Management Accounting Solution: Costing, Budgeting, and ROI Analysis

This document provides a comprehensive solution to a management accounting assignment, addressing key concepts and practical applications. The solution begins by defining management accounting, contrasting it with financial accounting, and highlighting its importance for internal decision-making within an organization. The assignment then delves into product costing, overhead allocation, and the use of activity-based costing (ABC) for accurate cost determination. It explores break-even analysis, calculating unit contribution margins, weighted average contribution margins, and break-even points. The solution also covers budgeting, including the creation of production and sales budgets, and ratio analysis, such as profit margin, capital turnover, return on investment (ROI), and residual income (RI). Finally, the assignment discusses the role of different management accounting centers: cost centers, revenue centers, profit centers, and investment centers, explaining their functions and importance in organizational management. The document includes calculations, explanations, and references to academic literature.

MANAGEMENT ACCOUNTING
STUDENT ID:
[Pick the date]

PART A
1) Management accounting refers to the providing of various information with regards to
various aspects about the organization to internal stakeholders particularly management so as
to enable them to indulge in prudent decision making. It is imperative to note that
management accounting is different from financial accounting as the former is focused
towards the internal users while the latter is focused on the external uses. Owing to the
difference in the user base, the underlying flexibility that is available also tends to be
significantly different. For instance, in management reporting, there is high flexibility with
regards to presentation and format which is driven by the demands of the management. This
is not the case with financial accounting where the formats are rigid and minimal flexibility is
available. Also, while the focus of financial account is to present a glimpse of the past
performance, management accounting is quite often focused on present and future rather than
past analysis (Bhimani et. al., 2017).
Management accounting would play a crucial role for an organisation like Royal Garden
Enterprises. Based on the company background, it is apparent that one of the core
competencies is cost leadership. In order to maintain the same, it is imperative that the
product costing should be done accurately so that the product pricing could be competitive. In
this regards, the choice of the proper costing method is of high relevance. Also, considering
the fact that the company has multiple products, hence a challenge that would face the
company is to allocate the overhead costs correctly between the various products. In this
regards, activity based costing would prove to be immensely useful. This would highlight the
precise cost of the various products and thereby allow the company to make decision in
regards to pursuing the most profitable products (Drury, 2016).
Additionally, the estimation of cost correctly would allow the company to take decisions with
regards to special orders which may come from time to time and competitive quotes would be
required for the same. Also, correct estimation of cost would enable the management to take
prudent decision with regards to make or buy and allow the company to keep the cost low.
Further management accounting may also enable the company by measuring the performance
through the use of variance analysis which can highlight the key weaknesses and strengths of
the internal working of the organisation. This would allow the organisation to continuously
improve the operational performance (Brealey, Myers and Allen, 2014).

2) The objective is to highlight the income statement for merchandising and manufacturing
divisions separately.
Explanation
 Cost of goods sold = Opening inventory (2018) + Purchase of Merchandising Inventory
(2018) – Ending Inventory (2018) = 400,000 + 800,000 -260,000 = $940,000
 Gross Profit = Sales – Cost of goods sold
 Operating Profit = Gross Profit – Administrative Expenses – Selling Expenses
Explanation
 Cost of materials used = Opening inventory of materials + Purchase of materials – Ending
inventory of materials = 140,000 + 800,000 – 130,000 = $ 810,000
 Gross Profit = Sales – Cost of materials used – Direct Labour – Manufacturing Overheads
 Operating Profit = Gross Profit – Administrative Expenses – Selling Expenses
3) The unit contribution margin is the difference of unit sale price and unit variable cost.
Unit contribution margin (Product X) = $3,600 - $ 2,400 = $ 1,200

Unit contribution margin (Product Y) = $2,800 -$2,000 = $ 800
Unit contribution margin (Product Z) = $2,000 - $400 = $ 1,600
Further, based on the given information, it is apparent that sales mix is such that for every
unit of product Z sold, 2 units each of product X and product Y are sold.
Hence weighted average unit contribution margin = (2*1200 + 2*800 + 1*1600)/(2+2+1) = $
1,120
Total fixed costs = $ 5,600,000
BEP = (Total fixed costs/Weighted average unit contribution margin) = (5,600,000/1,120) =
5,000 units
Hence, in order to break even it is imperative that in total 5,000 units should be sold.
Considering the given sales mix, it would imply 2,000 units of product X, 2,000 units of
product Y and 1,000 units of product Z.
4) The given information is summarised below.
Fixed costs = $ 13,200,000
Contribution margin ratio = 75% of sales revenue
(i) Let the breakeven sales for Royal Gardens be $ X
Then contribution margin would be (75/100)*X = 0.75X
At breakeven, contribution margin = Fixed costs
Hence, 0.75X = 13,200,000
Solving the above, we get X = $ 17,600,000
ii) At the above level of BEP, the variable costs need to be determined.
Since the contribution margin ratio is 75%, it implies that the variable costs are 25% of the
revenue.
Break even revenue = $ 17,600,000

Hence, variable costs corresponding to BEP = 0.75*17,600,000 = $ 13,200,000
PART B
1) i) The production budget in unit is indicated as follows.
Explanation
1) Beginning Units of January = (40/100)*40000 = 16,000 units
2) Ending inventory for January = 50% of February sales unit = (50/100)*24000 = 12,000
units
Ending inventory for February = 50% of March sales unit = (50/100)*16000 = 8,000 units
Ending inventory for March= 50% of April sales unit = (50/100)*18000 = 9,000 units
3) Ending inventory of January = Beginning inventory of February
4) Planned production units = Budgeted sales units + Ending units – Beginning Units
ii) The sales budget is as indicated below.
Formula used: Total Sales = Sales units expected * Price per unit

2) The objective is to compute the various ratios based on the information given for Division
M.
a) Profit Margin
Profit Margin = (Operating Income/Sales) = (600000/1600000) = 37.5%
b) Capital Turnover
Capital Turnover = (Sales/Total Assets) = (1600000/2500000) = 0.64 or 64%
c) ROI or Return on Investment
ROI = (Operating Income/Total Assets) = (600000/2500000) = 0.24 or 24%
d) RI or Residual Income
RI = Operating Income – (Target rate of return* Total Assets) = 600000 – (15%*25000000)
= $225,000
3) A critical role is played by the various centres that the management is aiming for
segregate. A cost centre may be defined as a business unit which does not generate any
revenue but essentially incurs only cost. Typical examples include human resource,
accounting along with IT department that tend to provide useful services for the organisation
to keep working but do not directly generate any revenue (Damodaran, 2015).
In sharp contrast is the revenue centre which is responsible for generation of revenue through
the sale of products or services and does not consider any underlying costs. A typical
example of this would be sales department which aims to focus on the revenue without any
consideration to the costs involved in production and sales. The presence of revenue centre is
pivotal as it tends to generate money required to meet the demands of the cost centre (Drury,
2016).

A profit centre essentially contains both revenue centre as well as cost centre. These are
typically businesses which have both costs as well as revenues and tend to generate profits
for the business by ensuring that revenue is maximised and cost minimised. The investment
centre are those where capital expenditure is incurred for generation of assets that potentially
can produce future revenue and keep the business ongoing in the future (Bhimani et. al.,
2017).

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, 6th ed. New
York: McGraw-Hill Publications
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York:
Wiley, John & Sons.
Drury, C. (2016) Cost and Management Accounting: An Introduction. 6th ed. New York:
Cengage Learning