MANAGEMENT ACCOUNTING

Posted: August 26th, 2021

MANAGEMENT ACCOUNTING

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Management Accounting

Question 1- Sam Manufacturing Co. Ltd

Companies incur two high manufacturing costs in their operations to produce goods and services, which are variable and fixed. Variable costs refer to manufacturing costs that vary with the volume of units produced, while fixed costs remain constant no matter the number of units produced (Stoenoiu, 2018). Therefore, variable costs increase or decrease proportionately per the production volume. When the production volume increases, the variable costs go up, and when production declines, the costs also decrease. Some common variable costs include direct labor costs and direct material costs. In contrast, fixed costs remain the same regardless of the company’s production levels (Stoenoiu, 2018). However, the company can cut down on these costs to attain some competitiveness levels. For instance, a company may decide to reduce costs of rent by leasing some of its structures at affordable prices, thus lowering the aggregate production costs.

Furthermore, there are different methods used by companies to determine variable and fixed costs. These include the high-low method and regression method, among others. The high-low cost estimation method considers the highest and lowest cost level and compares it with the total costs. On the other hand, the regression method analysis the cost relationship in the variables and observes any variation in the independent variable. In this case, therefore, the management accounting technique employed in determining the variable and fixed expenses is the high-low method are as demonstrated below;

To determine the company’s fixed costs, the activity level adopted is 60,000 units of direct materials, which has total production costs of 650,000. Subsequently;

Therefore, the variable cost per unit in Sam Manufacturing Co. ltd is $10 per direct material, and the fixed cost is 50000.

Strengths and Limitations of High-Low Cost Management Technique

The strengths of the high-low method are identified in businesses when it comes to calculating the fixed and variable costs of products or entities with mixed costs. The method takes two factors when arriving at its results (Goddard and Simm, 2017). The first factor is that it considers the total dollars of the mixed costs found in the higher most volume of activities. Secondly, it considers the total dollars in applying the mixed costs found at the lowermost volume of activity (Goddard and Simm, 2017). The changes in total costs for the two methods are considered to be variable cost rate, multiplied by the activity units. The following are the advantages of the methods;

Advantages

The method is easy to use as it only requires the unit cost information at both the lowest and highest levels necessary for getting the required information. Therefore, it makes accountants and managers recommend its use, as it does not require special tools. Equally, managers’ preference for the approach is due to its simplicity as all they need to know is the list of manufacturing levels with their resultant costs plus a calculator to compute the desired costs. More so, the approach has very high accuracy results when using stable costs. This is attributed to the fact that the accuracies are determined if the lowest and highest activity levels are usually representative of the whole organizational cost behavior. However, if there exist two extreme activity levels that are systematically different, the approach will most likely produce inaccurate findings. 

 Disadvantages

One significant demerit of this model is that it uses the highest and lowest production activities in estimating the fixed and variable expenses while assuming that costs and production quantities increase will be linear. Thus, it ignores the other production points, a fact that may lead to errors if the expenses do not increase in the linear graph as the two points do not always represent a business production costs at the normal levels. The approach is known to work best where both total costs and activities have a linear program relationship, which is sometimes difficult to find in real-life situations between mixed costs and activity. Besides, the high low method only takes into consideration the lowest and highest figures, which may result in miscounting the whole year data.  The fixed and variable costs will not fit together in situations where the cost and activity do not have a linear relationship. The approach does not consider the impact of inflation, which will lead to different outcomes if taken into account. Because accountants do not adjust the impact of inflation in the fixed and variable costs, do not consider the inflation rate when using the method. The approach also ignores the fact that some fixed costs will not always remain constant, which usually stays constant in specific product ranges. Thus, fixed costs will change if the scale of activities also changes, which is sometimes challenging for accountants to take into consideration.

Question 2- Bell Franco Ltd.

1. Plant-Wide /Blanket Overhead Rate

Plant-wide overhead rates are a manufacturing cost allocation method that applies the company’s cost as a single expense based on direct labor hours and direct materials.

• Activity-Based Costing System

            The activity-based costing or the ABC was designed to protect against possible financial severe problems that arise when business costs diverge significantly from the actual business expenses (Weygandt et al., 2018). Notably, businesses need to implement costing systems that will ensure that they measure the impact of performance and costs of activities in decision-making processes. Thus, the ABC is useful in assigning and tracing costs to the business cost objectives, which will lead to the measurement of the activities undertaken (Weygandt et al., 2018). The system will produce a bill of activities that provides the costs of each service or product. The ABC model is essential in ensuring that organizations indicate their activities to increase profits and decrease costs. Hence, it provides an opportunity for managers to identify unnecessary and inefficient activities.

Additionally, the ABC approach ensures that the organization ensures that management understands the real cost of services, processes, and products, as it will access the performance and cost of activities. It is because organizations will allocate their resources depending on the activities they have, which will let the management know how they are spending their funds. Therefore, it will help management know whether to reduce their costs to ensure they maximize profits (Weygandt et al., 2018). Equally, ABC will facilitate the gathering of costs into the company’s working activities cost objectives and later match them according to the service or product, which will be based on the events or transactions taking place in the business. The use of ABC systems will also lead to the provision of the business with the correct product line costing, mostly where non-volume associated overheads will be significant. The approach also provides actual expenses in businesses with diverse product lines, which is crucial for planning (Weygandt et al., 2018). The system is flexible, ensuring that it analyses its expenses through its cost objectives, which is different from using the organizations’ other products. The method will ensure that managers can identify and understand the cost behavior, thus improving the business’s cost estimation practices.

Moreover, the ABC system provides managers with an approach that always ensures that expenses are evaluated according to their specified activities as used in supporting a product. The systems also provide accurate measurements concerning the activity driving costs, which helps managers to foster value addition in projects and improve their product design choices. Ostensibly, most managers prefer the system as it gives accurate customer and product profitability measurements, which are crucial in making the right decisions about market segments and product pricing (Gersil and Kayal, 2016). Thus, the application of ABC in an organization always improves profitability and efficiency, especially regarding the benefits of tracing costs associated with every product. It also acts as a cost comparison measure against other similar items.Hence, it will result in ensuring that the business has the right job cost estimates concerning budgeting and pricing decisions. 

Direct materials	90000
Direct Labour	3000
Order Acquisition	193.125
Material handling	530
Machine hours	1080
Total cost	94803.125

25% profit

Total cost	94803.125
25% profit	23700.78125
Selling price	118503.90625

The qualitative factors are difficult to analyze but are crucial in the decision-making process in any organization. The factors are not measurable by numbers, but they can affect the profitability of a business (Reyns et al., 2018) The factors represent positive or negative forces that affect a business’s operations, which is why managers have to take into consideration whenever they are making critical decisions in any organization. Qualitative factors include how customers satisfaction with using the company’s products and a pending lawsuit that the outcome can harm the organizations’ reputation (Areena, 2019; Collis and Hussey, 2017) The business improvements in the introduction of new technological processes that will result in improving the organization’s process, is immeasurable as it will lead to the improvements in employees morale (Areena, 2019). Other factors include the impact of the employees assisting in voluntary community work, which will create a good reputation that may lead to sales improvements.

Question 3- Scopus Team Ltd

Question 3-(i) Report

	ZR series	SQ series
Units	10,000	12,000
Purchase price	150	200
Total purchase price	1500000	2400000
Direct materials per unit (15%)	12	15
Total Direct materials	120000	180000
Direct labor per unit (20%)	10	8
Total Direct labor	100000	96000
Warehouse space	15000
Fixed selling and administrative overhead per unit	45.125	45.125
Total Fixed selling and administrative overhead	451250	541500
Depreciation per unit	16	30
Total Depreciation	160000	360000
Refund on depreciation (75%)	487.5	562.5
Fixed selling and administrative overhead per unit (80%)	24	16
Total selling and administrative overhead	240000	192000
Total cost	2586738	3770063

Allocated costs will be incurred irrespective of the decision. Hence, Not Relevant. The depreciation of the machine is not relevant for this analysis. The relevant fixed manufacturing cost.

Selling price

	ZR series	SQ series
Units	10,000	12,000
Total cost	2586738	3770063
Selling price	258.6738	314.1719

No warehouse cost

	ZR series	SQ series
Units	10,000	12,000
Purchase price	150	200
Total purchase price	1500000	2400000
Direct materials per unit (15%)	12	15
Total Direct materials	120000	180000
Direct labor per unit (20%)	10	8
Total Direct labor	100000	96000
Fixed selling and administrative overhead per unit	45.125	45.125
Total Fixed selling and administrative overhead	451250	541500
Depreciation per unit	16	30
Total Depreciation	160000	360000
Refund on depreciation (75%)	487.5	562.5
Fixed selling and administrative overhead per unit (80%)	24	16
Total selling and administrative overhead	240000	192000
Total cost	2571738	3770063

Question 4- Canister Food limited

First-quarter Report
Revenue and Costs  (1st quarter)	£
Sales- 2,001,000 kgs	8,504,250
Direct materials- 3,901,950 kg	2,146,073
Direct labour- 100,100 hours	975,975
Fixed manufacturing overhead	90,000
Total cost of production	3,212,048
Profit/loss	5,292,202
Second-quarter Report
Revenue and Costs  (2nd quarter)	£
Sales- 800,000 kgs	4,000,000
Direct materials- 1,700,000 kgs	1,020,000
Direct labour- 49,500 hours	519,750
Fixed manufacturing overhead	110,000
Total cost of production	1,649,750
Profit/loss	2,350,250

According to Ozili and Arun (2020), the Covid-19 crisis has impacted many business operations negatively, resulting in them making losses. Other impacts are scaling operations and temporarily terminating staff due to loss of income (Abu, Nor, and Rahman, 2018). Therefore, the business is not immune to the crisis, which has resulted in scaling down its operations massively, resulting in a variance of 2,941, 952.

Reference List

Abu, M.Y., Nor, EM, and Rahman, M.S.A., 2018, April. Costing improvement of the remanufacturing crankshaft by integrating the Mahalanobis-Taguchi system and activity-based costing. In IOP Conference Series: Materials Science and Engineering (Vol. 342, pp. 1-10).

Areena, S.N., 2019. A review on a time-driven activity-based costing system in various sectors. Journal of Modern Manufacturing Systems and Technology, 2, pp.15-22.

Collis, J., and Hussey, R., 2017. Cost and management accounting. Macmillan International Higher Education.

Gerstle, A., and Kayal, C., 2016. A Comparative Analysis of Normal Costing Method with Full Costing and Variable Costing in Internal Reporting. International Journal of Management, 7(3).

Goddard, A., and Simm, A., 2017. Management accounting, performance measurement, and strategy in English local authorities. Public Money & Management, 37(4), pp.261-268.

Ozil, PK, and Arun, T., 2020. Spillover of COVID-19: Impact on the Global Economy. Available at SSRN 3562570.

Raghunath, K.M.K., Devi, S.L.T., and Patro, CS, 2017. An empirical take on qualitative and quantitative risk factors. International Journal of Risk and Contingency Management (IJRCM), 6(4), pp.1-15.

Reyns, N., Casaer, J., De Smet, L., Devos, K., Huysentruyt, F., Robertson, P.A., Verbeke, T. and Adriaens, T., 2018. Cost-benefit analysis for invasive species control: the case of greater Canada goose Branta canadensis in Flanders (northern Belgium). PeerJ, 6, p.e4283.

Stoenoiu, C.E., 2018. Comparative analysis for estimating production costs. In MATEC Web of Conferences (Vol. 184, p. 04004). EDP Sciences.

Weygandt, J.J., Kimmel, P.D., Kieso, D.E., and Aly, I.M., 2018. Managerial Accounting: Toolsfor Business Decision-making. John Wiley & Sons.