Management Accounting Project: Costing Systems and Analysis

This project report for HA2011 Management Accounting analyzes cost concepts, costing systems, and their application in a business context. Part A explores the value chain concept, its benefits, and its application to Caltex Australia, including its mission, vision, competitive strategy, and value chain model. Part B focuses on cost allocation, including estimated allocation rates, total overhead costs, and the amount of fixed and variable costs. Part C delves into cost pools, cost drivers, and allocation rates. The report examines the relevance and usefulness of the value chain concept in detail, providing calculations and interpretations to support its findings. The report aims to demonstrate an understanding of cost management principles and their impact on decision-making within an organization.

Running Head: Management Accounting
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Project Report: Management Accounting

Management Accounting
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Contents
Part A................................................................................................................................3
a.Value chain concept...................................................................................................3
b.Company description.................................................................................................4
i.Mission and vision..................................................................................................4
ii.Competitive strategy:.............................................................................................5
iii.Value chain model................................................................................................5
iv.Value adding process............................................................................................6
v.Relevance and usefulness of value chain concept.................................................7
Part B................................................................................................................................7
a.Estimated allocation rate............................................................................................7
b.Total overhead cost allocated....................................................................................8
c.Total cost of job 20....................................................................................................8
d.Amount of fixed and variable cost in Oct..................................................................9
e.Cost pool method.......................................................................................................9
Part C..............................................................................................................................10
a.Cost pool and cost assignment.................................................................................10
b.Cost drivers for each cost pool................................................................................11
c.Allocation rate and interpretation............................................................................12
References.......................................................................................................................14

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Part A:
a. Value chain concept:
Value chain analysis is a strategic tool which is used in an organization to identify the
primary and secondary activities of the business in order to reach over the final product of the
company to evaluate the activities of the business. This process helps an organization to
reduce the overall associated cost with the production and service delivery of the company
and it also helps the company to improve the differentiation. The main goal of the value chain
analysis process is to identify the most valuable activities of the business and evaluate them
in order to set the competitive advantage of the company and improve the overall
performance of the company (Mihm, 2010). Below are the 2 main benefits of value chain
concepts which are used in an organization to improve the overall performance and set the
better position in the market:
i. Ensure value creates exceeds cost:
There are mainly 5 primary activities of an organization which defines about the main
operations of the business and associated with the management of cost and profit level of the
business. On the basis of evaluation over those 5 primary activities of the business, it
becomes easier for an organization to ensure about the exceed value of the business and the
cost to create the overall value of the business. The five value chain activities of the business
are as follows (Lang, and Stice-Lawrence, 2015).
 Inbound logistics
 Outbound logistics
 Operations
 Service
 Marketing and sales (Madura, 2011)
These primary activities ensure that all the process of preparation and delivery of a
product or delivering a service are managed efficiently. It assures that the cost level of the
business could be reduced and it can set a better competitive advantage in the market
(Kozlowski, Searcy, and Bardecki, 2015).
ii. Gain competitive edge and boost profit:

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Further, the value chain analysis also helps the business to gain a competitive
advantage and manage the profitability level of the business in the market. If an organization
could create an advantage in any of the below five activities then it becomes easier for the
business to capture the competitive advantage in the market and improve the overall
profitability level in the market.
 Inbound logistics
 Outbound logistics
 Operations
 Service
 Marketing and sales
In order to capture a competitive state and advantage in the market, an organization
should map out all the activities within the main 5 value chain activities and improve the
efficiency level of the business in the market. It would help the business to meet the common
goal of the business (Lysons and Farrington, 2012).
b. Company description:
In the report, Caltex Australia has been chosen to identify the concept of value chain
and the importance of value chain analysis in an organization. Caltex Australia is a subsidiary
company of Woolworths limited. It is an Australian chain which operates under the
automotive and retains industry in the Australia. The main products of the business are petrol,
convenience and grocery. Company has been founded in the year of 1996 by the name of
Woolworths petrol. Later on, the company name changed to Caltex Woolworths in the year
of 2013.
i. Mission and vision:
Mission and vision statement of Caltex Australia has been studied further to understand
the main goal and aim of the company. Vision statement of company depicts that company’s
main vision is to be the leader in oil and refinery industry in Australia and company further
focused towards to be more admired and loved by the people, stakeholders and society
because of the performance and policies of the business (Our vision, 2019).

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Further, the mission statement of company explains that the company wants to create a
universe whether all the excellent services are provided to the customers of the company. The
company wants to support and grow the employees and other stakeholders of the company.
Company is planning to invest in the infrastructure of the business in order to make it safer,
brighter, cleaner and more convenient to the environment of the company. The company
supports to the local initiatives and organizations to grow together and improve the education
and sport in the surrounding.
ii. Competitive strategy:
Caltex Australia has focused more towards the development of core competencies of
the company through differentiating the products of the company and become the cost leader
in the market. Caltex Australia is undergoing through a strategic shift away from the refining
business of the business which has basically contributed towards the unpredictable return and
disappointment of the business. The company is currently Australia’s leading fuel company
and the main competitive strength of the company is distribution of infrastructure that also
includes port terminals, airport terminals, inland terminals and pipelines. All of these
terminals are reliable delivery of fuel and enable efficient. The long term demand of transport
fuel remains favourable (Fuel and lubes, 2019). The demand of the business would grow
further in the market through offsetting the petrol prices in the market.
iii. Value chain model:
Caltex Australia has maintained and managed the value chain analysis model in an
efficient manner. The company has differentiated the primary and secondary activities of the
business in order to reach over the final goal of the company and evaluate the activities of the
business. This process has helped the business to reduce the overall associated cost with the
production and service delivery of the company and it also helps the company to improve the
differentiation. The main goal of the Caltex Australia behind the value chain analysis process
is to identify the most valuable activities of the business and evaluate them in order to set the
competitive advantage of the company and improve the overall performance of the company.
Below is the vale chain model of the business:

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(The Australia, 2019)
The primary and secondary services of the business has been set in such a way that the
performance criteria of the company could be set and it could help the business to reach over
the main goal of the business. The main operations of the company are to deliver the petrol,
oil and refinery products in the market. In order to do the same, company is required to mine
the products and transfer it to the factory to the business which falls under the inbound
logistics, Further; it refines the products which is called operations (The Australia, 2019). The
next step of the business is to do the marketing promotional activities to set the brand worth
in the market and lastly, company offers carious services to the customers in order to satisfy
them.
Along with that, Caltex Australia also focuses over the human resource management,
technology development and procurement in order to maintain the internal performance and
overall production level of the business.
iv. Value adding process:
In Caltex Australia limited, the main value adding process of the company and inbound
logistics and the marketing and sales process of the business. The details of both the process
is as follows:
Inbound logistics:
The main operations of the company are to deliver the petrol, oil and refinery
products in the market. In order to do the same, company is required to mining the products
and transfer it to the factory to the business. In this process, company is supposed to collect

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the raw materials from the mining and suppliers and transfer it to the factory to the company.
The process is called inbound logistics. Company has set proper logistics tactics in order to
manage the inbound logistics and reduce the extra cost of the business.
Marketing and sales:
Further, it has been found that there is huge competition for Caltex Australia in the
market. Hence, it becomes important for the business to check all the factors, in the market
and promote the product in the market. The Caltex Australia is using the various ways such
as TV media and newspaper to promote the products of the company and improve the sales
growth in the market (Sivula and Kantola, 2014).
v. Relevance and usefulness of value chain concept:
In order to examine the relevance and usefulness of value chain concept of the business,
various dimensions have been studied. on the basis of the study over Caltex Australia, it has
been found that value chain’s main aim is to ensure that all the activities of the company is
performed nicely so that the ultimate goal of the business could be reached. The Caltex
Australia is using inbound logistics, outbound logistics, Operations, Service and Marketing
and sales department and process in such a way that the main mission and vision of the
company could be achieved (Simatupang, Piboonrungroj and Williams, 2017).
The company had made changes into logistic process and marketing and sales process
in order to ensure that the value chain process relevancy could be improved in the business
and it becomes easier for the business to maintain the overall performance of the company.
Part B:
a. Estimated allocation rate:
Cost allocation is one of the important aspects of cost management in an organization.
It becomes important for production house to measure and analyze the fixed and variable
overhead cost related to the production of a particular in order to make better decision about
the performance and position of the company. The fixed overhead allocation and variable
overhead allocation of an organization depends on the cost drivers and cost pool of the
business.
Cost drivers are always set by the business on the basis of the involvement and
operations of each of the production and service department of the business. On the basis of

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the study over case, it has been observed that the allocation of the cost should be done on the
basis of cost drivers in order to reach over better outcome (Quattrone, 2016). The estimated
allocation rate of the company has been initially measured on the basis of total fixed
overhead and variable overhead of the business.
The allocation rate of an organization is the standard overhead amount. It amount is
applied in a production house on the basis of activity measurement. The main aim behind this
process is to ensure that the exact applied and occurred cost of the business could be
measured. The allocation rate of the business is as follows:
Particular Details Calculations
Variable rate 50% of direct labour cost <=750000/1500000*250 $ 125
Fixed variable rate
Fixed overhead / Direct
labour hours <=150000/250 $ 600
Total overhead cost
Fixed cost + variable
cost <=125+600 $ 725
b. Total overhead cost allocated:
Total overhead cost in an organization depicts about the total cost which has been
incurred in an organization at the time of producing a product or delivering a service. The
total overhead cost involves the fixed overhead cost as well as variable overhead cost. In the
given case, the below table has been presented to identify the total overhead cost incurred in
the company:
Particular Details Calculations
Variable rate 50% of direct labour cost <=750000/1500000*250 $ 125
Fixed variable rate
Fixed overhead / Direct
labour hours <=150000/250 $ 600
Total overhead cost
Fixed cost + variable
cost <=125+600 $ 725
(Messner, 2016)

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c. Total cost of job 20:
Total cost stands for the total amount which has been incurred in an organization while
the production of a product or because of different process applied while delivering the
services. It includes the total cost from getting the raw material in the business to deliver the
final product in the market. The total cost involves fixed cost, variable cost and semi variable
cost of the business. In case of the given case study found that there is various cost involved
with the production of a particular product.
In this section, the study has been conducted over the total cost involved in job 20 of
the business. The study brief that there are various cost such as fixed cost, variable cost and
semi variable cost are involved with the Job 20 of the company. The detail of the same is as
follows:
Particular Cost
Add: Direct labour cost $ 250
Variable overhead cost
(calculated) $ 125
Fixed overhead cost (calculated) $ 600
Total $ 975
Add: Opening WIP $ 3,500
Total cost for Job 20 $ 4,475
d. Amount of fixed and variable cost in Oct:
Further, the study has been done over the total fixed cost and variable cost of the
different jobs in the month of Oct. On the basis of the study, it has been found that there were
various cost involved in the production process of the business. In the case, the cost
evaluation has been done through allocating them in the variable cost and fixed cost. Also,
the cost drivers of the different cost have been taken into consideration.
Particular Amount
Fixed overhead allocation ($ 5725*48%) 2748
Variable overhead allocation ($ 5725 *
52%) 2977

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e. Cost pool method:
On the basis of the study, it has found that accountants basically prefer the two cost
pool system rather than one cool post system. The main reason behind the same is
conventional system. The study explains that two cost pool systems improves the ability of
the business to enhance the amount in cline bills along with that the labour of the business
could be more effective in this process. The cost bifurcation is done on the basis of activities
involved so that a better decision could be made for the betterment of the business. It
allocates the proper cost to each of the department and determines the total cost involved with
each of the department (Madura, 2011).
On the basis of the study, accounting system assigns the indirect cost involved in the
business to the main production department on the basis of two stage allocation of the
company. It identifies the support department’s indirect cost and allocates it to the production
department. For instance, maintenance and purchasing are the two departments and customer
service is the service department (Koc and Bozdag, 2017). The service department cost is
allocated to the maintenance and purchasing department on the basis of their activities.
Hence, it is better option for the accountant to use the two cost pool system (Rodriguez-
Fernandez, 2016).
Part C:
a. Cost pool and cost assignment:
Cost pool is a group of various individual cost which typically depends on the service
centre and the department centre of the business. Cost allocation depends on the cost pool of
the business. Such as, the maintenance department’s cost is accumulated to the cost pool and
then it directly allocates to the department which are using those services. In case of
Malekula Council, the cost pool and drivers of the company are as follows (Michelon
Pilonato, and Ricceri, 2015).
Total cost Cost pool
Director and staff salaries Direct basis
Animal shelter employee salaries Number of animals
Vegetarian and technicians Direct basis
Animal trainers Training hours

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food and supplies Apportionment basis
Building related costs Sq feet
Further, it has been studied that the cost pool involves the gathering and classification
of various cost items such as direct cost and indirect cost. The cost pool and the amount of
company are as follows:
Identification of cost pool
Total cost Amount
Director and staff salaries $ 60,000
Animal shelter employee
salaries $ 100,000
Veterinarians and technicians $ 150,000
Animal trainers $ 40,000
food and supplies $ 125,000
Building related costs $ 200,000
(Indiatsy et. al, 2014)
The indirect cost of the business is related to the offering trainer services to other
department and focusing the employees of one department t another. The cost pool and cost
driver assures that the proper allocation of cost is done accordingly (Secundo, Dumay,
Schiuma, and Passiante, 2016).
b. Cost drivers for each cost pool:
A cost driver is called as an activity which is involved in an organization to assure that
the cost is allocated to that department only in which it has been incurred. Such as
Total cost Amount Cost pool
Director and staff salaries $ 60,000 Direct basis
Animal shelter employee
salaries $ 100,000 Number of animals
Veterinarian and technicians $ 150,000 Direct basis
Animal trainers $ 40,000 Training hours
food and supplies $ 125,000
Apportionment
basis
Building related costs $ 200,000 Sq feet
Further, the explanation of each of the cost driver of the company is as follows:

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Cost Driver determination
Total cost Amount Cost pool
Director and
staff salaries
$
60,000 Direct basis
Director and staff salaries have been
assigned to direct basis to training and
services department because of
occurrence of cost due to that
department only.
Animal shelter
employee
salaries
$
100,000
Number of
animals
Animal shelter employee salaries have
been assigned on the basis of total
number of employees.
Veterinarians
and technicians
$
150,000 Direct basis
Veterinarians and technicians have been
assigned to providing healthcare and
Veterinarians department because of
occurrence of cost due to that
department only.
Animal trainers
$
40,000
Training
hours
Animal trainer fees have been assigned
on the basis of total training hours.
food and
supplies
$
125,000
Apportion
ment basis
According to the case, $ 75000 has been
apportioned to Veterinarians services
directly and rest has been assigned to
housing services.
Building related
costs
$
200,000 Sq feet
Building related cost has been assigned
on the basis of floor occupied by each
of the department.
(Hertati and Sumantri, 2016)
c. Allocation rate and interpretation:
Calculation of allocation rate of the company is as follows:
Calculation of allocation rate
Total cost Amount Cost pool Apportio
nment
Housing and
finding
homes for
scary and
unwanted
animals
Providi
ng
health
care
and
Vegeta
rian
service
Train
ing
servi
ces

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s
Director and staff
salaries
$
60,000 Direct basis -
$
60,0
00
Animal shelter
employee salaries
$
100,000
Number of
animals
0.47:0.5
3
$
47,368
$
52,632
Veterinarians and
technicians
$
150,000 Direct basis -
$
150,00
0
Animal trainers
$
40,000
Training
hours
0.25:0.2
5:0.5
$
10,000
$
10,000
$
20,0
00
food and supplies
$
125,000
Apportionm
ent basis -
$
50,000 75000
Building related
costs
$
200,000 Sq feet
0.5:0.3:0
.2
$
100,000
$
60,000
$
40,0
00

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