Tuesday, May 5, 2020

Management Accounting Purpose of Managerial Person

Question: Describe about the Management Accounting for Purpose of Managerial Person. Answer: Introduction 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 Accountants 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 managers 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 Rossis 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 todays competitive environment quality is key to succeed. Accountants Ross and production managers proposal is different but giving same level of profit. Now if we see companys future growth and in lon term prospective its better to charge less and provide good quality. So we should go for production managers 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 companys 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 cant 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 3. Salaries and depreciation can be become assets in following cases: 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 cant 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 Revised total cost is as follows: 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

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