Management Accounting Report: ABC Ltd - Costing Analysis

This management accounting report analyzes ABC Ltd, a manufacturer of electronic products, focusing on various theoretical underpinnings and practical applications. It covers cost accounting, the role of a management accountant, and cost classification, including fixed, variable, direct, indirect, pr...Read More

MANAGEMENT ACCOUNTING
ASSIGNMENT BRIEF 1
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Introduction
The objective of this report/proposal is to discuss various theoretical underpinnings related to
management accounting, role of accountant and classification of costs. Additionally, the various
computations in relation to costing, optimum production mix have also been taken based on the
information provided for ABC Ltd which is involved in manufacturing electronic products.
Besides, the feasibility of the new product launch (Iphone) has also been carried out with regards
to break even and the viability of the proposed promotion campaign.
Management Accounting and Types
Management accounting is an umbrella term which is used to refer to the various reports which
relate to the organizational activities and are useful for the decision making by the management
about the current state or future. This is in quite in contrast with financial accounting where the
focus is to provide standardized information to external users for decision making. However, the
focus of management accounting activities is towards internal stakeholders primarily the
management as decisions ought to be taken regarding various business aspects. There is high
degree of flexibility in the type and format of reports produced. Also, most of the reports are
directed towards future projections which can facilitate decision making by understanding risk in
a more comprehensive manner (Drury, 2016).
One of the key types of management accounting is cost accounting. This relates to various
aspects of the product costing which is a pivotal element as it has direct influence on price and
thereby the sale and profitability of the underlying product. Also, it can potentially help in
making decisions related to outsourcing of production besides providing quotation for special
orders where it is imperative to classify the costs as fixed and variable. Here, the focus is on the
appropriate costing method to be used (Bhimani et. al., 2017). Another noticeable type of
management accounting relates to evaluation of performance of various departments and
activities that are undertaken by the company in order to deliver the end product. This is a vital
aspect and is closely related to budgeting since it allocates the various targets which the
departments ought to meet. Another key type of management accounting is related to planning.
The focus of these activities is on future planning using various forecasting techniques and tools
which can allow the management to make appropriate decisions in wake of the various internal

and external factors coupled with the mission and vision of the company (Parrino and Kidwell,
2014).
Role of Management Accountant
The management accountant plays a pivotal role in improving the quality of decisions made by
the company. He/She would prove useful with regards to cost classification, budgeting and
planning. In relation to cost classification, a particular challenge could be allocation of overhead
costs. In this regards, the management accountant can help the company to implement activity
based costing. Further, there are several budgeting techniques which are available but the
management accountant can provide sound advice in relation to appropriate technique in this
regards This plays a crucial role in ensuring that the budget is overall a success and fulfills the
various objectives. Besides, guidance is provided by management accountant in relation to the
host of decisions taken by the management based on forecasting of the key variables in the
future. Inevitably, management accountant plays a crucial role in fine tuning these forecasts
especially in the background where a host of tools and techniques are available to produce the
forecasts (Emmauel and Otley, 2015).
Classification of Costs
A pivotal role with regards to improve the overall management decision making is played by the
classification of costs. This would involve segregation of costs into various types based on the
underlying characteristics. The most common classification is based on activity level where costs
can be classified as fixed cost and variable cost. This is quite useful in decision making. An
illustration of this is evident when decision has to be made if the production should be
outsourced or not. Outsourcing decisions must consider not only the variable costs that would be
fully avoided but also the fact that some of the fixed costs may be avoidable while others may
not be. Further, in case of special orders to fulfill, the decision regarding quotation would be
based on variable costs as fixed cost would not be impacted owing to incremental production
(Heisinger, 2014).
Additionally, the classification of costs as direct and indirect is also pivotal. This is important
considering the fact that direct products can be traced to a particular product while the same is
not the case for indirect products. In costing of products when multiple products are

manufactured, the above classification has huge significance. This is because the indirect cost
ought to be allocated between the two products while the direct costs are directly attributed to the
respective product to which it can be traced. Any mistake in classification could cause error in
product costing while may lead to under –pricing of a given product and over-pricing of the
other. Such errors could have significant adverse impact on the competitive position and
reputation of the firm (Brealey, Myers and Allen, 2014).
The costs are also divided into product cost and period cost whereby the product costs related
directly to the production of the product while period cost relate costs related to administration,
sales along with miscellaneous costs. This allows the firm to distinguish between the
manufacturing costs with the selling costs and thereby could be useful in specific costing
techniques. Additionally, it can also allow comparison of firm’s efficiency with peers in terms of
different activities which can enable identification of areas of improvement. This can enable
management decision in regards to future performance targets which the company and specific
departments ought to meet (Bhimani et. al., 2017).
Unit Cost Determination
The key difference between marginal costing and absorption costing with regards to product
costing is the formal only considers the variable costs per unit while the latter considers both the
variable costs as well as fixed costs (Drury, 2016).
Marginal Costing
Unit variable cost (PC) = Direct material + Direct labour + Variable overhead cost = $ 600 + $
200 + $ 200 = $ 1,000
Unit variable cost (VP) = Direct material + Direct labour + Variable overhead cost = $ 800 + $
400 + $ 200 = $ 1,400
Absorption Costing
Unit variable cost (PC) = Direct material + Direct Labour + Variable overhead cost = $ 600 + $
200 + $ 200 = $ 1,000

Unit variable cost (VP) = Direct material + Direct labour + Variable overhead cost = $ 800 + $
400 + $ 200 = $ 1,400
From the above $ 2.4 million of fixed cost would be allocated based on the unit produced for
each of the above products during the year. Considering that this data has not been provided,
hence the allocation of fixed costs between the two products on a unit basis is not possible. The
maximum monthly demand cannot be extrapolated to indicate the yearly production for any of
the two products.
Special Order Analysis
In order to determine whether the special order should be accepted or not, the marginal costing
should be considered as it focuses only on variable costs without considering the fixed costs.
Since no incremental fixed costs would be incurred, hence only the variable costs ought to be
considered to determine the costing for the special order. A key non-financial variable to be
considered is the availability of surplus capacity along with resources for accommodating the
extra production. Also, the impact of accepting the special order may have an adverse impact on
the overall profitability which ought to be considered (Parrino and Kidwell, 2014).
PC unit cost based on the marginal costing has already been computed as follows.
Unit variable cost (PC) = Direct material + Direct labour + Variable overhead cost = $ 600 + $
200 + $ 200 = $ 1,000
On the positive side, since price offered for the special order exceeds $ 1,000, hence it would
result in higher profits. However, owing to the profitability on the special order being lower than
normal orders, hence profitability would be adversely impacted. Also, in the long run, the
company placing the special order may emerge as a competitor (Heisinger, 2014).
Optimum Production Mix
For determining the optimum production mix, the unit consideration margin for each of the two
products ought to be evaluated.
Unit Selling Price (PC) = $ 1,200

Unit variable costs (PC) = $ 1,000
Unit contribution margin (PC) = $1,200 - $ 1,000 = $ 200
Unit Selling Price (VP) = $ 1,600
Unit variable costs (VP) = $ 1,400
Unit contribution margin (VP) = $1,600 - $ 1,400 = $ 200
The contribution margin for both the products is same. However, direct labour hour consumed
per unit is lesser for PC as compared to VP. Since the constraint is the number of direct labour
hours whose availability is only 60,000 hours per month, hence PC would be given first
preference and only after the demand of the same is completely satiated would VP be produced.
Maximum monthly demand of PC = 10,000 units
Direct labour hours required = 10,000*2 = 20,000 hours
Hours remaining = 60,000- 20,000 = 40,000 hours
Maximum monthly demand of VP is 20,000 units which would also be fulfilled in 40,000 hours.
Hence, 10,000 units of PC would be produced while 20,000 units of VP would be produced in
the given case to maximize profits.
IP Break Even Analysis
A key assumption that has been made for the given breakeven computation is that the fixed cost
continues to remain the same at $ 2.4 million. Also, it has been assumed that the fixed cost is
attributed equally to all the three products i.e. PC, VP and IP. Hence, fixed costs attributed to IP
would be ($240,000/3) = $ 80,000
Unit contribution margin = $ 600
Number of units of IP to break even = (80000/600) = 134 units
Target profit = $1,200,000
Number of units to achieve the desired profit = (1,200,000+80,000)/600 = 2134 units

Evaluation of Promotional Spending Proposal
The evaluation of the proposal would be carried out based on incremental cost benefit analysis.
Incremental cost due to promotional spending = $ 600,000
Incremental benefit in the form of higher consideration on account of price hike = $ 60 per unit
Total unit sales expected during the year = 6300*12 = 75,600
Total incremental benefit expected = 75600*60 = $4,536,000
It is evident that the incremental benefit exceeds the incremental cost and thereby the proposal
must be accepted. It is noteworthy that the above analysis is based on the assumption that the
there would not be any change in the fixed costs and also sufficient capacity exists for sustaining
the given production level. With regards to pricing, it is essential that a comparison with the
competitors should also be carried out so as to ensure that the prices remain competitive
(Emmauel and Otley, 2015).
Conclusion
Based on the above discussion, it may be concluded that management accountant plays a pivotal
role with regards to assisting management decision making and improving quality of decisions
by ensuring that the theoretical frameworks of management accounting are correctly captured in
various reports used for decision making. The costing of the existing products has been carried
out using marginal and absorption costing. With regards to special order, marginal costing would
be used which leads to the conclusion that the order should be accepted as it would increase
profits but lower overall profitability assuming spare capacity is available. The optimum monthly
production mix is expected to comprise of 10,000 units of PC production and 20,000 units of VP
production. Also, the promotion campaign for the IP (new product) is expected to be viable as
the incremental benefits exceeds incremental costs.

References
Bhimani, A., Horngren, C.T., Datar, S.M. and Foster, G. (2017), Management and Cost
Accounting 4th ed.Harlow: Prentice Hall/Financial Times
Brealey, R. A., Myers, S. C. and Allen, F. (2014) Principles of corporate finance, 6thed. New
York: McGraw-Hill Publications
Drury, C. (2016) Cost and Management Accounting: An Introduction. 6thed. New York: Cengage
Learning
Emmauel, R.C. and Otley, T.D. (2015) Accounting for Management Control. 8th ed. London:
Cengage Learning.
Heisinger, K.(2014) Essentials of Managerial Accounting 4th ed. London: Cengage Learning.
Parrino, R. and Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London: Wiley
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