MAA262 Assessment 2: Individual Assignment - Management Accounting

This document presents a comprehensive solution to a management accounting assignment, addressing various aspects of cost analysis, budgeting, and ethical considerations. The assignment explores a case study involving a company's cost structure, quality management, and overhead allocation. It delves into ethical standards for management accountants, the classification of quality costs (prevention, appraisal, internal failure, and external failure), and the importance of long-term quality management strategies. The solution also includes the high-low method for analyzing delivery expenses, and calculation of predetermined overhead rates, and the application of overhead costs to a specific job. The assignment also considers the allocation of overhead costs and comparisons to industry benchmarks. This detailed solution is designed to help students understand and apply management accounting principles in a practical context.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student:
Name of the University:
Author’s Note:

1MANAGEMENT ACCOUNTING
Table of Contents
Answer to question 1:......................................................................................................................2
Answer to question 2:......................................................................................................................3
Sub part (a):.................................................................................................................................3
Sub part (b):.................................................................................................................................4
Answer to question 3:......................................................................................................................5
Sub part (a):.................................................................................................................................5
Sub part (b):.................................................................................................................................6
Answer to question 4:......................................................................................................................6
Sub part (a):.................................................................................................................................6
Sub part (b):.................................................................................................................................7
Answer to question 5:......................................................................................................................8
Sub part (a):.................................................................................................................................8
Sub part (b):.................................................................................................................................8
Sub part (c):.................................................................................................................................9
Sub part (d):.................................................................................................................................9
Sub part (e):.................................................................................................................................9
Answer to question 6:....................................................................................................................10
Sub part (a):...............................................................................................................................10

2MANAGEMENT ACCOUNTING
Sub part (b):...............................................................................................................................10
Answer to question 7:....................................................................................................................11
Sub part (a):...............................................................................................................................11
Sub part (b):...............................................................................................................................11
References and bibliography:........................................................................................................13

3MANAGEMENT ACCOUNTING
Answer to question 1:
In the given case study, Mr. John has hired Mr. Gorge who is a plumber by his profession
for the post of management account who will be analyzing the costs structure of the company to
find out the reasons for unnecessary costs and strategies to reduce those costs. Institute of
Management Accountants is the prime body of professional Management Accountants. IMA
have issued a statement of ethical standards, which needs to be followed by the professional
management accounts (Imanet.org 2019). The statement includes four ethical standards,
Competence, Confidentiality, Integrity and Credibility. The most important ethical standard is
the Competence, which requires the management accountant should have appropriate
professional expertise, knowledge and skill. In the given case study, Mr. George is a plumber
who have been appointed as the management accountant, hence the ethical standard of
competence have been jeopardized.
Further, the competence standard requires the management accountant to perform
respective duties in accordance with the applicable laws, regulations and standards. If a
management accountant does not have such competencies and knowledge about the respective
laws, regulations and technical standards, then the management accountant would not be able to
perform his duties deliver his obligations properly.
Being unable to analyze the cost accounting information and cost related data the
management accountant would be failing to provide adequate, clear and accurate decisions
support information, which is the intended objective of appointment of a management
accountant. Hence, the appointment of Mr. George by Mr. John for the post of Management

4MANAGEMENT ACCOUNTING
accountant has been jeopardized the Competence ethical standard of the IMA statement of
ethical professional practices (Imanet.org 2019).
Answer to question 2:
Sub part (a):
In the given case study, the Fridges-R-Fun company was facing some quality issues and
customers were requesting for replacement of their products. It was affecting their sales and
customer satisfaction greatly and Mr. John had to do some analysis and adopt certain measures
for improvement of the quality of their products (Kaplan and Atkinson 2015). For this purpose,
Mr. John has appointed Mr. Ringo a professional accountant for analyzing the issues, and for
suggesting certain strategies. After analyzing, the manufacturing process and the cost structure of
the company Mr. Ringo suggested certain strategies, which require some additional costs to be
incurred for quality control and quality management and the components of the total quality
costs can be listed in the table 1 as follows.
Table 1: Quality Costs
Activity Year 1 Year 2 Year 3
Systems development costs 200 100
Technical support to suppliers of compressors 150 150
Technical support to suppliers of pipes 100 100
Field testing at customers' site 250 250
Inspection on assembling line 500 500
Rework on assembling line 500 100
Warranty repairs of fridges 700 600 500
Warranty replacement of fridges 1,500 1,300 1,100
Total quality costs 3,200 2,700

5MANAGEMENT ACCOUNTING
2,700
In total quality management, the quality costs can be classified into for types, Prevention
costs, Appraisal costs, Internal Failure costs and External failure costs. Based on the concept of
such classifications the components of the total quality costs of Fridges-R-Fun can be classified
into four groups as follows.
Activity Year 1 Year 2 Year 3
Prevention Costs:
Systems development costs - 200 100
Total Prevention Costs - 200 100
Appraisal Costs:
Technical support to suppliers of compressors 150 150
Technical support to suppliers of pipes 100 100
Field testing at customers' site 250 250
Inspection on assembling line 500 500
Total Appraisal Costs - 1,000 1,000
Internal Failure Costs:
Rework on assembling line 500 100
Total Internal Failure Costs 500 100 -
External Failure Costs:
Warranty repairs of fridges 700 600 500
Warranty replacement of fridges 1,500 1,300 1,100
Total External Failure Costs 2,200 1,900 1,600
Total Quality Costs 2,700 3,200 2,700

6MANAGEMENT ACCOUNTING
Sub part (b):
The prevention cost includes costs related to some preventive measures, which are taken
for reducing the number of defects and for improvement in the quality of the products. It
includes the product development and design costs and other services, which are incurred far
advance before the manufacturing with an intention to reduce the possible defects in the output.
With the achievement in efficiency, the prevention costs decreases. Appraisal costs are incurred
for testing and inspecting the materials coming into the production line and going out from the
production line (Kaplan and Atkinson 2015). It is a continuous process and costs related to such
activities are variable in nature. With the increase in volume of output, the appraisal cost also
increases. Internal failure cost includes the rework costs and costs related to minor rectifications
done within the manufacturing process. Initially the internal failure cost becomes high and
gradually it decreases with the increase in efficiency and effectiveness of the prevention policies.
The external failure costs are extensive in nature, which are incurred to replace and rework the
products after it has been sold to the customers. Like the internal failure costs, the external
failure costs also decrease with the improvement in quality and with the increase in effectiveness
of the preventive measures (Kaplan and Atkinson 2015).
Answer to question 3:
Sub part (a):
Quality management is a long-term process and takes time to be effective in practice and
to give a positive result. In the initial stage, some amount needs to be invested in the preventive
measures such as process reengineering and product designing, and after applying the new
design and new manufacturing process, a continuous efforts needs to be given in testing and

7MANAGEMENT ACCOUNTING
inspecting the incoming and outgoing materials, which constitutes the appraisal costs (Kaplan
and Atkinson 2015). Mr. John thinks that, the quality management is a short-term process and he
expects the results promptly. On the other hand, Mr. Ringo thinks that, the quality management
is a long-term process and initially there would be a huge investment but with the application of
the strategies and initiatives, the total quality costs will be decreasing gradually. Being a
professional management accountant Mr. Ringo has argued the right concept of the total quality
management.
Sub part (b):
If Mr. Ringo’s decisions are kept then in the fourth year it is expected that the internal
and external failure costs will decrease by a significant margin which in turn reduce the total
quality costs to certain extent.
If Mr. Ringo’s decisions are cancelled then, though there would be no prevention costs
and appraisal cost, but the failure costs would be increased to significant level. Therefore, it can
be recommended for the company to keep the decisions and adopt the strategies as suggested by
Mr. Ringo.
Answer to question 4:
Table 2: Delivery Expenses
Month Fridges Delivered Delivery Expenses
January 450 $ 4,600
February 280 $ 3,000
March 400 $ 4,100
April 550 $ 5,700
May 500 $ 5,000

8MANAGEMENT ACCOUNTING
June 450 $ 4,700
Total 2,630 $ 27,100
Sub part (a):
Particulars Fridges Delivered Delivery Expenses
High 550 $ 5,700
Low 280 $ 3,000
Difference 270 $ 2,700
Variable Cost Per Fridge Delivered (2700/270) $ 10.00
High Low
Total Variable Costs (No of fridges delivered *
Variable cost per fridge delivered) $ 5,500 $ 2,800
Total Fixed Costs (Total Cost - Total Variable Cost) $ 200 $ 200
Total Costs $ 5,700 $ 3,000
Sub part (b):
From the above computations, it can be found that the variable costs per fridge delivered
are $10 and fixed costs are $200. Considering the same if the fixed costs and variable costs are
calculated for all levels, it can be observed that there are certain discrepancies. The computed
discrepancies can be shown in the following table.
Month Fridges Delivered Delivery Expenses Delivery Expenses Delivery Expenses
January 450 $ 4,600 $ 4,500 $ 100
Februar
y 280 $ 3,000 $ 2,800 $ 200
March 400 $ 4,100 $ 4,000 $ 100
April 550 $ 5,700 $ 5,500 $ 200
May 500 $ 5,000 $ 5,000 $ -
June 450 $ 4,700 $ 4,500 $ 200

9MANAGEMENT ACCOUNTING
Total 2,630 $ 27,100 $ 26,300 $ 800
It can be observed that when 450 units of fridges are delivered the total variable cost is
$4,500 and fixed cost is $100. When 400 units are delivered, the fixed cost becomes $100 and
when 500 units of fridges are delivered, the total fixed cost is zero, which is an exceptional case.
It can be commented that, there is no fixed relationship between the units delivered and the
variable costs. Most of the part of the total delivery costs are variable in nature and depends on
certain situations. The delivery costs depends on situations such as distance and so on and it
varies accordingly.
Answer to question 5:
Sub part (a):
Computation of Predetermined Overhead Rates:
Estimates Welding Assembly
Direct labor-hours 3600 7200
Machine-hours 6000 600
Variable manufacturing overhead per machine-hour $ 2
Variable manufacturing overhead per direct labor-hour $ 1
Fixed manufacturing overhead costs $ 288,000 $ 64,800
Variable manufacturing overhead (6000*2), (7200*1) $ 12,000 $ 7,200
Total manufacturing Overhead (Fixed + Variable) $ 300,000 $ 72,000
Predetermined Overhead Rate (based on Machine Hour) $ 50
Predetermined Overhead Rate (based on Labor Hour) $ 10
Sub part (b):
Computation of total overhead costs applied to the
Job:
Estimates Welding Assembly
Direct labor-hours 25 80

10MANAGEMENT ACCOUNTING
Machine-hours 40 5
Applicable Overhead Rate $ 50 $ 10
Overhead Applied (40*50), (80*10) $ 2,000 $ 800
Total overhead applied to the job (2000+800) $ 2,800

11MANAGEMENT ACCOUNTING
Sub part (c):
Particulars Welding Assembly Total
Direct materials $ 500
$
200 $ 700
Direct labor $ 300
$
800 $ 1,100
Prime costs (Direct materials + Direct
labor) $ 800
$
1,000 $ 1,800
Manufacturing overhead $ 2,000
$
800 $ 2,900
Total manufacturing costs recorded for the Job $ 4,700
Sub part (d):
Computation of unit production costs:
Particulars Amount
Total cost recorded for the job $ 4,700
Number of units contained in the Job 100
Production cost per unit (4700/100) $ 47
Sub part (e):
Assembly department is a labor-intensive department and requires more labor hour rather
than the machine hour. To make fair allocation of the overhead costs the labor hour has been
used as the base for computing the overhead rate for assembly department and the predetermined
overhead rate comes to $10 per direct labor-hour. Applying the same rate total overhead applied
to the Job for the assembly department comes to $800. From the given case study, the total direct
labor cost can be considered as $1,100, which included the direct labor cost for both the welding
and the assembly department. Taking these two figures the overhead rate as a percentage of the
total direct labor cost can be computed which comes to 72.73%. The industry benchmark for
overhead for the assembly department is 75% of the direct labor costs. Therefore, it can be

12MANAGEMENT ACCOUNTING
commented that, these specific job has lower overhead cost for the assembly department than the
industry benchmark. If the labor hour consumed in the assembly department for the specified job
increases then the applied overhead will be increased and it might go beyond the industry
benchmark. The calculation showing the actual overhead percentage for the assembly department
as a percentage of the total direct labor costs have been shown in the following table.
Computations of over or under applied overhead:
Total Direct Labor Costs $ 1,100
Overhead costs for assembly $ 800
Percentage of direct labor costs (800/1100) 72.73%
Answer to question 6:
Sub part (a):
Cost plus pricing is a pricing strategy where the sales price of the products is determined
by adding a profit margin with the cost of production (Kaplan and Atkinson 2015). It is helpful
in inflationary situation where the input costs are increasing and varying very frequently. It
adjusts the sales price with the inflation keeping the profit margin same (Kamal 2015). However,
it has certain limitations, which are listed as follows.
i. Cost plus pricing never considers the market price and the current situations prevailing in
the market. Hence, it might set a price, which might be less than or much higher than the
market price of the identical goods.
ii. It cannot help conscious pricing in a competitive situation.
iii. It also ignores the replacement costs and considers only the historical, which have already
been incurred, but it might not be in line with the current market situation.

13MANAGEMENT ACCOUNTING
Sub part (b):
Value based pricing is the method of setting the sales price of the products based on the
perception of the customers. It is set with the focus of delivering value for money to the
customers. It gives more importance to the customers rather than the expenses. This strategy has
various advantages and disadvantages (Kamal 2015). Mr. Ringo the management Fridges-R-Fun
has implemented certain strategies for improvement in the quality of their products. If that can be
materialized and the quality of their products can be increased, then it would give more
satisfaction to the customers, which will increase perceived value of their products to their
customers. Hence, Mr. Ringo’s strategies may help in improving the customers’ loyalty and
perceived value of the products, which in turn can help the company to earn more profit.
Answer to question 7:
Sub part (a):
Computation of under applied or over applied overhead for Welding:
Actual overhead costs incurred $ 320,000
Actual machine our 5,800
Actual overhead rate per machine hour (320000/5800) $ 55.17
Machine hour consumed in welding department for the Job 40
Predetermined overhead rate $ 50.00
Actual overhead rate $ 55.17
Overhead Applied (50*40) $ 2,000
Actual Overhead Applicable (55.17*40) $ 2,207
Under applied overhead (2207-2000) $ 207

14MANAGEMENT ACCOUNTING
Sub part (b):
Overhead costs are estimated and applied to the products based on certain basis of
overhead allocation. As and when the actual overhead incurred is determined, it can be compared
with the overhead applied to the products (Kamal 2015). If the applied overhead is more than the
applicable actual overhead then the difference between the applied overhead and the actual
applicable overhead is considered as the over applied overhead and if the applied overhead is
less than the actual applicable overhead then it is known as the under applied overhead. As
effective and efficient the overhead estimations are, the difference between the applied overhead
and the actual overhead becomes lesser and if there is a large difference between these two then
it will affect the product costing and management planning. As the overhead allocation based on
predetermined overhead rates an estimate, it might give some unrealistic product costs and might
lead to set the price much higher than the actual (Kamal 2015).

15MANAGEMENT ACCOUNTING
References and bibliography:
Adler, R., 2013. Management Accounting. Routledge.
Ansoff, H.I., Kipley, D., Lewis, A.O., Helm-Stevens, R. and Ansoff, R., 2018. Implanting
strategic management. Springer.
Collis, J. and Hussey, R., 2017. Cost and management accounting. Macmillan International
Higher Education.
David, F.R. and David, F.R., 2013. Strategic management: Concepts and cases: A competitive
advantage approach. Pearson.
DRURY, C.M., 2013. Management and cost accounting. Springer.
Gamble, J.E., Peteraf, M.A. and Thompson, A.A., 2014. Essentials of strategic management:
The quest for competitive advantage. McGraw-Hill Education.
Goetsch, D.L. and Davis, S., 2014. Quality management for organizational excellence:
Introduction to total quality.
Goetsch, D.L. and Davis, S., 2014. Quality management for organizational excellence:
Introduction to total quality.
Hilton, R.W. and Platt, D.E., 2013. Managerial accounting: creating value in a dynamic
business environment. McGraw-Hill Education.
Imanet.org. (2019). [online] Available at: https://www.imanet.org/career-resources/ethics-center?
ssopc=1 [Accessed 3 Aug. 2019].