Evolution of Management Accounting Assignment

Management Accounting Assignment Sample

Task 1 :

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.

1. Economic order quantity
2. ABC analysis
3. Stores ledgers
4. Input-output ratios
5. Level of stocks
6. FSN analysis
7. 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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Task 2 :

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1. 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

1. Fixation of the selling price
2. Exploring new markets
3. Make or buy decisions
4. Product mix
5. Operate plant or shut down
6. Fixation of selling price under normal circumstances
7. Pricing in competitions and depressions
8. An additional order for utilizing spare capacity
9. Export sales
10. Outsourcing and idle capacity
11. Product mix decisions
12. Decisions when there are no key factors
13. Decisions when there are key factors
14. The plant shut down decisions
15. Acceptance of special order
16. Adding or dropping of a product lines
17. 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:

1. The setting of standard costs for all the resources of production, it is material cost, Labour cost as well as the overheads.
2. Once the operation is done we calculate the actual cost.
3. We compare the standard cost with the actual costs a find out the variances.
4. 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 :

1. (P3) Preparation of Income Statements using Absorption and Marginal Costings
2. 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

 

1. 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

 

1. 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

 

1. 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

 

1. 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:

1. 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

 

1. 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

 

1. 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)

 

1. 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.

1. 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.
2. 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.

1. 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.
2. 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.

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