Comprehensive Analysis and Solution: Management Accounting Assignment

This management accounting assignment solution provides a detailed analysis of various concepts and problems. It covers static and flexible budgeting, including variance analysis and the impact of budgetary slack. The solution delves into manufacturing overheads, explaining under-applied and over-applied overhead scenarios. Ethical considerations, based on the IMA Statement of Ethical Professional Practice, are presented, along with their application to pro bono work. The assignment further explores absorption and variable costing methods, comparing their impact on profit and inventory valuation. It also addresses strategies for improving operating profit through stock build-up and evaluates departmental performance using Return on Sales (ROS), Return on Investment (ROI), and Residual Income (RI) metrics. The solution concludes with an assessment of alternative measures for achieving a target return on investment.

Management Accounting

TABLE OF CONTENTS
QUESTION 1..................................................................................................................................1
a)..................................................................................................................................................1
b)..................................................................................................................................................1
c)..................................................................................................................................................1
d)..................................................................................................................................................1
QUESTION 2..................................................................................................................................2
a....................................................................................................................................................2
b...................................................................................................................................................2
C...................................................................................................................................................2
QUESTION 3..................................................................................................................................4
a) Presenting two ethical consideration provided by Institute of Management Accountants
(IMA) Statement of Ethical Professional practice.......................................................................4
b) Applying the principle for Pro bono work..............................................................................4
QUESTION 4..................................................................................................................................5
A Value of closing inventory under absorption costing..............................................................5
B Difference between profit in absorption and variable costing and which has higher profit
with reason...................................................................................................................................5
C Things management must do if they are planning on improving operation profit through
stock build up...............................................................................................................................6
QUESTION- 5.................................................................................................................................7
a)..................................................................................................................................................7
b) Assessing alternatives does the department have for attaining this return..............................8
QUESTION: 6.................................................................................................................................8
REFERENCES..............................................................................................................................10

QUESTION 1
a)
Static budget variable overhead cost = 5*3= $15 per unit produced
Flexible budget variable overhead cost = 100000/45000 *5 = $11.11 per unit
b)
The company’s variable overhead costs
(i) Spending variance
Actual hours worked x (Actual overhead rate - standard overhead rate)
= 100000 * (11.11-15) = 389000 favorable
(ii) Efficiency variance
Standard overhead rate x (Actual hours - Standard hours)
= 5*(100000 – 150000) = 250000 favorable
c)
It is good to have a small static budget as it helps in effectively monitoring the sales, revenue
and the expenditure which assists the business entity in achieving the optimal financial
performance. In addition to this, through keeping such information of each department or
division in the budget it helps the organization in keeping in track with its long term aims and
objectives. As given below, the static budget provides a guideline within which the costs related
to the production is needed to be maintained along with the budgeted outcomes. Therefore, it is
considered to be good to have astatic budget prepared as well which helps in completing the task
in time.
Static Flexible
Units 50000 45000
Variable overhead cost 750000 499950
d)
There is no evidence found on the part of budgetary slack which refers to the in-built cushion
which results into increasing the chances of improving the actual performance of the company
better than the budget one. This involves underestimating the cost of revenue or overestimating
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the expenses which results into reducing the budget or making it less competitive in nature. This
leads to making it easy for the management or the divisions to enhance their performance. In the
given case, the actual outcome is less than the budgeted one which clearly states there is no such
thing like the budgetary slack is being done by the management of the company.
QUESTION 2
a.
Manufacturing overheads is relating with all indirect cost incurred during the production
process. It is included in unit produced within reporting period. In addition to this, it does not
comprise any selling & administration function of business. For example- salary of maintenance
personnel, rent of the factory building, property taxes on the production facility. These are
included in head of manufacturing overheads because it’s all are indirect expenses that is not
concerned with unit’s production cost therefore it is also known as factory overheads.
b.
It is identified that there is situation of under applied overhead which reflects that actual
cost to produce the goods sold was higher than anticipated. It presents that not enough cost has
been applied to jobs during the period & therefore COGS was understated. Its cause can be
found when overhead rate is not accurate. It mainly occurs in managerial process due to errors
in estimating the predetermined overhead rate which is crucial for deriving significant function
of company process. This can be easily identified by organization via focus on debit side which
is exceed than credits that is causing under applied situation in company (Under- or Over-
Applied Overhead, 2021). In order to make treatment regarding the under applied cost focus is
giving on actual cost as kit is recorded on debit side of manufacturing overhead account.
Increasing the expenses on the income statement and decreasing that period’s net income. In
cost of goods sold, under applied expenses are usually recorded by inputting a debit to COGS
section by the end of year. When there is any specific adjustment is made it is basically added to
cost of goods sold as in case of over applied it is reduced from COGS. Under applied are
basically disposed off by allocating to cost of goods sold account by transferring.
C.
From the evaluation of particular case it can be identified that there is situation of
overestimate as the budgeted cost for factory overhead is 90000 and actual given is 70000 that is
interpretation that company has over applied its cost. it can also be understood that labor hour
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given area s well very high than actual progress and utilization of labor in company. It becomes
crucial for giving concentration on over applied budgetary cost as it gives insights about way of
working of specified organization.
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QUESTION 3
a) Presenting two ethical consideration provided by Institute of Management Accountants (IMA)
Statement of Ethical Professional practice
Confidentiality: The information should be kept confidential that helps to protect the
overall sensitive data to being misused. Also, as per the IMA, it is necessary for the company to
keep the information confidential except when disclosure is authorized or legally required (IMA
Statement of ethical Professional Practice, 2020). Moreover, it is also necessary to inform
relevant parties regarding use of confidential information and also management should monitor
to ensure compliance. In addition to this, if such data cannot be kept confidential, then it will
lead to cause illegal advantage.
Credibility: It is necessary to communicate the information in accurate many and also
provide relevant information otherwise it would lead to influence the understanding of the
report. Further, management is also responsible to communicate entire professional limitation or
other constraints, otherwise it will lead to affect the performance of entire activity. Under this
standard, report any delays regarding information and internal control while implementing any
new law or policy, entire process should be communicated properly.
b) Applying the principle for Pro bono work
George also comply the two ethical standards and this is why, he did not disclose his
work experience in mining industry. He already knows the principle mentioned under IMA,
Statement of ethical professional practice and that is why, work for pro bono in order to get a
promotion (Lee, 2020). In the same way, George did not disclose the information about pro bono
work and as a result, the principle is compiled without any jeopardizing. Further, it has been
analyzed that the confidential information should not use for a personal advantage Apart from
this, credibility (another ethical standard) should also be complied and that is why, George
should properly communicate with their senior management about their working and do not
share any confidential data with anyone that might cause opposite impact. This further helps to
resolve the conflicts because it is the application of fundamental principle that improve the
performance of a business. Thus, adhering with such ethical consideration will help a George to
improve the growth as well.
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QUESTION 4
A Value of closing inventory under absorption costing
Sales 125,000 units
Units produced 150,000 units
Beginning Inventory 5,000 units
Closing inventory= opening inventory + purchase – sales
= (5000 + 150000) - 125000 = 30000 units.
Thus, the closing inventory is 30000 units
B Difference between profit in absorption and variable costing and which has higher profit with
reason
Per Unit Cost Per Unit
Sales 125000 19
Variable Manufacturing 150000 8
Fixed Manufacturing 150000 5
Selling And Administrative Cost 125000 3
Profit Under Absorption Costing
Sales 2375000
Less: Cost Of Goods Sold
Op Stock 5000
Add: Purchase 150000
Less: Cl Stock 30000 125000
Less Variable Cost 1200000
Gp 1050000
Less: Fixed Manufacturing 750000
Less: Selling And Administration 375000
Net Profit/ Loss -75000
Profit Under Variable Method
Sales 2375000
Less: Cost Of Goods Sold
Op Stock 5000
Add: Purchase 150000
Less: CL Stock 30000 125000
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Less Variable Cost 1200000
Less: Fixed Manufacturing 750000
GP 300000
Less: Selling And Administration 375000
Net Profit -75000
Evaluation of the above calculation relating to marginal and variable costing it was
viewed that under both the method the companies suffering with a loss. In addition to this
amount of loss is also cm and there is not much any difference by the use of any of the method
of costing (Hojna and Stryckova, 2018). On the other hand with respect to the theoretical aspect
of potty methods variable costing method is the one which will provide a slightly higher gross
profit as compared to see profit under the absorption costing. Use of theme variable costing
method is suggested to the company.
C Things management must do if they are planning on improving operation profit through stock
build up
The improvement of operating profit is very essential for the companies to gain
successful stop and different strategies which management can undertake in order to improve the
operating profit with stock build-up are as follows-
It is advisable to the management of company that they must improve the inventory
management. This is very essential because if the inventory will be managed then this will result
in making better decisions relating to purchase and sales. And this will allow the company to sell
more products and reduce the products been idle (LIU and PAN, 2018).
Along with this it is also advisable to company to increase the average order value. The
increase average order value will result in increasing the value of different types of products
which are purchased together. This is particularly when the consumer will buy certain product
then they will undertake the purchase of the related product as well. By stocking up the related
products will also increase the purchase of the company which will result in sales increase for
the company.
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QUESTION- 5
Bright Diamictite Standard Diamictite Dark Diamictite
Total assets $3,400,000 $3,400,000 $2,000,000
Total liabilities $2,500,000 $2,750,000 $1,000,000
Revenues $2,200,000 $2,000,000 $1,500,000
Operating profit $420,000 $375,000 $250,000
a)
i) The higher Return on Sales (ROS)
Return on Sales= Operating profit / Revenues
Bright Diamictite= $420000 / $2200000
= 0.190
Standard Diamictite= $375000 / $2000000
= 0.1875
Dark Diamictite= $250000 / $1500000
= 0.1667
So, it can be assessed from the above table that the Bright Diamictite department of teh
company is offering the highest return on sales of 0.190 as compared to the other two
departments of the company who are lagging behind.
ii) The higher Return on Investments (ROI)
Return on Investments= Net income / Cost of investments
Bright Diamictite= $420000 / $900000 * 100
= 46.67%
Standard Diamictite= $375000 / $650000 * 100
= 57.69%
Dark Diamictite= $250000 / $1000000 * 100
= 25%
So, it can be assessed from the above data that for the company the highest return on
investments are generated by the Standard Diamictite department which is approximately 58%
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much higher than the two departments of the company. The Dark Diamictite is close to half in
the generation of the returns on investments as compared to the other two departments.
iii) The higher Residual Income (RI)
Residual income= Operating income – (Required rate of return * Operating assets)
Bright Diamictite= $420000 – (0.12 * $3400000)
= 12000
Standard Diamictite= $375000 – (0.12 * 3400000)
= -33000
Dark Diamictite= $250000 – (0.12 * 2000000)
= 10000
So, from the above analysis it can be concluded that the highest residual income is of
Bright Diamictite department of the company which is up-to $12000 which is comparatively
greater than the other two departments of the company. The Standard Diamictite department of
the company is having the negative balance which means that their residual income is nil.
b) Assessing alternatives does the department have for attaining this return
In order to achieve the target return on investments of 15% for the Dark department of
the company it has to apply the alternative measures which are like it can either boost the sales
of the company, or it can reduce the current costs of the company so that the net income is
higher generated for the company. Apart from this one more alternative is that the company can
also go for re-evaluating the required rate of return from the various departments.
QUESTION: 6
a) Assembly cost = 400000
Cost driver = direct labor hour
400000 * 48000/64000 = 300000 for lounge
Units produced of lounge = 12000
Per unit cost of activity = 300000 / 12000 = 25
Per unit cost of activity in case of patio = 100000 / 8000 = 12.5
b)
Driver Lounge Patio Total
No. of Parts 12000 * 20 = 240000 8000 * 10 = 80000 320000
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Direct labor hours 12000 * 4 = 48000 8000 * 2 = 16000 64000
Activity
cost Pool
Cost
Pool
driver
Allocations Lounge Patio Total Cost
pool
rates
Lounge Patio
Activity driver usage
Material
setup
No. of
set up
150000 30 45 75 2000 60000 90000
Material
handling
No. of
parts
200000 240000 80000 320000 0.625 150000 50000
Cutting No. of
parts
500000 240000 80000 320000 1.5625 375000 125000
Assembly Direct
labor
hours
400000 48000 16000 64000 6.25 300000 100000
Finishing No. of
units
600000 12000 8000 20000 30 360000 240000
Total 1245000
Per unit
cost
103.75
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REFERENCES
Books and Journals
Hojna, R. and Stryckova, L., 2018. ABSORPTION COSTING ANALYSIS AND ITS USE BY
CZECH MANUFACTURING COMPANIES. In 5th International Multidisciplinary
Scientific Conference on social sciences and arts SGEM 2018 (pp. 19-26).
Lee, J. J., 2020. Double Standards: An Empirical Study of Patent and Trademark
Discipline. BCL Rev.,61 p.1613.
LIU, B. and PAN, H.Q., 2018. Comparative Study of Absorption Costing and Variable Costing.
Journal of Qiqihar University (Philosophy & Social Science Edition), p.06.
Online
Under- or Over-Applied Overhead. 2021. Online. Available through:
<https://courses.lumenlearning.com/tcc-managacct/chapter/factory-overhead-calculations/>.
IMA Statement of ethical Professional Practice. 2020. [Online]. Available through:
<https://www.imanet.org/-/media/b6fbeeb74d964e6c9fe654c48456e61f.ashx?
la=en#:~:text=IMA's%20overarching%20ethical%20principles%20include,Fairness%2C
%20Objectivity%2C%20and%20Responsibility.&text=IMA%20members%20have%20a
%20responsibility,may%20result%20in%20disciplinary%20action.>.
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