Describe about the Management Accounting for Purpose of Managerial Person.
Bonza Hand tools Ltd. power drill manufacturer is currently producing and selling 20000 units of power drill, now management wants to increase its overall profit.For the same purpose different managerial person has been asked to submit their own proposal. Suggested proposals include increase in sales price, increase in product quality and reduction in sales price.
Analysis
Analysis of the proposals is given below:
|
|
Present |
Proposal – 1 |
Proposal – 2 |
Proposal – 3 |
|
Sales Qty (In Units) |
20000 |
20000 |
25000 |
24000 |
|
Selling Price p.u |
130 |
140 |
130 |
120 |
|
Variable Manufacturing Cost p.u |
50 |
50 |
55 |
50 |
|
Variable Selling & Administration Cost p.u |
30 |
30 |
30 |
30 |
|
Contribution per unit |
50 |
60 |
45 |
40 |
|
Total contribution |
1,000,000 |
1,200,000 |
1,125,000 |
960,000 |
|
Fixed Manufacturing cost |
400,000 |
400,000 |
400,000 |
400,000 |
|
Fixed Selling cost |
300,000 |
300,000 |
300,000 |
300,000 |
|
Additional advertismenst cost |
– |
125,000 |
50,000 |
40,000 |
|
Profit |
300,000 |
375,000 |
375,000 |
220,000 |
Results
Proposal one – Accountant’s proposal to increase the selling price by $10 per unit will increase overall profit of $75,000. But increasing the selling price and simultaneously increasing the advertisement cost will not help in long term. Sales price increase may lead to loss of current customer in future also.
Proposal two – Production manager’s proposal to increase the production quality which cost the company $5 per unit, is a nice idea as it will leads to increase in sales quantity and built a brand image too. By additional advertisement cost of $50000 per year, company will sale more quantity and profit of the company will increase by $ 75,000 which is same as Jan Rossi’s proposal.
Proposal three – Reducing sales price and incurring additional cost to increase 4000 units of quantity sales is not good idea as it will reduce the current level profit.
Discussion and Conclusion
Various alternatives provide different level of profit. But we have to check which alternative is better in long run. In today’s competitive environment quality is key to succeed. Accountant’s Ross and production manager’s proposal is different but giving same level of profit. Now if we see company’s future growth and in lon term prospective it’s better to charge less and provide good quality. So we should go for production manager’s proposal of increasing quality of the product which will help the company in long term. And this proposal is giving the maximum profit also. (Bhattacharya 2011)
2. The Tassie company’s estimated sales quantity for the next year is 150,000 units.
Variable cost per unit is as follows:
Direct Material Cost $2.50
Direct Labour Cost 3.00
Variable Factory Overhead 1.50
Variable Selling and Administrative Cost 2.00
Total variable Cost per unit 9.00
Contribution per unit = 15 – 9 = $6 per unit
Now, the company has an option to sell additional 40000 units to a government department. For that purpose we have to check variable cost and additional cost (if any) due to contract. But in this case there is no additional cost. Fixed cost will not change due to acceptance of the offer so we will ignore the fixed factory overhead and fixed selling and administrative overhead for decision making. (Agarwal 2013)
If company has capacity of 200000 units of production, then company can easily sell additional quantity without hampering its current market demand.
Bid price should be fixed in a manned that at least variable cost of the product can be recovered.
Minimum bid price = $ 9 per unit
If company wants to earn same level of profit from sale to government department, then bid price should be $9 + 25% profit margin = $11.25 per unit.
If company has capacity of only 180000 units then we can’t produce additional 40000 units for government supply. If we supply to government then we have to lose our current customer which leads to loss in revenue.(L.M. Walther, C J Skousen, 2011)
If Government is ready to accept 30000 units, then we can supply them without losing current sales. So bid price for 30000 units should be $ 9 to $ 11.25 per unit.
However if government is not ready to accept 30000 units then, we have to recover profit of 10000 units which we can earn through market sales.
Benefit to be loosed due to sale to government: Selling price – variable cost
= 15 – 9
= $ 6 per unit
Bid price for additional 10000 units = Variable cost + benefit to be loosed
= $9 + $6
= $15
Average minimum bid price for 30000 units = (30000*9 + 10000*15)/40000
= $ 10.5 per unit
Summary of minimum bid price at different capacity and at different acceptance level quanity is as follows:
|
Capacity |
30000 units |
40000 units |
|
200000 Units |
$9 |
$9 |
|
180000 Units |
$9 |
$10.5 |
Any expense related with project period should be capitalized on books and salary payable to different employee should be capitalized which will increase the assets valuation.
If an employee is hired for installation of new machinery only which leads to increase in capacity, then his salaried cost can be capitalized, as employee is hired only for increasing production capacity.
In normal circumstances, depreciation is charged after commencement of production, deprecation is normally charged as revenue expenses.
Depreciation can’t become assets. Depreciation is always revenue expenses which are charged against reduction in value of assets.
Advance salary paid to employee is also prepaid expense, which can be shown as asset in balance sheet. As any prepaid expense which is paid for the future period are assets for the company.
4. Overhead allocation rate is used for allocating indirect costs. Since process is labour-intensive, we will use labour hours as base for allocating indirect cost.
Indirect costs $98,400
Labour hours 25795
Per hour indirect cost/ overhead allocation rate: $ 98400/25795 = $ 3.82 per hour
Direct labour cost per hour : Direct labour cost / Direct labour hours
: $ 327,600/25,795 = $12.70 per hour
Total cost of special order is as follows:
|
Qty (a) |
Rate (b) |
Total Cost (a*b) |
|
|
Direct Material |
2100 Kg |
16.10 |
33,810 |
|
Direct Labour |
1400 Hrs |
12.70 |
17,780 |
|
Indirect cost |
1400 Hrs |
3.82 |
5,341 |
|
Total Cost |
$ 56,931 |
If ABC Ltd uses machine hours as the basis for allocating overhead cost, then we have to revised overhead allocation rate which will be based on machine hour.
Revised overhead allocation rate: $98400/ 9840 = $10 per machine hour
|
Qty (a) |
Rate (b) |
Total Cost (a*b) |
|
|
Direct Material |
2100 |
16.10 |
33,810 |
|
Direct Labour |
1400 |
12.70 |
17,780 |
|
Indirect cost |
525 |
10.00 |
5,250 |
|
Total Cost |
56,840 |
Minimum price is the price which is directly linked with the production of the product. Indirect expenses are not relevant for the decision making, as indirect costs are sunk cost due to future commitment. So minimum price is calculated as follows:
|
Qty (a) |
Rate (b) |
Total Cost (a*b) |
|
|
Direct Material |
2100 |
16.10 |
33,810 |
|
Direct Labour |
1400 |
12.70 |
17,780 |
|
Prime Cost for 350 trailers |
51,590 |
||
|
Minimum price for a trailer |
$ |
147 |
Activity based costing is method of cost allocation where all costs are allocated with the help of cost driver. Activity based costing is useful for those products where product is prepared through various process or for those organization where different cost drivers are simultaneously consuming costs. Example, Hospital provides various services at the same time to different customers, some customers use various services or some customers use few services. So based on the actual consumption of services, with the help of activity based costing hospital can charge a customer fair value.(L.M. Walther, C J Skousen, 2011)
Traditional overhead cost method accumulate the total indirect cost, and allocate the whole cost based on any specific cost driver. ABC uses various cost drivers at the same time while segmented costing uses just a single cost allocation method either labour hours or machine hours in most of the cases. By pooling all indirect cost and allocating with the help of single allocation basis, sometimes organization reaches to a wrong decision.
Since Activity based costing uses various cost drivers for allocation of various indirect costs, it helps in greater manner for price determination.
References:
L.M. Walther, C J Skousen, 2011, Budgeting and Decision Making Exercise 2, 1St Edition
L.M. Walther, C J Skousen, 2011, Managerial and Accounting Exercise IV, 1 st Edition
Averkamp, H. n.d.. When should costs be expensed and when should costs be capitalized? , Viewed on 09 September 2016< https://www.accountingcoach.com/blog/when-should-costs-be-expensed-and-when-should-costs-be-capitalized>
Bilant, S. n.d.. Activity-Based Costing: Definition, Formula & Examples.Viewed on 09 September 2016,< https://study.com/academy/lesson/activity-based-costing-definition-formula-examples.html>
Eric Bank, s. n.d.. Capitalized Labor vs. Expensed Labor. Viwed on 9 Setember 2016, <https://smallbusiness.chron.com: https://smallbusiness.chron.com/capitalized-labor-vs-expensed-labor-76652.html
Hoyle, K. H. (n.d.). 3.2 Approaches to Allocating Overhead Costs. Viewed on 9 September 2016, Avilable <https://catalog.flatworldknowledge.com: https://catalog.flatworldknowledge.com/bookhub/reader/4402?e=heisinger_1.0-ch03_s02>
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download