Management accounting has developed worldwide only after the second worldwar when all the country which were involved in the war decided to open their economy. And then the concept of the open and free market has emerged worldwide and we could see the growth of the multinational organization worldwide. Due to this reason, cut-throat competition has been started and there wasa need for a management accounting where top management must be reported about all the analytical information on which they can take fast decisions. And this is how management accounting has developed worldwide.
Uses of management accounting:
It works exclusively for the top-level management and prepares analytical reports on which top-level management take fast decisions as well as they can use the controlling techniques also.
b) essential characteristics of cost accounting systems
it calculates the cost of product and services.
It also helps in cost control through the techniques of standard costing as well as the budgetary control
It also provides reporting systems to the top and middle management as well as it has also featured for decisions makings.
Essential characteristics of Inventory Management systems: Under inventory management system we study the following tools for controlling the inventory cost as well as control. Few of the inventory control systems is as follows.
Economic order quantity
ABC analysis
Stores ledgers
Input-output ratios
Level of stocks
FSN analysis
VED analysis
As we know that the Inventory consists almost 50% of the cost of materials and the materials need to be controlled properly otherwise mismanagement in the stock will lead to huge losses for the company. Inventory control systems are also a part of the Cost control systems.
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Marginal Costings: As we know that as per the marginal costings we do the valuation based on variable cost only. The fixed cost is considered as period cost only. We calculate the contribution per units as well as we also calculate contribution per unit of key factors. It is a decision-making tool and it is very much help full for the management for taking short term decisions making. It very helps full tool for the management as we can calculate the break-even points as well as we can calculate the margin of safety. We can also calculate the units to be sold for target profits to be achieved.
Marginal costing is very much help full for following types of decision makings.
Based on marginal costing as well as its related decisions making tools we can take the following types of decisions
Fixation of the selling price
Exploring new markets
Make or buy decisions
Product mix
Operate plant or shut down
Fixation of selling price under normal circumstances
Pricing in competitions and depressions
An additional order for utilizing spare capacity
Export sales
Outsourcing and idle capacity
Product mix decisions
Decisions when there are no key factors
Decisions when there are key factors
The plant shut down decisions
Acceptance of special order
Adding or dropping of a product lines
The decision regarding further processings of joint or by-products
So we can see that the above types of decisions can be taken from the support of marginal costing and it is an added tool for the management.
Standard Costing: Standard costing is a specialized technique of cost accounting to control the cost. For each part of the cost, we fix the standard cost for every resource. Once the standard is fixed and actual operation is done we go and calculate the variances from the standard and the actuals and based on the results, it could be favourable or the adverse we make the decisions for controlling purpose.
Features of the standard costing are listed as follows:
The setting of standard costs for all the resources of production, it is material cost, Labour cost as well as the overheads.
Once the operation is done we calculate the actual cost.
We compare the standard cost with the actual costs a find out the variances.
The management at all level analysed the variances and take the requisite decisions.
Hence we can say that the fixation of standard and uses of standard costing helps the management for controlling the entire operations.
Task 3 :
As we know that Management accounting looks after the decision making as well as the controlling of any business organization. In the present world of competitiveness, we know that the management can control the selling price,especially it can not increase the selling price in normal circumstances. Hence what management can control is its cost. We also know that there are a thousand types of a component of the cost we are having. Mainly material cost, labour cost and the different types of overheads.
For this, we have to integrate the entire costing operation as well as inventory control operation management with the management accounting for the effective functioning of the management accounting. We are also aware that the controlling techniques can become successful unless we control at the macro level as well as micro-level. Hence if we integrate all the tools of cost control as well as inventory control it will be very good for the management accountants.
Part Two
Solution :
(P3) Preparation of Income Statements using Absorption and Marginal Costings
Absorption Costings
Statements of profits statements for August using absorption costing
Units
Sales
20,000
Production
26,000
Closing Stock
6000
Selling price per unit
£ 32.00
Variable Cost per unit
£ 14.00
Total Sales
£ 6,40,000
Fixed overhead absorption rate per unit
£ 8.20
Cost of goods sold
The variable cost of manufacturing
£ 3,64,000.00
Absorbed fixed Overheads
£ 2,13,200.00
The total cost of Productions
£ 5,77,200.00
Production cost per units
£ 22.20
Add: Opening stock cost
0
Less: Closing Stock cost
£ 1,33,200.00
Cost of Goods Sold(Variable)
£ 4,44,000.00
Gross Profits
£ 1,96,000.00
Less: Fixed cost (selling & distributions)
Fixed Selling & Distribution Overheads
£ 55,000.00
Total Fixed Costs(selling & distributions)
£ 55,000.00
Net Profits
£ 1,41,000.00
b). Marginal Costing
Statements of profits statements for August using marginal costing
Units
Sales
20,000
Production
26,000
Closing Stock
6000
Selling price per unit
£ 32.00
Variable Cost per unit
£ 14.00
Total Sales
£ 6,40,000
Cost of goods sold
The variable cost of manufacturing
£ 3,64,000.00
Add: Opening stock cost
0
Less: Closing Stock cost
£ 84,000.00
Cost of Goods Sold(Variable)
£ 2,80,000.00
Contributions
£ 3,60,000.00
Less: Fixed cost
Fixed Production Overhead
£ 1,64,000.00
Fixed Selling & Distribution Overheads
£ 55,000.00
Total Fixed Costs
£ 2,19,000.00
Net Profits
£ 1,41,000.00
The profits as per marginal costing and absorption costing as same because there is no difference between the absorption rate of fixed production overhead as well as the actual fixed overhead is same, hence there is no over and under absorption of factory fixed overheads. Normally the net profits are different because there are different rates for absorption rate and we see that there is also a difference in the valuation of opening stock as well as closing stock.
a).
Product
Gamma
Delta
Units made and sold
5,00,000
7,50,000
Machine hours required
10,00,000
37,50,000
Sales revenue (£)
50,00,000
90,00,000
Direct materials (£)
10,00,000
22,50,000
Direct labour (£)
12,50,000
26,25,000
Variable overheads (£)
15,00,000
15,00,000
Gamma
Delta
Total
£
£
£
Unit selling price
10
12
Unit variable costs
7.5
8.5
Direct materials
2
3
Direct labour
2.5
3.5
Variable overheads
3
2
Contribution per unit
2.5
3.5
Sales volume (units)
5,00,000
7,50,000
12,50,000
Total Contribution
1250000
2625000
38,75,000
Fixed costs
34,50,000
Budgeted profit or loss
4,25,000
b) Calculation of breakeven and margin of safety
Product
Gamma
Delta
Fixed costs (£)
10,00,000
24,50,000
Unit contribution (£)
2.5
3.5
Break-even sales (units)
400000
700000
Forecast sales (units)
4,80,000
9,10,000
Margin of safety (units)
80,000
2,10,000
Margin of safety (%)
16.67
23.08
c). Limiting factor and maximization of profits
Product
Gamma
Delta
Total
Unit Contribution
2.5
3.5
Machine hours per unit
2
5
Contribution per machine hour
1.25
0.7
Product Ranking
I
II
Machine hours available
3500000
Machine hours allocated to:
Gamma
1000000
2500000
Delta
Total Contribution
1250000
1750000
3000000
Fixed costs
3450000
Profit or loss made
-450000
Production Budget
Number of units
Jan
Feb
Mar
Apr
Opening the inventory of finished goods
2,200
2275
2050
2175
Production
8,875
8,875
8,325
9,175
Sub total
11,075
11,150
10,375
11,350
Forecast sales
8,800
9,100
8,200
8,700
Closing inventory of finished goods
2275
2050
2175
2650
Raw Material Purchase Budgets
Jan
Feb
Mar
Apr
Opening inventory of raw materials (kgs)
4,000
3550
3330
3670
Purchases (kgs)
17,300
17,530
16,990
18,310
Sub total
21,300
21,080
20,320
21,980
Budgeted materials used in production (kgs)
17750
17750
16650
18350
Closing inventory (kgs)
3550
3330
3670
3630
Trade Payable(Creditors) budget
Jan
Feb
Mar
Apr
£
£
£
£
Opening balance
40,500
40,675
41,480
39,590
Materials Purchased (£)
60550
61355
59465
64085
Sub total
1,01,050
1,02,030
1,00,945
1,03,675
Payments made
60,375
60550
61355
59465
Closing balance
40,675
41,480
39,590
44,210
Flexing Budgets and Standard costing
Solution for Tasks:
Standard Cost Card for one Woody
Budget Details for 1 Woody
Cost per unit
Meter
Per Meter
Direct Material:
A40
8
£ 2.00
£ 16.00
C320
4
£ 1.50
£ 6.00
Hours
Per Hours
Direct Labour :
5
£ 5.50
£ 27.50
Budgeted Fixed Overheads
£ 15,500.00
Budgeted direct labour hours
1550
Budgeted fixed overheads/ hours
£ 10.00
Budgeted Fixed Overheads.units
5
£ 10.00
£ 50.00
Budgeted Production units
310
Staandard Cost for 1 units of Woodeye
£ 99.50
Total Variances, Total Material variances, Labour Variances and fixed overhead variances
Total Material Variances
-£ 260.00
U
Total Labour Variances
£ 822.50
F
Total Overhead Variances
£ 1,080.00
F
Total Cost Variances
£ 670.50
F
Calculate Price variance, Usage variances, efficiency variance and all fixed overhead variances
Standard Materials Cost details for actual productions
Actual Materials Cost details for actual productions
SQ
SP
S Total
AQ
AP
A Total
A40
2520
£ 2.00
£ 5,040.00
2410
2.16
£ 5,200.00
C320
1260
£ 1.50
£ 1,890.00
1260
1.58
£ 1,990.00
Total
3780
£ 6,930.00
3670
£ 7,190.00
Actual Production
Actual Production
315
units
315
units
Total Material Cost Variances
>
-£ 260.00
Material Price Variances
AQ(SP-AP)
A40
-£ 380.00
C320
-£ 100.00
Total Material Price Variances
-£ 480.00
Material Usage Variances
SP(SQ-AQ)
A40
£ 220.00
C320
£ -
Total Material usage Variance
£ 220.00
Labour Variances
Standard Labour Cost details for actual productions
Actual Labours Cost details for actual productions
SQ
SR
S Total
AH
AR
A Total
DLH
1575
£ 5.50
£ 8,662.50
1600
4.90
£ 7,840.00
Total
1600
£ 7,840.00
Actual Production
Actual Production
315
units
315
units
Total Labour Cost Variances
>
£ 822.50
Labour Price Variances
AH(SR-AR)
£ 960.00
Labour Efficiency Variances
SR(SH-AH)
-£ 137.50
Overhead Variances
Budgeted Fixed Overhead(BFO)
£ 15,500.00
Actual fixed Overhead (AFO)
£ 14,670.00
Allocated(Recov) fixed Overheads(RFO)
£ 15,750.00
Standard Fixed Overhead(SFO)
£ 16,000.00
Total Fixed Overhead Variances
£ 1,080.00
(RFO-AFO)
Fixed Overhead spending Variances
£ 830.00
(BFO-AFO_
Fixed Overhead Volume variances
£ 250.00
(RFO-bFO)
Fixed Overhead Capacity Variances
-£ 250.00
(RFO-SFO)
Fixed overhead Efficiency Variances
£ 500.00
(SFO-BFO)
Reconciliation Statements
Reconciliation statements between standard cost &the actual cost
Total Standard Cost
£ 31,092.50
Material Price Variances
£ 480.00
U
Material Usage Variances
-£ 220.00
F
Labour Price Variances
-£ 960.00
F
Labour Efficiency Variances
£ 137.50
U
Fixed Overhead spending Variances
-£ 830.00
F
Total Actual Costs
£ 29,700.00
We can see that there is anUnfavourable balance of Material Price Variances, But material usages variances arefavourable, Labour rate is increased but the efficiency of labour has increased, fixed overhead spending variance has reduced.
Part Three :
Regarding the work we have done in Part one as well in part two, the following notes are there which will help to support the resolution of financial problems.
Purpose of planning and budgeting process. We are very much aware that all the business and business model is working for the future. Unless we do the proper planning as well as do the budgeting we would be able to fix the target or we would be driving our businesses into goalless directions. Hence the first thing we need for running a successful business or running any operations we must make a plan as well as budgets.
Advantage of budgetary control
Budgeting process and budget make the management to look for the future .
It increases the production efficiency of the management as well as the entire operations.
It also helps in making Break-even analysis or we can say that the break-even analysis helps us for fixation of the targets.
Budget is also considered as fundamental tools for fixing the standard and then making standard costing operational.
Budgeting is also helping in taking the bak credits.
Budgetary control systems assist in the delegation of the responsibility as well as accountability.
Budgeting also helps in increasing efficiency.
We have just discussed above that even marginal costing tools like break-even analysis as well as margin of safety analysis help for fixation of budgets.
There are so many problems we are facing in the long term as well as short terms financial activity. We have seen there are a lot of issues like product mix decisions, sales mix decisions, controlling decisions as well as achievements of the decisions of the operational target. Management accounting tools consist of everything which helps us in solving these issues.
Make or buy decisions, Limiting factors decisions, Breaking into a new market. These are the issues are taken care of by the management accounting tools. As we have seen in the part one as well as part two that while budgeting and planning or while running the business operations we have solved these issues very easily by using the marginal costing tools.
Management accounting tools also help us to aid sustainable success within an organisation. We have seen with above discussions as well as the practical concepts that most of the short decisions making is taken by the marginal costing tools as well as the operations are being controlled by using the budgetary controlling tools as well as standard costing tools.
Yes, we have seen that while planning we plan for every bit of the business operations and then once the actual operation is done we compare the results and we take corrective measurements also to remove the obstacles. Hence we can say that tools of management accounting meet the needs in seeking a resolution to these problems.
Referencing :
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