Essays on Management Of Accounting Assignment

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Part A: BudgetingRevenue budgetRevenue budget for Standard trolleysOctNovDecTotalUnits270003000030000 Selling Price per unit$84 $88 $88  Total sales for Standard trolleys(Total Units * Selling Price per unit)$2,268,000 $2,640,000 $2,640,000 $7,548,000 Revenue budget for Child trolleysUnits320034003400 Selling Price per unit$89$92$92 Total sales for Child trolleys(Total Units * Selling Price per unit)$284,800$312,800$312,800$910,400Total sales for all trolleys(Total sales for standard trolleys + Total sales for Child trolleys)$2,552,800 $2,952,800 $2,952,800 $8,458,400 Production budget in unitsStandard trolleysSepOctNovDecJanTotal (Oct - Dec)Budgeted units sold270002700030000300002400087000Add budgeted ending finished goods inventory (trolleys)345003750036000300003000067500Total requirements6150064500660006000054000124500Deduct beginning finished goods inventory (trolleys)337503450037500360003000070500Budgeted production277503000028500240002400054000Child trolleys    Budgeted unit sales3200320034003400280010000Add budgeted ending finished goods inventory (trolleys)4050425041003500350011850Total requirements7250745075006900630021850Deduct beginning finished gds inventory (trolleys)4000405042504100350012400Budgeted production325034003250280028009450Direct material usage budget (both units to be used and the cost budget in dollars)Steel rod for: OctNovDecTotalStandard trolleys(Budgeted production * 24 * $1.60 per metre)$1,152,000 $1,094,400 $921,600 $3,168,000 Child trolleys(Budgeted production * 24 * $1.60 per metre)$76,160 $72,800 $62,720 $211,680 Plastic seat    Child trolleys(Budgeted production * Number of seats * $7 each)$23,800 $22,750 $19,600 $66,150 Wheels for:    Standard trolleys(Budgeted production * 4 * $2)$240,000 $228,000 $192,000 $660,000 Child trolleys(Budgeted production * 24 * $1.60 per metre)$27,200 $26,000 $22,400 $75,600 Direct material purchases budget in units and in dollarsSteel rod for: OctNovDecTotalStandard trolleys(Budgeted purchases * 24 * $1.60 per metre)$1,209,600 $864,000 $691,200 $2,764,800 Child trolleys(Budgeted purchases * 24 * $1.60 per metre)$77,280 $59,360 $49,280 $185,920 Plastic seatChild trolleys(Budgeted purchases * Number of seats * $7 each)$24,150 $18,550 $15,400 $58,100 Wheels for: Standard trolleys(Budgeted purchases * 4 * $2)$252,000 $180,000 $144,000 $576,000 Child trolleys(Budgeted purchases * 24 * $1.60 per metre)$27,600 $21,200 $17,600 $66,400 Total$1,590,630 $1,143,110 $917,480 $3,651,220 Direct manufacturing labour hours and cost budgetStandard trolleysOctNovDecTotalUnits to be produced30,00028,50024,00082,500Direct labour hours per trolley0.250 0.250 0.250 Total direct labour hours(Total Units * labour hours per trolley)7,5007,1256,00020,625manufacturing labour Cost per hour$14.50$14.50$15.08Total Manufacturing Cost of direct labour108,750103,31390,480$302,543Child trolleysUnits to be produced3400325028009450Direct labour hours per trolley0.333 0.333 0.333 Total direct labour hours(Total Units * labour hours per trolley)1133.3331083.333933.3333150manufacturing labour Cost per hour$4.50$4.50$5.10Total Manufacturing Cost of direct labour$5,100.00$4,875.00$4,760.00$14,735Manufacturing overhead budgetOctNovDecVariable manufacturing overhead   Total direct labour hours8,6338,2086,933Budgeted direct manufacturing labour cost per hour (variable)$4.50$4.50$5.10Total Variable manufacturing overhead$38,850 $36,938 $35,360 Fixed manufacturing overhead$14,000 $16,000 $16,000 Total manufacturing overhead52,85052,93851,360Opening and ending inventories budget for direct materials for three months ending 31 December 2012$Opening inventories budget for raw materials$9,656,390Add: Direct material purchases budget in units and in dollars $3,651,220 Available direct raw materials$13,307,610 Less: Direct material usage budget (both units to be used and the cost budget in dollars)$75,600 Ending inventories budget for direct materials$13,232,010 Opening and ending inventories budget for finished goods for the three months ending 31 December 2012$Opening inventories budget for finished goods$10,844,960Add: budgeted production in units and in dollars $2,859,030 Available finished goods$13,703,990 Less: budgeted sales (both units to be used and the cost budget in dollars)$8,458,400 Ending inventories budget for finished goods$5,245,590 Income Statement budget for the three months ending 31 December 2012 $Budgeted sales8,458,400Less: cost of goods sold75,600Gross profit8,382,800Less: Labour expenses$317,278Net income$ 8,065,523Part B: Decision making and relevant informationRelevant costsRelevant costs are appropriate costs for management decision making and they are therefore affected by the decision taken.

This is because they are future costs and a decision is always about the future and it may not change what has already been done. According to Hilton (2004), the cost already incurred in the past is totally irrelevant to any decision making.

Therefore, in deciding whether to accept or reject the order, the CEO should consider all the costs related to acquiring the equipment to make the brakes. He should also consider the costs of buying the brakes from a supplier for $6 per set and add the brakes to the trolleys. The CEO should only consider those costs that are in form of cash flows. It is normally assumed that decisions are taken in order to maximize the wealth of the shareholders or the value of the firm. Therefore, such decisions should change the net cash flows of the company.

Those decisions that do not reflect additional cash flows may be ignored in decision making. Therefore, the CEO should not consider whether the decision enhances the image of the Steelworks Ltd in deciding whether to accept or reject the order. This is because such a decision does not cause cash flows to the firm. The relevant costs will be only those costs that are incremental, that is, there should be an increase in the total amount incurred if the decision is undertaken.

Customizing the child trolleys by adding a set of brakes to the trolley will call for incremental cost of buying the brakes from a supplier for $6 per set and adding the brakes to the trolleys. Supposing the trolleys are manufactured in November and: If the firm buy the brakes from a supplierIncremental cost = 10,000 * $6 = $60,000Total cost = cost of manufacturing 10,000 child trolleys + incremental cost of brakes = (10,000 * $37.4) + (10,000 * 0.333 * $4.50) + $60,000 = $449,000Revenue = 10,000 * $90 = $900,000 Profit = $900,000 - $449,000 = $451,000If the firm buys equipment: Incremental cost = $30,000Total cost = cost of manufacturing 10,000 child trolleys + incremental cost of brakes = (10,000 * $37.4) + (10,000 * 0.333 * $4.50) + $30,000 = $419,000Profit = $900,000 - $419,000 = $481,000If order is rejected: Cost = direct raw materials cost + direct labour cost = (4,000 * $37.40) + (4,000 * 0.333 * $4.50) = $155,594Revenue = 4,000 * $92 = $368,000Profit = $368,000 - $155,594 = $212,406This means the CEO has to consider this additional cost in order to find ways of minimizing it and ensure that the firm will not incur extra costs for which returns are low. The CEO of Steelworks Ltd should consider whether to accept or reject the order if only there is a limiting factor.

This is a scarce resource on which the decision should be made. This is important consideration since Steelworks Ltd has a constraint on the direct manufacturing labour hours. This means the production of the customized child trolleys is subject to availability of direct manufacturing labour hours hence the firm is limited from attaining the maximum possible production. Other financial issues and costsIt has been argued that the goal of a financial management is to earn the highest possible profit for the firm.

This argument has some serious drawbacks to profit maximization as the primary goal of the firm. Such drawbacks may include;

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