Managerial Accounting Report for Kilbirnie Fabrications (KF) - MA515

This report analyzes the managerial accounting challenges faced by Kilbirnie Fabrications (KF), focusing on its costing system. The report identifies issues with the current absorption costing method, such as potential profit misrepresentation and difficulties in operational decision-making. It breaks down product costs, including direct labor and complex hour calculations. The core of the report proposes a variable costing approach as a more accurate alternative, highlighting its benefits in providing a logical relationship between direct materials and factory overhead, improving operational efficiency, and representing actual product inputs. The differences between the two methods, particularly in the treatment of fixed manufacturing overhead, are discussed. The report concludes with a recommendation to Fred, the manager, to adopt the variable costing method for improved cost allocation and net income reporting, ensuring greater transparency and visibility for management decisions. The analysis covers the implications of fluctuating material prices and the importance of considering the time factor in overhead allocation.

Managerial
Accounting
Fred Ferrous of Kilbirnie Fabrications (KF)

General problems associated
with KF’s costing system
 Use of absorption costing may lead to company’s profit level appear
better than the actual accounting period
 Difficulty in making efficient decision to increase the operational
efficiency
 Fluctuating trend in the material prices has posed additional threat
pertaining to the high or low overhead costs
 The use of direct materials cost approach ignores the time factor
which is an essential characteristic to be considered during allocation
of the overhead

Breakdown of product costs
 Direct cost per unit was computed as $ 50 for Expert fitters and $ 30
for Junior fitters
 The breakdown of the quoted price per unit is stated with 3 complex
hours for Expert fitters, 2 hours for Junior fitters and complex Junior
hour of 1 hour
 The data on the typical fabrication cost has also revealed that the use
of welding equipment (welding hours) for complex hours is 2 hours
 The annual budget of KF shows direct labour cost for Expert fitters
was $ 170000 and for Junior fitter was $ 153000

Alternative job costing
approach that will provide more
accurate job costs Variable costing approach will allow non deduction of fixed cost being
not deducted from the revenues
 The present costing system lacks in providing a logical relationship
which is found among the direct materials cost of a product and
factory overhead
 This will contribute to the operational efficiency
 Variable costing will allow the users of the financial statement to
represent the actual inputs of a product

Difference of the previous and
alternative job costing approach
 The main form of the difference between the two methods may be taken into
account with treatment for fixed manufacturing overhead costs
 Alternative costing method such as variable costing has allowed KF to segregate
cost considerations as per fixed cost for the operating expenses and cost of
production
 KF has the opportunity to allocate the fixed overhead cost resulting to all units
which are produced during a particular period
 The variable costing will be able to combine the fixed overhead cost into one
expense group and reporting the same under single line item in a balance sheet
taken as per net income

Advising Fred for using
appropriate job costing system
 The final advise to Fred can be inferred with the adoption of variable
costing approach
 The adoption of the variable costing method will be ideal for the company
in allocating the manufacturing costs and consider the effect of the same
as per reporting of the net income
 Variable costing will be more concrete and visible to the managers of the
company
 The adoption of such a technique will ensure that variable and fixed are not
charged with the individual products

Thank You