Management Accounting Report: Decision Making in X Limited

This report analyzes the significance of management accounting in business decision-making, using the case of X Limited, a computer table manufacturer. The company faces challenges selling its ordinary tables due to competitor pricing. The report examines the allocation of production overheads using traditional costing methods and identifies the limitations. It then demonstrates the application of Activity-Based Costing (ABC) to accurately allocate overheads, revealing the true costs of both ordinary and deluxe tables. The analysis includes quantitative data, cost driver identification, and a comparison of costing methods. The conclusion emphasizes the importance of ABC for correct product pricing and recommends adjusting selling prices based on ABC results to improve sales. The report highlights the benefits of management accounting in strategic pricing and competitive advantage.

Running head: MANAGEMENT ACCOUNTING
management accounting
Importance of management accounting in decision making process in business
MAY 31, 2019

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Management Accounting
Name of the Student:
Name of the University:
Authors Note:

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Executive summary:
Management accounting is a system of management of financial data in a way to help the
management in taking important business related decisions such as level of production,
determination of selling price of a product and other such important matters. The discussion and
analysis in this document clearly shows that proper allocation of production overheads in
different products that an organization manufactures often determines the ability of the
organization to sale these products. Thus, the ability of an organization to generate revenue from
sale of its products to a large extent is also dependent on management accounting. The practical
application of management accounting and its benefits are narrated below.

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Contents
Executive summary:........................................................................................................................2
Introduction:....................................................................................................................................4
Statement of problem:......................................................................................................................4
Quantitative and qualitative data presentation and analysis:...........................................................5
Conclusion:......................................................................................................................................9
Recommendation:............................................................................................................................9
References:....................................................................................................................................11
Appendix:......................................................................................................................................12

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Introduction:
X Limited is a manufacturer of computer tables. The company manufacturer two types of
computer tables, one is ordinary model and the other one is deluxe model. The company over the
years have easily sold the deluxe model in the market without any difficulties however, it has
struggled to sale the ordinary model of computer tables. In order to assess the reasons for the
difficulties faced by X Limited in selling the ordinary computer tables a detailed analysis is
provided below.
Statement of problem:
X Limited as mentioned earlier is a computer table manufacturer that produces ordinary and
deluxe model of computer tables. The ordinary tables have been priced at $250 per table whereas
deluxe model has been $350 per table. The company has failed to sale its ordinary tables fully as
almost 50% of the tables are still lying in the closing inventory. The deluxe model on the other
hand have been sold very easily by the company. The statement below shows the direct costs,
production overheads and selling price in relation to the two models of table manufactured by the
company.
Tables
Particulars Ordinary Deluxe
Number of units 5000 5000
Selling price 250.00 350.00
Direct materials per unit 100.00 180.00

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Direct labour @20 per hour 30.00 60.00
Total labour hours 7500 15000
The total production overhead is $450000 for a year and the company uses traditional method of
costing to allocate the production overheads to the products. Direct labor hours is used to allocate
production overheads. In 2018-19 financial year the company has sold all the deluxe tables, i.e.
all 5000 of them however, has only been able to sale 3000 ordinary tables.
Quantitative and qualitative data presentation and analysis:
The reason for the company’s struggle to sale its ordinary tables in the market is due to the low
pricing of its competitors. Other companies operating in the industry sale their ordinary products
between $220 and $230 range. An in-depth discussion on the cost of product and subsequent
pricing shall be helpful in assessing the reasons for the failure of the company to sale its ordinary
products in the market (Rezazadeh, Soumehsaraei and Gholizadeh, 2014).
Tables
Particulars Ordinary Deluxe
Direct material costs 500,0
00.00
900,000.0
0
Direct labour 150,0
00.00
300,000.0
0

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Add: Production overhead
Ordinary (450000 x 7500/22500) 150,0
00.00
Deluxe (450000 x 15000/22500) 300,000.0
0
Total cost 800,0
00.00
1,500,000.0
0
Unit cost 1
60.00
300.0
0
As per traditional costing method the cost ordinary table is $160 per unit and deluxe table is
$300 per unit. However, from the information provided below about production overhead it
seems that allocation of indirect overheads on the basis of direct labor hour has not correctly
reflected the actual overheads incurred to produce the two types of tables (Askarany, 2011).
A thorough investigation into the affairs of the company showed that the production overheads
of the company can be segregated in the following elements.
Production overheads Amount ($)
Machine cost 80,000.00
Ordering cost 20,000.00

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Factory rent 120,000.00
Office rent 60,000.00
Energy and power 110,000.00
Machine set up cost 40,000.00
Inspection cost 20,000.00
Total 450,000.00
Activity based costing system allows companies to properly allocate the production overheads in
different products in a scientific manner resulting in better costing of products. Similarly, X
Limited should determine the actual cost of deluxe and ordinary tables to correctly determine the
price of these products. This could improve the ability of the company to sale ordinary tables in
the market. Accordingly, the cost drivers have to be identified and ascertained for different
products to correctly allocate the production overheads to deluxe and ordinary tables. The
following table contains the cost drivers associated with the two products (Hoozze and Hansen,
2014).
Tables
Particulars Cost driver Ordinary Deluxe Total
Machine cost Number of machine hours 500 3500 4000

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Ordering cost Number of orders 20 80 100
Factory rent Factory space used 500 Sqm 2500 Sqm 3000 Sqm
Office rent Office spec used 100 sqm 400 Sqm 500 sqm
Energy and power Power points 50 200 250
Machine set up cost Number of machine hours 1000 4000 5000
Inspection cost Number of inspections 50 200 250
Taking into consideration the above cost drivers associated with the two products the production
overheads shall be reallocated to these products to determine the costs of these two types of
tables manufactured by the company.
Particulars Ordinary Deluxe
Direct material costs 500000 900000
Direct labour 150000 300000
Add: Production overhead
Machine cost 10,000.00 70,000.00
Ordering cost 4,000.00 16,000.00
Factory rent 20,000.00 100,000.00

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Office rent 12,000.00 48,000.00
Energy and power 22,000.00 88,000.00
Machine set up cost 8,000.00 32,000.00
Inspection cost 4,000.00 16,000.00
Total cost 730,000.00 1,570,000.00
Cost per unit 146.00 314.00
Thus, it is clear that the actual cost of ordinary and deluxe tables are not what has been disclosed
as per the traditional costing model. As per traditional costing system ordinary table costs $160
per unit to manufacture whereas the deluxe table manufacturing costs come to $300 per unit.
Using ABC system shows different costs of these two products at $146 and $314 respectively.
Conclusion:
It is clear from the above that the manufacturing costs of ordinary table and deluxe tables are not
correctly reflected in traditional costing system resulting in wrong pricing of both these products.
Instead ABC system helps in determining the actual price of these products. The management by
using the costs determined as per ABC method will be able to correctly price both the deluxe and
ordinary tables in the market. This will help the company to take on its competitors to sale its
ordinary tables without much difficulty (Kont and Jantson, 2011).

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Recommendation:
As per the ABC method the ordinary table manufacturing cost is $146 per unit and that of deluxe
table is $314 per unit. Accordingly, the selling price of these two products shall also be adjusted
accordingly. Since, the cost of ordinary tables has decreased by $14 per unit and that of deluxe
table has increased by $14 per unit, it would be quite feasible to decrease the selling price of
ordinary tables by $200 per unit and increase the deluxe table price by equal amount. As a result
the ordinary table would be priced at $230 per unit and the deluxe table would be priced at $370
per unit. Considering that the competitors of X Limited is currently selling the ordinary tables
within the range of $230 per unit hence, it can be expected that this pricing would reduce the
difficulties faced by the company to sale its ordinary tables in the market (Cokins, Capusneanu
and Barbu, 2011).

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References:
Askarany, D. (2011). Interaction between Target Costing and Activity-Based Costing: Is
Target Costing a True Costing Technique?. SSRN Electronic Journal, 2(4), pp.17-21.
Cokins, G., Capusneanu, S. and Barbu, C. (2011). Decisions Based on Synthesis Documents
Information of the ABC (Activity-Based Costing) Method. International Journal of
Accounting and Financial Reporting, 1(1), p.112.
Hoozze, S. and Hansen, S. (2014). A Comparison of Activity-Based Costing and Time-
Driven Activity-Based Costing. SSRN Electronic Journal, 1(2), pp.12-32.
Kont, K. and Jantson, S. (2011). Activity-Based Costing (ABC) and Time-Driven Activity-
Based Costing (TDABC): Applicable Methods for University Libraries?. Evidence Based
Library and Information Practice, 6(4), p.107.
Rezazadeh, K., Soumehsaraei, B. and Gholizadeh, M. (2014). An Overview Income
Management and Income Smoothing and Its Importance in Accounting. Kuwait Chapter of
Arabian Journal of Business and Management Review, 4(1), pp.134-138.

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Appendix:
Particulars Ordinary Deluxe Total
Direct material costs 500,000.00 900,000.00
Direct labour 150,000.00 300,000.00
Add: Production overhead
Ordinary (450000 x 7500/22500) 150,000.00
Deluxe (450000 x 15000/22500) 300,000.00
Total cost 800,000.00 1,500,000.00
Unit cost 160.00 300.00
Calculation of cost of products as per Traditional costing method
Tables
Tradtional costing method
Production overheads Amount ($)
Machine cost 80,000.00
Ordering cost 20,000.00
Factory rent 120,000.00
Office rent 60,000.00
Energy and power 110,000.00
Machine set up cost 40,000.00
Inspection cost 20,000.00
Total 450,000.00
Activity based costing

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Particulars Cost driver Ordinary Deluxe Total
Machine cost Number of machine hours 500 3500 4000
Ordering cost Number of orders 20 80 100
Factory rent Factory space used 500 Sqm 2500 Sqm3000 Sqm
Office rent Office spec used 100 sqm 400 Sqm 500 sqm
Energy and power Power points 50 200 250
Machine set up cost Number of machine hours 1000 4000 5000
Inspection cost Number of inspections 50 200 250
Tables
Particulars Ordinary Deluxe Total
Direct material costs 500000 900000
Direct labour 150000 300000
Add: Production overhead
Machine cost 10,000.00 70,000.00
Ordering cost 4,000.00 16,000.00
Factory rent 20,000.00 100,000.00
Office rent 12,000.00 48,000.00
Energy and power 22,000.00 88,000.00
Machine set up cost 8,000.00 32,000.00
Inspection cost 4,000.00 16,000.00
Total cost 730,000.00 1,570,000.00
Cost per unit 146.00 314.00
Calculation of cost of products as per ABC method