00
Total Manufacturing Cost $ 2,491.67 $ 1,355.00
Total Manufacturing Cost recorded for
Job262 $ 3,846.67
Question 5.4:
Unit product Total cost of Job 262 $3846.67 $384.67

Importance of Managerial Costing 9
Cost
Number of units in Job
262 10
Question 5.5:
Since in welding function, more machine hours are used per job than the labour hours and
hence the appropriate basis to allocate the welding overheads is machine hours. However, in
the assembly function more of labour hours are consumed and hence it is more reasonable to
allocate overheads related to assembly cost on the basis of labour hours rather than machine
hours.
Question 5.6:
If the estimated variable manufacturing overhead rate for the welding function is increased
from $ 1.5 to $ 3, there will be no impact on the total assembly overhead cost as the assembly
overheads are to be allocated on the basis of labour hours and machine hours are used to
allocate the welding overheads.
PART 6
Question 6
Key performance indicators are the areas which define whether the business is performing
effectively and efficiently to achieved the desired results (Hilton & Platt, 2013). In the
present case of Fridges-R-Fun, the firm has adopted KPIs on the basis of 6 principles but the
company cannot be said to be the advanced user of KPI as per Schrage and Kiron since the
company KPI’s works on the principle that it should focus mostly on the sales. However it is
not correct, the firm must emphasise more on the value and satisfaction offered to customers

Importance of Managerial Costing 10
to grow and survive. Further, the company works on the principle that KPIs must be reviewed
annually which is not appropriate. Rather, the intervals of review of KPI’s must depend on
the sensitiveness of KPI and it may be taken on weekly or monthly basis. Moreover, the
belief that KPIs are private information and hence must not be shared with the employees of
the company is not justifiable. Rather, the firm must share the KPI information with all the
personnel so that they can effectively be achieved (Schrage & Kiron, 2018).
The firm must change changes its focus from mere sales to the customer satisfaction through
improved quality management. It must also introduce such policies to review the most
significant and material KPIs on weekly or monthly or on more frequent intervals than on
annual basis. Also, the firm must share KPI information with the employees so as to provide
them the freedom to effectively undertake appropriate decision making.
PART 7
Question 7:1
Limitations of cost plus pricing:
 The cost plus pricing method discourages the containment of cost and efficiency
especially in the case of stand-alone projects.
 It is generally believed that cost plus pricing method guarantees to cover the costs.
However, in real practices, the volume of sales is predetermined and fixed cost is
allocated on the basis of such estimation which often leads to miscalculation. Hence,
cost plus price model neither guarantees covering of cost nor earnings of profits.
 This method also ignores the key factors like willingness of customers to pay and the
prices of competitors and therefore it leads to pricing decisions that are completely off
base (Dholakia, 2018).

Importance of Managerial Costing 11
Benefits of value based pricing
It basically prices the product on the basis of value derived by the customer by using the
product and not on the basis of cost involved in its production (Garrison, 2010). Value based
pricing emphasises on the customers. In the present case, where the firm is more focused on
managing its quality of the products, the value based pricing is more beneficial than the cost
plus pricing as the improved quality of the product will enhance the worth of the product for
the managers and they will be willing to pay more for the value derived from the best quality
products. This will ultimately lead to higher profitability.

Importance of Managerial Costing 12
References:
Ahmed Al-Dujaili, M.A., 2013. Study of the relation between types of the quality costs and
its impact on productivity and costs: a verification in manufacturing industries. Total Quality
Management & Business Excellence, 24(3-4), pp.397-419.
Dholakia, U., 2018. When Cost -Plus Pricing is a good idea. Available at: <
https://hbr.org/2018/07/when-cost-plus-pricing-is-a-good-idea> Accessed on: 06.08.2018.
Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A., 2010. Managerial
accounting. Issues in Accounting Education, 25(4), pp.792-793.
Hilton, R.W. and Platt, D.E., 2013. Managerial accounting: creating value in a dynamic
business environment. McGraw-Hill Education.
IMA, 2005. IMA Ethics Resources for Accounting and Finance Professionals. Available at: <
file:///C:/Users/System04091/Downloads/ima_ethics_resources.pdf> Accessed on:
06.08.2018.
IMA, 2017. IMA Statement of Ethical Professional Practice. Available at: <
file:///C:/Users/System04091/Downloads/ethics_prof_prac_full.pdf> Accessed on:
06.08.2018.
IMA, 2018. Ethics Centre. Available at: < https://www.imanet.org/career-resources/ethics-
center?ssopc=1> Accessed on: 06.08.2018.
Schrage, M. & Kiron, D., 2018. Leading with next-generation Key Performance Indicators.
Available at: < https://sloanreview.mit.edu/projects/leading-with-next-generation-key-
performance-indicators/> Accessed on: 06.08.2018.

Importance of Managerial Costing 13
Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and
control. Issues in Accounting Education, 26(1), pp.258-259.