Management Accounting - Case Study Example

MANAGEMENT ACCOUNTING Table of Contents Task 2 3 Task 3 5 Task 4 7 Memo to the Sales Manager 10 Task 5 12 Bibliography 15 Task 2 Particulars Job 666(in £) Job 667 (in £) Direct Materials 35 42 Direct Labour Cutting (14*8) 112 (7*8) 56 Assembly (7*9) 63 (14*9) 126 Machines (21*10) 210 (21*10) 210 385 392 Overheads (as recovery rates not given, it is assumed to be in the wages rate) Cutting (7*8) 56 (7*8) 56 Assembly (28*9 ) 252 (21*9) 189 Machines (42*10) 420 (49*10) 490 728 735 Therefore, total cost 1148 1169 Proposed Profit @ 25% 382.67 389.67 Sales Price Without VAT 1530.67 1558.67 Sales Price with VAT@ 15% 1760.27 1792.47 In the above numerical, the total cost is calculated by adding direct materials, direct labour and the overhead expenditures. The expenditure for the direct material is provided. The direct labour charge is calculated by multiplying the wage rate pert hour with the number of hours worked. As, overhead absorption rates are not given, it has been assumed that the overhead rates are same as wage rates. Adding all the three heads, the total cost is calculated. Taking the cost as 75% we derive at the expected (or proposed) profit of 25%. This gives the sale price. Then, the Value Added Tax (VAT) is calculated over the sales price at the rate of 15%. In this way, the sales price of £1760.27 and £1792.47 is arrived for the job number 666 and 667 respectively. Task 3 To – The Director, Finance From – The Management Accountant Date – 11th May 2009 Subject – Working of ABC costing Activity Based Costing (ABC) method has many advantages over traditional method of costing. The total cost incurred is assigned to the particular activities which have a direct relationship with it. Therefore, cost for any particular activity can be easily calculated and all sorts of redundant expenditures can be checked. Activity Based Costing has come up as a major cost cartel weapon. At the outset, overhead costs of manufacturing are allocated to the activity cost pool. Activity cost pool is a pool of various costs which are caused because of a particular activity. The next step is to find out the contribution of each activity to the finished product. Then, the overhead of every activity is divided by the cost driver. Cost driver denotes any activity which has a direct relation with the resources consumed. This provides with the activity based overhead rate. Overhead costs of manufacturing are assigned to each product of each activity cost pool. Overhead costs of manufacturing can be obtained by multiplying the number of units of the cost driver which was utilised by the product with the activity based overhead rate. Hope, the above note on working of Activity Based Costing would clarify your query. Task 4 Note 1 – To calculate the variable cost, we add up the variable part of the production overhead with direct materials and direct wages. Contribution is calculated by deducting variable expenses from sales. Net profit is calculated by deducting fixed expenses from the contribution. Note 2 – We can find contribution per unit by dividing total contribution (= sales – variable cost) by the number of units produced i.e. 70,000 units. Therefore, contribution per unit is £ 4.44 3) Fixed Cost £ 290000 Contribution £ 311000 Sales £ 1400000 C/S Ratio 0.222142857 BEP (Sales) £ 1305466.238 BEP (Units) 65315.31532 Units Note 3 – BEP is the Break Even Point. It denotes the point at which the firm earns neither profit nor it incurs any loss. BEP in sales value can be calculated if we divide the fixed cost by the contribution-sales ratio. This figure denotes the sales value for which firm has a zero profit margin. Dividing the fixed cost by the contribution per unit, BEP in units can be determined. BEP in unit is important because if the firm cannot sale at least the BEP units, it will incur loss but if the firm can sale more than the BEP units with the given sales price, it can earn profit . Note 4 – If the price is reduced by 25% i.e. by £ 5 and if the sales is doubled (i.e. from 70000 units to 140000 units), we find the business will incur a loss of £ 368000. 5) No of Units to be sold 80000 Sales Price per unit £ 20 Therefore, Sales Price £ 1600000 Expected Variable Cost £ 1244571.429 Contribution £ 355428.5714 Fixed Cost £ 290000 C/S Ratio 0.222142857 BEP (Sales) £ 1305466.238 Therefore, Break Even Price Per Unit £ 16.31832797 Note 5 – If there is an additional order of 10,000 units, then the total number of units will amount to 80,000 units (70,000 + additional 10,000). The sales price remains same at £ 20. The Contribution-Sales ratio and the fixed cost remain same. With all these considerations, the BEP sales amount to £ 130546. So, the BEP per unit is £ 16.3. If SG Printers sale catalogue below this price, it will make loss. Therefore, it cannot afford to sale at £ 9.1 per catalogue. The minimum price affordable for the company is £ 16.3. Memo to the Sales Manager To - The Sales Manager, SG Printers From – Management & Cost Accountant, SG Printers Date – 11th May, 2009 Subject – Minimum sales price allowable It is hereby informed that SG Printers cannot afford to sale additional 10,000 units at £ 9.1. The reason behind the decision is the break-even sales for 80,000 units (70,000 units plus additional 10,000 units) is £ 1305466 which implies for 80,000 units of production, the company cannot afford to sale below £ 16.3. It is advised to convey the message to the customer. Task 5 Direct Material Metal (Assumed to be direct material) 14700 Less- Closing Stock of Raw Material 3500 11200 Direct Labour Wages of machine operators 70000 Fitting Dept Wages 7700 77700 Direct Charges Factory Power 5880 Prime Cost 94780 Factory Overhead Factory Depreciation 1050 Factory Cleaning 4200 Security of Factory 3500 Factory Expenses 3150 Machine Depreciation 2800 Paint used in production 3850 Factory Insurance 4900 23450 Less - Closing Stock of WIP 5600 17850 Factory Cost 112630 Administration Overhead Depreciation of office equipments 770 Telephone 3500 Canteen Costs 8400 Plastic 24500 Admin Wages 22400 Print Post & Stationary 2100 Admin Expenses 3920 Insurance 1400 89390 Cost of Production 202020 Less - Closing Stock of Finished Products 10,500 Cost of Goods Sold 191,520 Selling & Distribution Overhead Selling Exp 1330 Distribution Cost 23800 25130 Cost of Sales 216,650 Sales Price (Given) 280,000 Therefore, Net Profit 63,350 In the above numerical, metal has been assumed as the direct material or the raw material. Adding up the direct material, the direct labour and the direct charges, we get Prime Cost. With Prime Cost when factory overhead is added, we find factory cost or works cost. Adding administration overhead with the factory cost, the cost of production is determined. With the cost of production when the closing stock is deducted, cost of goods sold is calculated. Adding up selling and distribution overhead (selling expense and distribution cost), we get Cost of Sales. Deducting the Cost of Sales from the Sales value (given), we arrive at the net profit. Bibliography Activity Based Costing, No Date, Georgia Perimeter College, [Online], Available: facstaff.gpc.edu/~jpatters/PowerPoint-ACCT%202102%20(Wiley)-outline/JWMaCh04-outline.doc [May 11, 2009] Mc Dermott R. E., No Date, Activity Based Costing, [Online], Available: faculty.weber.edu/rmcdermott/Acc%202020/PowerPoints%20McD/Ch%20%204%20Activity%20Based%20Costing.ppt [May 11, 2009] How to Write Memos?, No Date, The Hong Kong Polytechnic University, [Online], Available: http://elc.polyu.edu.hk/CiLL/eiw/memos.htm [May 11, 2009] Sample Memo, No Date, The Purdue Online Writing Lab, [Online], Available: http://owl.english.purdue.edu/owl/resource/590/04/ [May 11, 2009] Tulsian P.C., Cost Accounting, Published by Tata McGraw-Hill, ISBN 0070620431, 9780070620438 Read More