ACCT6004 Case Study: Cost Analysis and Management Accounting Report

This case study solution addresses a management accounting problem, likely from an ACCT6004 course, focusing on cost analysis and decision-making. The solution analyzes mixed, fixed, and variable costs, calculating operating profit and contribution margins. It explores how changes in sales volume impact profitability and the importance of understanding cost behavior for strategic decisions, such as special orders and outsourcing. The solution includes calculations and a contribution format income statement, demonstrating the impact of an advertising campaign on profit. The assignment emphasizes the relationship between cost structures, sales volume, and overall profitability, providing insights into how management accountants can use cost information for planning, control, and making informed decisions. References to relevant academic sources are also included.

MANAGEMENT ACCOUNTING
STUDENT ID:
[Pick the date]

ACTIVITY 1
1a) This would be mixed cost as the $ 5,000 is a fixed component whereas 6% sales
commission is a variable component of cost (Damodaran, 2015).
b) This would be fixed cost as the cost remains $ 200 irrespective of the usage of equipment.
c) This would be variable cost as it is dependent on the number of jerseys and does not
remain constant.
d) This would be variable cost as the price tags cost is dependent on the number of jerseys
that are manufactured.
e) This would be variable cost since it is dependent on the extent of the sales made by the
company which is linked to jerseys sold (Petty et. al., 2015).
f) The website hosting cost is a fixed cost since the cost would remain constant.
2) a) The operating profit equation is indicated below.
Operating profit = Sales – Variables Expenses – Fixed Expenses
b) Let the expected annual sales be X units. Actual sales = 0.9X units
Total jerseys actually sold = (1039500/20) = 51,975 units
Thus, 0.9X = 51,975 units
Hence, X = 57,740 units
Therefore, the company had planned to sell 57,740 units in the year.
Incremental unit sales = 57740-51975 = 5,775 units
Contribution margin per jersey = $ 4
Since the fixed costs would remain same, hence incremental operating profit = 5775*4 = $
23, 100
Incremental profit after tax= 23100*(1-0.3) = $ 16,170

c) Total unit sales = 55,000
Variable cost per jersey = $ 16
Hence, total variable expenses = 55,000*16 = $ 880,000
Further, the fixed expenses would remain same irrespective of the jerseys produced and
would be $168,000
Hence, total expenses = 880,000 + 168,000 = $1,048,000
d) If the annual ad campaign is accepted, then the fixed costs would further increase by $
20,000 to $ 188,000 and as a result, the operating profits would lower by $ 20,000 assuming
no increase in sales (Drury, 2016).
e) The contribution format income statement based on sale of 60,000 jerseys for next year is
indicated below (Parrino and Kidwell, 2014).
The sales and variable expenses have been computed by multiplying the per unit cost/revenue
by 60,000. The fixed expenses have increased by $ 20,000 owing to spending on ad
campaign.

f) It is apparent that owing to the acceptance of the ad campaign, there has been an increase
in the operating income from $ 39,900 to $ 52,000. It is interesting to note that the unit sales
have increased from 51,975 units in 2018-2019 to 60,000 units in 2019-2020. It is noticeable
that the increase in sales is less than 20%, however the profit has jumped in excess of 30%.
Further, this 30% was witnessed when the fixed expenses increases by $ 20,000. Had the
fixed expenses remained constant, then the increase in profits would have been in excess of
60%. This clearly highlights the importance of volumes on the profits (Petty et. al,, 2015).
It is noticeable with regards to cost behaviour that while the variable cost tends to increase or
decrease in the same percentage as unit sales, the same cannot be said about the fixed costs.
As a result, as sales volume increase, the percentage costs in terms of fixed costs tend to
decrease since the proportion of variable costs increases. Besides, higher volume would
imply lower fixed cost per unit which in turn would boost the profitability of the operations
(Damodaran, 2015).
This cost behaviour difference between the fixed cost and variable costs can be quite helpful
for the management in taking various key decisions. One instance could relate to a situation
when the company may receive a special order. In order to provide a competitive quote for
the special order, it is essential that the company must not consider the fixed cost and only
take the variable costs to arrive at a quotation for the special order (Drury, 2016). Another
situation where cost behaviour is of relevance is when the company is considering the buy
versus outsourcing decision. In this regards, it is essential that by outsourcing, the company
may prevent variable costs but fixed costs would still be incurred to some extent and same
needs to be considered for prudent decision making (Parrino & Kidwell, 2014).

References
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
Parrino, R. & Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London:
Wiley Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M. & Nguyen, H. (2015).
Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education,
French Forest Australia