UGB106 Management Accounting: Costing, Budgeting, and Analysis

This document presents a comprehensive analysis of management accounting principles through the lens of several practical questions. It begins with Plaistead Plc, examining contribution per unit, break-even sales revenue, margin of safety, and profit estimation under varying conditions, including pricing strategy adjustments. The analysis extends to calculating the units needed to achieve a specific profit target and evaluating the impact of new pricing strategies. The report then transitions to Crawford Plc, focusing on cost allocation across different departments using various methods such as employee numbers, direct materials, and floor space. It calculates overhead recovery rates and determines the full job cost for a special product. Finally, the document briefly discusses the advantages and disadvantages of absorption costing. The assignment also includes estimations of budgets and variances.

Introduction to
management accounting

Contents
Contents................................................................................................................................................2
Part 1.....................................................................................................................................................3
Question 2: Plaistead Plc..................................................................................................................3
Part 2.....................................................................................................................................................8
Question 3: Crawford Plc.................................................................................................................8
Part 3.....................................................................................................................................................3
Question 4:........................................................................................................................................3
REFERENCES.....................................................................................................................................9

Part 1
Question 2: Plaistead Plc.
Answer to (a)
Estimating Contribution per Unit
Note: Contribution per unit = (selling price per unit) – (variable costs per unit)
Particulars £
Selling Price 13
Materials (5.25)
Labour (2.95)
Variable Overheads (1.85)
£2.95
Answer to (b)
Estimating Break Even Sales Revenue at the Break-even Point and Margin of Safety:
Break Even point is reached when: total contribution = total fixed costs.
The break-even point (units) is estimated as:
Fixed Cost/ (𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡)–(𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡𝑠 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡)
Note: (selling price per unit) – (variable costs per unit) = Contribution per unit
According to the information in the question, total fixed costs are estimated as:
Production Fixed Costs = £59,000
Selling Fixed Costs. = £47,600
£106,600

Applying the formula, the number of electric kettles at break-even (the break-even point
(sales): =£106,600
£2.95
= 36,136 electric kettles.
Therefore, Revenue at Break-even = 36,136 electric kettles x £13
= £469,768
Margin of Safety (Volumes/Units) = (Planned sales in unit) - (Breakeven sales in unit)
= (53, 000 electric kettles) – (36, 136 electric kettles)
= 16, 864 electric kettles
Margin of Safety (Revenue) = (Planned sales revenue) - (Breakeven revenue)
= £689,000 –£469,768
= £219, 232
OR
Margin of safety (revenue) = (Margin of safety (volume/unit)) x (Selling price)
= 16,864 electric kettles x £13
= £219, 232
Answer to (c)
Estimating profit at 53,000 electric kettles at selling price of £13per electric kettle:
Sales (from question) = 53,000 electric kettles
Break even number of electric kettles (from calculation). = 36,136 electric kettles
Therefore, sales are above break-even point by 16,864 electric kettles (53, 000 – 36,136)
Contribution per electric kettles = £2.95
Additional contribution = 16, 864 x £2.95 = £49, 749
Answer to (d)
Estimating units of electric kettles to produce and sell for a profit of £90,000

Creating and attempting to sell 36,136 electric kettles would then contribute in neither a
deficit nor revenue, as per the computations above. This really is the juncture at which
the investment pays off hence is called break-even point (Abou Taleb and Al Farooque,
2021).
 In many other phrases, no profit, no loss (zero profits) would've been decided to
make when 36,136 electric kettles were manufactured and marketed.
 Evey supplemental electric kettle bought and marketed will indeed contribute
£2.95 (see answer (a) above).
 To create £90,000 revenue, the multitude of different electric kettles to generate (in
addition to 36,136 electric kettles) is:
£90,000
£2.95
= 30,508 electric kettles.
As a consequence, the maximum count of electric kettles that might have needed to be
manufactured and marketed in sequence to make a revenue of £90,000 would have been:
= (36,136 electric kettles) + (30,508 electric kettles = 66,644 electric kettles
Answer to (e)
Recalculation of selling price at which 53,000 electric kettles would be sold for a profit of £90,000.
Total contribution = (fixed costs) + (profit)
Therefore: Profit = (Total Contribution) – (Fixed Costs)
Thereafter: Derive ‘contribution per unit’ of 53, 000 electric kettles.
Note that: Contribution per unit = (selling price per unit) – (variable costs per unit)
Therefore: Selling Price per unit = (Contribution per unit) + (variable costs per unit) Total
Contribution is estimated as: £106,600 (Fixed costs) + £90,000 (Profit desired) = £196, 600

If 53,000 electric kettles are sold, contribution needed per electric kettles is estimated as:
£196, 600
53, 000 (electric kettles)
= £3.71
Therefore, the estimated selling price = (Contribution per unit) + (variable costs per unit):
Contribution per unit £3.71
Materials £5.25
Labour £2.95
Variable Overheads £1.85
New Selling Price £13.76
Answer to (f)
Adoption of new pricing strategy:
Proposed Strategy’s Selling Price = £13 x 1.09 (estimating 9% increase in
selling price)
= £14.17
Proposed Strategy’s Contribution (per kettle) = £2.95 + £1.17 (This is the proposed
Strategy’s selling price less old selling price)
= £4.12
Proposed Strategy’s Sales (in Units/Volume) = 53, 000 x 1.17 (estimating 17% increase in
Sales volume)
=62, 010 electric kettles

Proposed Strategy’s Total Contribution = £4.12 x 62, 010 electric kettles
= £255,481
Proposed Strategy’s Fixed Costs = £106,600 + £45,000
= £151, 600
Proposed Strategy’s Profit = New Total Contribution – New Fixed Costs
= £255, 481 - £151,600
= £103, 881
The suggested technique generates a revenue of £103, 881, which is larger than the initial
allocated financial gain of £49,749 As a result (as stated in response (c) above), the new
proposal is a vital way that should be approved by Plaistead Plc (Adams and Larrinaga, 2019).
Answer to (g)
The break-even assessment is based on a number of assumptions, including the aforementioned:
 All costs (manufacturing, shipments, and setup) are broken down into fixed and changeable
components.
 Since the framework of expenditure is continuous, if valuation records are kept on a chart,
there will be a tendency.
 The total quantity of operating expenses would then stay unchanged at each current output,
while indirect expenses would then vary in comparison to production.
 The manufacturer's selling prices will stay continuous at each and every sale volume,
implying that it does not change in response to variants in end goods (Alsharari and
Abougamos, 2017).
 The cost of implementation, employees, housing, advertising, and other bought equipment
would all stay unchanged.
 People’s views and computer systems' science abilities and efficacy will indeed remain
unchanged.
 Earnings and expenditure were also computed using a fully electric measurement, like the
fair prices of inventory or the total demand.
 Only the level of productivity or marketing is viewed as a crucial percentage of the price
(Altukhov, Predeus and Predeus, 2019).

Part 2
Question 3: Crawford Plc
Answer to (a)
Allocating cost based on:
 Number of employees 12:10:3.
 Direct materials 17:8.
 Floor space 3:4:1.
 Floor space 3:4:1.
 Machinery used in each department 50:40:3.
 Number of employees 12:10:3.
 Kilowatt hours 1.5:1.3:2.
STEP 1: Allocating costs to departments using a suitable method (ratio) for each
department:
Total (£) Assembly (£) Joinery (£) Canteen
(£)
Indirect labour–12:10:3 28 000 13,440 11,200 3,360
Indirect material – 17:8 22 000 14 960 7 040 -----
Heating & lighting – 3:4:1 13 000 4 875 6 500 1 625
Rent & rates – 3:4:1 14 000 5 250 7 000 1 750
Depreciation – 50:40:3 19 000 10 215 8 172 613
Supervision – 12:10:3 15 000 7 200 6 000 1 800
Power – 1.5:1.3:2 9 000 2 813 2 438 3 750
120 000 58 753 48 350 12 898
STEP 2: Allocating service department costs to production departments:
Total (£) Assembly (£) Joinery (£) Canteen
(£)
Balance from Step 1 above 120 000 58 753 48 350 12 898
Allocate Canteen to Assembly &
Joinery
7 035 5 863 [12 898]
120 000 65 788 54 213 ------
STEP 3: Calculating the overhead recovery rates for Assembly and Joinery Department:
The expenditure installed capacity is determined by the number of "labour hours." In both
cases, the department's overhead costs are calculated by dividing the number of real labour
hours for each suburb. The following is the surplus recovery proportion:
𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦 𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 = 𝑇𝑜𝑡𝑎𝑙 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦
𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 Di𝑟𝑒𝑐𝑡 𝐿𝑎𝑏𝑜𝑢𝑟 𝐻𝑜𝑢𝑟𝑠 𝑜𝑓𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦 𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛t

= 65,788 = £31.33 per labour hour
2 100 hours
𝐽𝑜𝑖𝑛𝑒𝑟𝑦 𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 = 𝑇𝑜𝑡𝑎𝑙 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐽𝑜𝑖𝑛𝑒𝑟𝑦 𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡
𝐷𝑖𝑟𝑒𝑐𝑡 𝐿𝑎𝑏𝑜𝑢𝑟 𝐻𝑜𝑢𝑟𝑠 𝑜𝑓 𝐽𝑜𝑖𝑛𝑒𝑟𝑦 𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛t
= £54,202 =38.72 per labour hour
1 400 hours
Answer to (b)
Special Product Soft Stool: Calculation of full job cost and product cost for 10 units of Soft Stool.
£ £
Direct costs 85
Production overhead:
Assembly department (4 labour hours x £31.33) 125.32
Joinery department (6 labour hours x £38.72) 232.32
Total production overheads 357.64
Total production cost for one unit £442.64
Total production for 10 units (£442.64 x 10) £4,426.4
Working of Overhead Costs Allocations
Allocation of cost of indirect labour is 12:10:3 (= 25), on the basis of number of employees
(28 000)
𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦= 12 x £28,000=£13,440
25
𝐽𝑜𝑖𝑛𝑒𝑟𝑦= 10 x £28,000=£11,200
25
𝐶𝑎𝑛𝑡𝑒𝑒𝑛= 3 x £28,000=£3,360
25
Note: Canteen would not be reimbursed for indirect material costs because they are not
manufacturing and do not use the £22,000 in raw - materials.
Allocation of cost of indirect materials is 17:8(= 25), in proportion to direct materials

𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦= 17x £22,000=£1
𝟒,960
25
𝐽𝑜𝑖𝑛𝑒𝑟𝑦= 8 x£22,000=£7,4
𝟎
25
Allocation of cost of heating and lighting is 3:4:1(= 8), in proportion to floor space (13 000)
𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦=3 x £13,000=£4,875
8
𝐽𝑜𝑖𝑛𝑒𝑟𝑦= 4 x £13,000=£6,500
8𝐶𝑎𝑛𝑡𝑒𝑒𝑛= 1 x £13,000=£1,25
8
Allocation of cost of rent and rates is 3:4:1(= 8), in proportion to floor space (14 000)
𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦=3 x £14,000=£5,250
8
𝐽𝑜𝑖𝑛𝑒𝑟𝑦. =4x £14,000=£7,000
8
𝐶𝑎𝑛𝑡𝑒𝑒𝑛=1 x£14,000=£1,750
8
Allocation of depreciation cost is 50:40:3(= 93), according to the value of machinery used in each
department (19 000)

𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦=50 x £19,000=£10,215
93
𝐽𝑜𝑖𝑛𝑒𝑟𝑦=40 x £19,000=£8,172
93
𝐶𝑎𝑛𝑡𝑒𝑒𝑛=3 x£19,000=£613
93
Allocation of cost of supervision is 12:10:3(= 25), on the basis of number of employees
(15,000)
𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦=12 𝑋£15,000=£7,200
25
𝐽𝑜𝑖𝑛𝑒𝑟𝑦=10 𝑋£15,000=£6,000
25
𝐶𝑎𝑛𝑡𝑒𝑒𝑛=3 𝑋£15,000=£1,800
25
Allocation of cost of power is 1.5:1.3:2(= 4.8), on the basis of kilowatt hours (9,000)
𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦=1.5 x£9,000=£2,813
4.8
𝐽𝑜𝑖𝑛𝑒𝑟𝑦=1.3 x£9,000=£2,438
4.8
𝐶𝑎𝑛𝑡𝑒𝑒𝑛= 2 x£9,000=£3,750
4.8

Absorption of canteen cost is 12:10(=22), on the basis of kilowatt hours
𝐴𝑠𝑠𝑒𝑚𝑏𝑙𝑦=12 x£12,898=£7,035
22
𝐽𝑜𝑖𝑛𝑒𝑟𝑦=10 𝑋 £12,898 =£5,863
22
Answer to (c)
Functioning at a continual absorptive stage is far more effective and definitely less
expensive (plant-wide rate). Nevertheless, if manufacturing methods vary markedly across
segments (labour-intensive vs that of machine-intensive), using a set sum quantity is
probable to exaggerate operational cost. It might have been risen if the outcomes were
dissimilar (Altukhov, Predeus and Predeus, 2019).
Advantages of Absorption Costing:
 GAAP Compliance– It has the advantage of adhering to Generally Accepted
Accounting Principles (GAAP), which is required for submitting with the Tax
Authorities (IRS).
 Accounting for All Production Costs– Extendable selling prices hardly considers
direct costs, whereas this takes into account all production costs. Absorptive costing
is used to address for corrected operating costs such as staff, property rental prices,
and energy costs. This provides employees with a far more complete picture about
how much a business consumes on each item, allowing someone to implement
orders to increase the economic growth and revenues options (Aouni, McGillis and
Abdulkarim, 2017).
 Tracking Profits- Absorption cost, as compared to extendable costing, offers a
much more precise financial position, particularly if all goods are not supplied
during that given cycle. If a firm spends manufacturing in the assumption of a
consistent sales growth, this is becoming a major problem.
Disadvantages of Absorption Costing: