Management Accounting Issues - Assignment Example

QUESTION 1 Part A (3marks) Unlike financial accounting, management accounting does not need to be regulated by a regulating agency (such as AASB). However, it is ‘governed/regulated’ by its own ‘Codes of Conduct’ (such as those mentioned in the text book). How you think non-adherence to these codes of conduct (choose any one) may result in unethical decisions in large corporations. Non-adherence to the management accounting codes of conduct may result in unethical decisions especially when those involved in making decisions act in their own interest rather than that of the organization at large. For instance, one of the fundamental principles of the Institute of Chartered Management Accounts (CIMA) Code of Ethics is integrity. Under this principle, management accountants are required to be honest, straightforward and truthful in all business and professional relationships. Management accountants are required not to be associated with any information that they believe contains substantially misleading or false statements, or which is misleading through omission (CIMA, 2015). It is apparent that if management accountants fail to adhere to this requirement, they are likely to make unethical decisions that affect an entire organization. Part B (4 Marks) i. Given this situation, describe in your own words your ethical responsibilities in the light of CIMA code of professional conduct. The act by Joe Taylor is contrary to section 300.12 of the CIMA Code of Ethics, which touches on the issue of a member being “pressured to become associated with misleading information” (CIMA, 2015, p. 33). In light of this, I would follow the guidance given in section 340.3 of the code of ethics of CIMA, which prohibits members from deliberately misrepresenting facts or subordinating their judgement when carrying out their professional duties for their employer (CIMA, 2015). Therefore, I would not give in to Joe Taylor’s pressure to alter the date of the revenue in question because doing so would be unethical. ii. If Joe is persistent in his order, what should you do to handle the situation in the light of CIMA code of professional conduct? Section 340.8 of the CIMA code of ethics states that if a member concludes that taking a certain position leads to material misrepresentation of facts or a violation of applicable regulations, they should raise their concerns with the supervisor (CIMA, 2015). In my case, after informing Joe why I will not misrepresent the date of the revenue, I would let the company Chief Management Accountant know about the issue, especially the pressure from Joe. QUESTION 2 Part A: 7 marks a. How much will a total production of 900 office chairs cost? What will be the per unit cost? Total variable manufacturing cost per chair is $287 Therefore, total variable cost of manufacturing 900 chairs is 900 × $287 = $258,300 Total fixed manufacturing overhead cost per year is $35100 Total production cost = total variable cost + Total fixed manufacturing overhead cost = $258,300 + $35,100 = $293,400 Total per unit cost for 900 chairs is $293,400 ÷ 900 = $326 b. How much will a total production of 1,900 office chairs cost? Work out the per office chair cost if the company utilized/operated at 100% of its production capacity during 2016? A total production of 1,900 office chairs cost as follows: Total variable cost: $287 × 1900 = $545,300 Total production cost for 1900 chairs is $545,300 + $35,100 = $580,400 Total per unit cost for 1900 chairs is $580,400 ÷ 1900 = $305.47 c. Comment on the outcomes of ‘a’ and ‘b’ from the point of view of ‘variable and fixed cost behavior’. It can be seen that the total variable production cost increases with an increase in production. Total fixed manufacturing overhead cost per year remains constant whether production is high or not. Total production cost per unit decreases as production increases (it decreased from $326 per chair for 900 chairs to $305.47 per chair for 1900 chairs). This is because as production increases, the fixed overhead costs are spread over a bigger number of units, hence the fixed cost per unit falls (Aryasri, 2006). Part B: 6 marks a. Closing Balance = opening balance + sales – purchases = $(42+224-211) =$55 b. DM used = opening balance + purchases – closing balance = $(8+49-15) = $42 c. Total manufacturing costs = opening balance + cost of goods manufactured – closing balance = $(9+22-23) = $8 d. Opening balance = Cost of goods sold – Cost of goods manufactured + closing balance =$(62- 63+ 21) =$20 QUESTION 3: Total 5 marks a. How much is the company’s contribution margin for 2016. Contribution margin = total revenue – total variable costs = $4,700 – ($1100 + $1010) = $2590 b. How much is the company’s contribution margin percentage for 2016. Contribution margin percentage = = = 55.106% c. Work out gross margin for Armidale Decorations for 2016. Gross margin = = = 0.765 d. Work out gross margin percentage for Armidale Decorations for 2016. Gross margin percentage = = 0.765 = 76.5% e. Work out operating income for Armidale Decorations for 2016. Operating income = gross income – operating expenses (nonmanufacturing expenses) = $4700 – ($1010 + $745) = $2945 QUESTION 4: (13 Marks) a. Work out the breakeven point for Armidale Manufacturing in units for each type of trousers, assuming that the company’s sales mix ratio is 2:1 in favor of men's trousers? (round off to the nearest unit) Break-even point is calculated as For men’s trousers: contribution margin = $26.80 – $18.40 = $8.4 Break-even point: ≃ 4333 units For boys’ trousers: contribution margin = $22.00 – $14.80 = $7.2 Break-even point: ≃ 5056 units b. Work out the company’s operating income, assuming the same sales mix ratio as in ‘a’, and the company sold a total of 7,500 trousers? At a ratio of 2:1 the company will have sold 5000 men’s trousers and 2500 boy’s trousers Gross income is (5000 $26.80) + (2500 $22.00) =$134000 + $55000 =$189000 Operating income = gross income – operating expenses (nonmanufacturing expenses) = $189000 – $36,400 = $152600 QUESTION 5: (5 Marks) In the light of your understanding of the ‘Cost Volume Profit (CVP)’ analyses, explain in your own words how your understanding of this topic can help you better manage your business as a sole proprietor (respond in less than 400 words). The ‘Cost Volume Profit (CVP)’ analyses have enabled me to understand several issues that can help me manage a business in a better way. To start with, I have learned that it is important to identify variable and fixed costs and determine how they affect the business’s revenue. For instance, variable costs increase as a business’s production increases. However, fixed variables are constant. Along this line, total production costs per unit decrease when a business increases production since the fixed costs will be spread over many units, hence reducing the cost per unit. This means that production or sales volumes need to be higher in order to reduce the impact of fixed costs such as advertising on a business’s revenue (Weygandt, Kimmel & Kieso, 2010). In this regard, the knowledge of CVP will help me in profit planning such that I will be able to plan on how to reduce costs and increase revenue. CVP knowledge is also important because it can help me to answer questions such what volume of sales my business needs to make to cover all expenses, i.e. to reach a break-even point; the number of units that the business needs to sell so as to make a profit; and whether it is worthwhile to spend more on expenses such as advertising to increase sales. In particular, I will be able to use the various formulae that I have learnt to calculate phenomena such as operating income, break-even point, gross income, contribution margin, and gross margin and use the findings to make rational decisions regarding the business. For example, I can use the various calculations to determine the sales price of my products and the mix of items to be sold, to choose marketing strategies, and to analyze the effect of changes in various costs on profit, as noted by Warren and Reeve (2007). As argued by Clarke (2002), CVP is a very important tool in the context of making decisions about costs, revenue and profit. References Aryasri, A. R. (2006). Economics, accountancy and management. New Delhi: Tata McGraw-Hill Publishing Company Limited. CIMA. (2015, January). CIMA code of ethics for professional accountants. Retrieved from http://www.cimaglobal.com/Documents/Professional%20ethics%20docs/2015%20code%20of%20ethics/CIMA_Code_of_Ethics2.pdf Clarke, P. J. (2002). Accounting information for managers (2nd ed.). Cork, Ireland: Oak Tree Press. Warren, C. S., & Reeve J. M. (2007). Managerial accounting (9th ed.). Mason, OH: Thomas Higher Education. Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010). Managerial accounting: Tools for business decision making (5th ed.). Hoboken, NJ: John Wiley & Sons. Read More