Management Accounting Report: Activity Based Costing and Budgeting

This report provides an executive summary, table of contents, and detailed analysis of two case studies in management accounting. The first case focuses on US Bright product company and its use of activity-based costing (ABC) to determine per-unit costs, billing amounts, and additional costs related to Lamington production. It includes calculations of cost per activity driver and a bill of activities. The second case examines Hawthorn Leisure Works, a physical fitness center and tennis court facility, evaluating its budgeting methods and a proposed new revenue plan based solely on membership fees. The report compares the old and new plans, assessing their potential impact on revenue and recommending the adoption of the new plan due to its increased revenue potential and simplified fee structure. The report references key concepts of ABC, budgeting and financial analysis to support its conclusions.

Running Head: Management Accounting
Management Accounting

Management Accounting 2
Executive Summary:
This report is about the evaluation of two cases, first case is about activity based costing and
the second one is about Budgeting. In the first case evaluation of US bright product company
which is manufacture of cakes and pastries is to be done. The evaluation is regarding the
allocation of cost on the basis of cost drivers. The cost per unit is calculated by dividing the
overall cost or we can say total cost from the annual production quantity. Activity based
costing elaborates the relationship between activities, cost and products.
In this case the three parts need to be evaluated in first part per unit cost needs to be
calculated based on the activity cost drivers. In the second part the billing amount needs to be
calculated as well as the per unit cost need to be evaluated and lastly the additional cost
which is required to reach at the product cost of the US Bright need to be estimated.
The second case is about Hawthorn Leisure works which is a physical fitness centre and it
also offers tennis court facilities to its members. The budgeting is actually done to know
about the companies coming growth prospects and helps in the further decision making
process. In this scenario HLW want to implement a new plan to change the revenue structure
as under the old plan the revenue is collect from membership fee and the court fee and under
the new plan the revenue comprised of only membership fee.

Management Accounting 3
Table of Contents
Task A. (Activity Based Costing)..........................................................................................................4
Introduction:......................................................................................................................................4
Part (a) Cost per unit of activity driver..............................................................................................4
Part (b) Bill of Activities...................................................................................................................5
Part (c)...............................................................................................................................................6
Conclusion:........................................................................................................................................6
Task B Budgets to evaluate Business Decision.....................................................................................7
Introduction:......................................................................................................................................7
Part (a)...............................................................................................................................................8
Part (b)...............................................................................................................................................8
Part (c)...............................................................................................................................................9
Conclusion:........................................................................................................................................9
References:..........................................................................................................................................10

Management Accounting 4
Task A. (Activity Based Costing)
Introduction:
Activity Based costing is the method of accounting that identifies the activities that are
performed by the firm and then allocate the cost on the basis of the activities performed by
the firm. ABC costing system is usually used in most of the manufacturing companies as it
enhances the cost classification and made the allocation of indirect easy (Heisinger, 2009).
ABC Costing system is used in product costing, customer profitability analysis and target
costing.
This present case is about the US Bright product company which produces cakes and pastries.
They use Activity Based Costing as their costing system. In the first part they need to know
the product cost on the basis of allocating the cost to the cost drivers. In the second part they
want the billing amount as well as per unit cost of producing cakes and pastries of
Lamington. Lastly the additional cost need to be determined which can be added in the
product cost to arrive at the total cost of Lamington.
Part (a) Cost per unit of activity driver
The cost per unit of activity driver is calculated by allocating the cost to their allocated cost
drivers (Wiese, 2009). With this we can also calculate the cost of producing one unit by
adding all the allocated costs. The cost drivers are assigned as per the nature of the cost. The
allocation is done by dividing the cost with its cost drivers. The statement need to be prepared
for allocating the cost to its cost drivers. That clearly shows the amount of cost and the
activity driver.
Calculation of Cost per Unit
Activity Activity Cost
Activity
Driver
Rate per
unit
Prepare annual Accounts 5,000.00
Process Receivables 15,000.00 5000 3.00
Process payables 25,000.00 2500 10.00
Program production 28,000.00 1000 28.00
Process Sales Order 40,000.00 4000 10.00
Dispatch sales Order 30,000.00 2500 12.00
Develop and test products 60,000.00
Load Mixers 14,050.00 1000 14.05
Operate Mixers 45,900.00 200000 0.23
Clean mixers 6,900.00 1000 6.90
Move mixture to filling 3,450.00 200000 0.02
Clean Trays 20,000.00 16000 1.25
Fill trays 16,000.00 800000 0.02
Move to Baking 8,000.00 16000 0.50
Set up ovens 50,000.00 1000 50.00

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Bake Cakes/Pastries 1,30,000.00 1000 130.00
Move to packing 40,000.00 16000 2.50
Pack cakes/pastries 80,000.00 800000 0.10
Cost per unit 268.57
The above table depict per unit cost of producing cakes and pastries as if company produce
one cake then it will cost $ 268.57 to the company. The cost is allocated as per the cost drives
according to the nature of the cost. The Activity Based Costing is used to allocate the cost to
the cost drivers.
Part (b) Bill of Activities
In this part the schedule of bill of activities in prepared for the Limington the batch size of
Lamington is 1000 and the annual production volume is 100000. Further the cost per unit is
also calculated as per ABC costing. The cost per unit is calculated by dividing total cost from
annual production. The cost is calculated for estimating the hike in annual production. The
total cost is calculated by adding all the costs which are derived by multiplying the costs to
the cost drivers.
Bill of activities
Activity Consumed
Annual
Quantity of
Activity Driver Cost per Unit Total Cost
Process Receivables 500
3.
00 1,500.00
Process payables 200
10.
00 2,000.00
Program production 100
28.
00 2,800.00
Process Sales Order 400
10.
00 4,000.00
Load Mixers 100
14.
05 1,405.00
Operate Mixers 30000
0.
23 6,885.00
Clean mixers 100
6.
90 690.00
Move mixture to filling 30000
0.
02 517.50
Clean Trays 2000
1.
25 2,500.00
Fill trays 100000
0.
02 2,000.00
Move to Baking 2000
0.
50 1,000.00
Set up ovens 100
50.
00 5,000.00
Bake Cakes/Pastries 100
130.
00 13,000.00
Move to packing 2000 2. 5,000.00

Management Accounting 6
50
Pack cakes/pastries 100000 0.10 10,000.00
Dispatch sales order 500 12.00 6,000.00
Total 64,297.50
Develop and test product 600.00
Annual Production 1,00,000.00
Cost per Unit 0.65
The cost of producing one unit is $0.65 that means that for producing one unit the company
need to incur a cost of $0.65, the annual production is 100000 units and total cost incurred by
the company is $ 64897.50. To arrive at cost per unit the total cost is divided by the annual
production. This total cost is calculated by applying Activity Based costing techniques.
Part (c)
The company prepared the schedule for calculating the total billing amount as well as the cost
of producing per unit of Lamington but the total cost cannot be arrived at without adding the
cost of preparing annual accounts in the cost schedule (Johnson, 2014). Hence, the cost of
preparing annual accounts must be added to arrive at the product cost of Lamington. As this
cost is also a part of the company it is not product attributable or no cost driver is there to
allocate this cost on product basis but still the company need to add this in its cost schedule to
arrive at the product cost.
Conclusion:
The above case illustrates the use of activity based costing in the company’s production run
and company need to allocate the cost as per the cost drivers attributable to the product. The
cost of producing one unit is $ 268.6 this is arrived by allocating the cost on the cost drivers.
The unit cost of Lamington is $0.65 and the total billing amount is $ 64897.50. The activity
Based costing is used by the company to arrive at the cost per unit and total cost for
producing cakes and pastries. They also want to know as if any other additional cost that can
be added to the cost schedule to arrive at the total cost of the company and that will affect the
decision of the company. The company’s additional cost is cost of preparing annual accounts
which is not added in the total cost schedule but is very necessary to add this cost in the cost
schedule as this cost is not product attributable but also is not an irrelevant cost that can be
avoided. Through this complete analysis we came to know about the cost structure of US
Bright and the per unit cost of producing cakes and pastries.

Management Accounting 7
Task B Budgets to evaluate Business Decision
Introduction:
The present case is about Hawthorn Leisure Works which is a physical fitness centre and also
offers tennis court facilities to its members. They are earning revenue by collecting
membership fee and court fee from its members. Presently there are 2000 members of whom
1000 are families and 500 individuals and 500 students. The court fees charged by them vary
from season to season as April to October is their peak season and remaining months there is
off season.
As per the new plan the company will only charge membership fee from its members and that
two if different if members ready to pay the lump sum fee then they will get some discount
and those who are paying the lump sum fee are only 45% of the total members (Lalli, 2011).
The company is estimating that they will earn higher revenues with the new plan as compared
to the old plan in this study we will briefly analyse the old and the new plan and then will
conclude as if which of these plan is better.
Annual membership fees(old plan)
Individual $ 45.00
Student $ 30.00
Family $ 100.00
Total Members 2000
Family 1000
Individual 500
Student 500
10 Courts and 12 hours per day
Peak tennis season October to April Court fees
Days 181
Capacity (5pm to 9pm) 90%-100% Avg. 95% $12 per hour
Capacity(9am to 4pm) 50%-60% Avg. 55% $8 per hour
Off season May to September
Days 184
Court usage(Capacity) 20%-40% Avg. 30% $ 6 per hour
Old Plan( Revenue) Amount
Membership Fees
Individual $ 22,500.00
Student $ 15,000.00
Family $ 1,00,000.00
Court Fees

Management Accounting 8
Peak Season
5pm-9pm $ 82,536.00
9am-4pm $ 63,712.00
Off Season $ 39,744.00
Total Revenue $ 3,23,492.00
Part (a)
In the new plan the members reduced from 2000 to its 70% but the membership fee increased
and also promotional benefit given to the members 45% members adopted the promotional
bonus. The new membership fee increased the revenue and we should implement the new
plan from July. The new plan only based on the membership fee no extra court fee is charged
from the members on the basis of the usage of the court.
New Plan of annual membership fees
Individual $ 300.00
Family $ 500.00
Promotional( for complete year)
Individual $ 250.00
Family $ 450.00
New Plan (Revenue) Amount
Membership Fees
Normal
Individual $ 75,000.00
Family $ 1,25,000.00
Promotional
Individual $ 1,12,500.00
Family $ 2,02,500.00
Total Revenue $ 5,15,000.00
Part (b)
The sales revenue will increase resulting from the planned change in the fee structure for next
financial year. The sales revenue under old plan was $ 3,23,492.00 and the sales revenue
under new plan $ 5,15,000.00.
The assumption made by me is regarding the calculation of court fees as the percentage range
is given for the occupancy of the court. So, I took the average of the given range. As either
we need to take any of the upper or lower range or average of the range one fixed criteria
need to be followed.
Part (c)
HLW should accept the new plan as the revenue will increase and the complexity of
managing the fee structure will decrease on part of the management. The members will also

Management Accounting 9
be happy as there will be no separate fee regarding court usage. The fall in the no. of
members will be combat by the new fee structure very soon as the membership fee increased
as compared to the old plan.
Conclusion:
As per the analysis being done regarding the acceptance of new plan or continuing with the
old plan it is recommended to accept the new plan as the revenue got increased. The revenue
under old plan was $ 323492 and the revenue as per the new plan is $ 515000. The benefit is
clearly there and no other contention is required to support the new plan.

Management Accounting 10
References:
Heisinger, K 2009, Essentials to Managerial Accounting, Cengage Learning.
Johnson, P. F. 2014, Purchasing and Supply Management, McGraw-Hill Higher Education.
Lalli, W. R. 2011, Handbook of Budgeting, John Wiley & Sons.
Wiese, N 2009, Activity Based Costing, GRIN Verlag.