Comprehensive Analysis of Management Accounting Cost Solutions

This document offers a detailed analysis of management accounting solutions, encompassing various costing methods and financial statement analysis. It begins with a comprehensive comparison of traditional and Activity-Based Costing (ABC) approaches, presenting detailed calculations for unit costs, total costs, and profit and loss statements for both basic and advanced models. The document highlights the impact of different costing methods on pricing decisions, explaining why an overseas buyer is interested in a specific model due to pricing discrepancies caused by overhead allocation. Furthermore, it addresses overhead variance treatment, exploring methods like carrying forward, writing off in the profit and loss account, and adjusting in the current year with existing units. Finally, the document provides a detailed overview of Activity-Based Costing, outlining its advantages, such as improved data analysis and cost allocation, and disadvantages, including data collection complexity and implementation costs. The solutions cover various aspects of cost accounting, including direct materials, direct labor, overhead allocation, and sales price calculations.

INTRODUCTION TO MANAGEMENT
ACCOUNTING
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Contents
Solution 1:.............................................................................................................................................3
Solution 2:.............................................................................................................................................4
Solution 3:.............................................................................................................................................6
Solution 4:.............................................................................................................................................8
Solution 5:.............................................................................................................................................9
Bibliography........................................................................................................................................11
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Solution 1:
Statement of Cost- Traditional Approach
Particulars Basic Model Advance Model
Units produced and sold 1,600 1,500
Direct Material cost per unit 325 560
Direct Labour cost per unit 150 260
Total Material Cost 5,20,000 8,40,000
Total Labour cost 2,40,000 3,90,000
Total Allocated Overhead cost 1,43,750 1,06,250
Cost related only to advance Model
Selling and Administration expenses - 1,40,600
Interest Expense - 25,200
Office Rent - 35,900
Total Cost 9,03,750 15,37,950
Cost Price Per unit 565 1,025
Allocation of Overhead under Traditional approach
Particulars Amount
Inspection 20,000
Assembly 90,000
Production Scheduling 1,05,000
Machine set-up 35,000
Total Overhead 2,50,000
Total Machine Hours consumed 8,000
Overhead per Machine Hour 31
Overhead Allocated to Basic Model 1,43,750
Overhead Allocated to Advance
Model 1,06,250
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Solution 2:
Statement of Cost- ABC approach
Particulars Basic Model Advance Model
Units produced and sold 1,600 1,500
Direct Material cost per unit 325 560
Direct Labour cost per unit 150 260
Total Material Cost 5,20,000 8,40,000
Total Labour cost 2,40,000 3,90,000
Total Allocated Overhead cost 75,506 1,74,494
Cost related only to advance Model
Selling and Administration expenses - 1,40,600
Interest Expense - 25,200
Office Rent - 35,900
Total Cost 8,35,506 16,06,194
Cost Price Per unit 522 1,071
Allocation of Overhead-ABC Approach
Particulars
Inspecti
on Assembly
Production
Scheduling
Machine
set-up
Total
Cost
Cost
20,000 90,000 1,05,000 35,000 2,50,00
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0
Consumption of resource
- units 950 8,000 550 350
Cost per unit 21 11 191 100
Units for Basic Model 200 4,600 50 100
Units for Advance
Model 750 3,400 500 250
Total Overhead for
Basic Model 4,211 51,750 9,545 10,000 75,506
Total Overhead for
Advance Model 15,789 38,250 95,455 25,000
1,74,49
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Solution 3:
Statement of Profit and Loss- Tradition Approach
Particulars
Basic
Model Advance Model
Sales 10,84,500 18,45,540
Less:
Total Material Cost 5,20,000 8,40,000
Total Labour cost 2,40,000 3,90,000
Total Allocated Overhead cost 1,43,750 1,06,250
Cost related only to advance Model
Selling and Administration expenses - 1,40,600
Interest Expense - 25,200
Office Rent - 35,900
Profit 1,80,750 3,07,590
Calculation of Sales Price Per unit- Tradition Approach
Particulars
Basic
Model Advance Model
Cost per unit 565 1,025
Add: profit margin 20% 113 205
Sale Price Per unit 678 1,230
Statement of Profit and Loss- ABC Approach
Particulars
Basic
Model Advance Model
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Sales 10,02,607 19,27,433
Less:
Total Material Cost 5,20,000 8,40,000
Total Labour cost 2,40,000 3,90,000
Total Allocated Overhead cost 75,506 1,74,494
Cost related only to advance Model
Selling and Administration expenses - 1,40,600
Interest Expense - 25,200
Office Rent - 35,900
Profit 1,67,101 3,21,239
Calculation of Sales Price Per unit- ABC Approach
Particulars
Basic
Model Advance Model
Cost per unit 522 1,071
Add: profit margin 20% 104 214
Sale Price Per unit 627 1,285
The company has been using tradition costing system under which cost allocation is not done
in a proper manner. The price of the advance model charged by the company is $1230,
whereas if the company would have adopted ABC costing they would have charged $1285
per unit. The overseas buyer has noticed this lower price for the given company and is
interested in advance model only. Since some portion of expense of advance model has been
transferred to basic model, the price of that has increased from $627 to $678. This means that
the basic model is overpriced and advance model is under price. This is reason because of
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which the overseas buyer is interested only in the advance model and not in the basic model
or both.
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Solution 4:
In order to pre determine the unit cost for the manufacturing companies, the managers
evaluate and budget the expenses which are likely to be expended in the production process.
These expenses are then allocated over the units produced to determine the cost per unit.
Based on this data the amount is recovered from the customers (Holtzman, 2013). When the
production cycle starts and actual expenses start to incur, then it is found that there are
variances between the budgeted and actual rates. Due to this difference the under and over
recovery of overheads takes place. No treatment is required if the applied and actual overhead
are same. This can be possible only when the budgeted expenses are equal to the actual
expenses.
This under and over recovery are to be treated in the books of accounts. There are three
common ways in which these are treated. They are as follows:
- Carrying forward the said amount: many companies follow the rule to carry forward the
under or over recovered amount to the next financial year. The adjustments are made in
the following year and then the balance is carried forward to the next year.
- Writing off in profit and loss account: the simplest ways to treat under or over recovery is
to write off the amount in the profit and loss statement for that year.
- Adjustment in the current year with existing units: this is the least commonly used ways.
Under this system the under or over recovered amount is adjusted over the remaining
units unsold. This is unrealistic as it increases the price of the products.
Therefore, companies can treat under and over recovery of overheads in the manner which is
most suitable to them.
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Solution 5:
Activity based cost, as the name suggest is the type of costing technique under which the cost
are allocated based on the activities consumed by the product. This modern costing technique
which helps is better allocation of cost, so that correct costing for a product can be done. This
system has both advantages and disadvantages. The advantages are:
- Since the ABC costing requires the cost data to be collected at one place, it gives the
mangers a pool of data to work and analyse on. They can process this data and make
important decisions.
- Since this system helps allocate cost as per usage, this helps eradicate the system of over
and under absorption of expenses. This helps in better recovery and accountability of cast
data.
- Just as discussed above, some products are wrongly overpriced while using averages for
cost apportionment. This approach helps remove this uneven distribution and helps in
correct pricing of the product
- The data collected is too much in this approach, using this data the managers can
implement policies which may help them in cost saving techniques. It may also help
unnecessary costs. (Menifield, 2014)
These were the advantages. Following are the few disadvantages of activity based costing:
- In order to implement the ABC approach, too much data collection is required which
requires extensive labour and time
- This approach may result to be expensive for small manufacturing companies.
- Since this system is most suited to manufacturing units, the service industry do not
benefit from them.
- Since the activities are the cost drivers under this approach it is important for the
managers to understand the organisational processes properly. This involved too much
man power.
- It is very time consuming process.
Therefore we see that the activity based costing has both advantages and disadvantages. The
companies should try to make of the system by overcoming the disadvantages. It is important
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that the enterprises apply the system only if it would help them simplify the processes and
not the opposite.
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