Accounting in Management - Assignment Example

Management Accounting Question 1) Product Unit Cost, mark and Selling price on profitability on current system (2) (a) Calculations showing Product unit cost, mark- up, selling price, and profitability using Activity based information (b) 1. Amount in ₤ Product X Y Z Product unit cost on current system basis 131.67 101.67 161.67 Product unit cost on ABC basis 146.50 117.00 188.00 The above figures show that direct product unit cost calculated on basis of ABC has increased as compared current system because a portion of (30%) of selling/ marketing has been identified as product specific and thus considered as variable cost. 2. With increase in variable cost per unit under ABC due to treatment of some selling/ marketing cost as product specific, the contribution per unit came down to₤ 4500000 in ABC system as compared to ₤ 5250000 on basis of current system. Despite reduction in fixed portion of selling/ marketing cost, loss has gone up in ABC as compared to current system. Question No. 2 a) Cost per unit using traditional method b) Cost per unit using ABC method c) Cost per unit calculated under ABC is often very different from cost per unit calculated under traditional method because of the following reasons: Costs are identified under ABC as per activities involved or as per pool centers and not department wise as in traditional costing. Therefore absorption of cost on the product is more realistic and actual. In the traditional costing departmental cost is absorbed on an assumed or an approximate basis resulting into an unrealistic product cost and this causes the difference between the per unit cost calculated under two different systems. d) Effects of ABC on pricing and profitability: Under ABC cost accumulation for a product is more realistic than traditional costing. Therefore pricing based on costing under ABC will be more competitive and not hypothetical. It is not necessary that ABC costing may increase the profitability. On the other hand pricing with help of ABC may bring in losses and force the entity to analyze the costing of product and find out areas or pitfalls causing losses. In a way pricing through ABC offers an opportunity to entity to cleans its shortcomings and provide competition based on real circumstances prevalent in the market. “ABC provides benefit over volume based costing in market segments in which biased cost allocation produce accounting losses that hinder learning from superior competitor.” (Warlop, Lup, January 2004) Question No. 3 a) Lowest cost estimate Reasons: 1. Though the price of steel is rising to £ 5.50 per sq. meter, the rate of existing stock is charged at £ 5per sq. meter as it covers the requirements 2. There is no alternative except to levy market purchase rate. 3. Considering the opportunity cost, overtime rate of one and times the normal rate is the lowest. 4. No alternative available 5. Job requires 10 hours power to be used @0.75 per hour. Hence the absorption power cost overhead is only£7.50. 6. No alternative available 7. Production cost is taken as all cost above except estimating time to determine cost estimates, i.e, £ 427.50; hence 20% thereof are administration overheads i.e, £85.50. b) For repeat orders the following factors should be considered before quoting the order: 1. The opportunity cost of producing alternative product. 2. Estimating cost of preparing drawings and preparing quotations as that will be repetitive job and such costs would be incurred only once. Question No. 4 1 (a) Total product specific profit or loss calculations under current market projections b) Total product specific profit or loss calculations after proposed changes b) Proposed strategy changes and quality improvement programmes should be implemented because of following reasons: 1. The entity starts working at capacity of 20000 units and thus increased sales 2. Though outsourcing Sub assembly B would increase overall direct cost even after considering reduction in conversion variable cost, but it may add quality to product to increase its sale. 3.Computation suggests a huge increase in profits from £4945000 to whopping £21300000. Question No.5 a) Calculations of sales volume and contribution: b) Proposed Evaluation (showing volume and contribution) of replacement of Standard with Deluxe purely on financial grounds using NPV. Interest rate is assumed at 6% for NPV purposes c) Reduction in volume justifying withdrawal of standards: d) Limitation of analysis performed in (b) and (c) 1. Variable cost has been assumed to be the same @ £ 165 even for years to come. 2. Interest rate for calculating NPV has been assumed Suggestion: Variable cost should be ascribed on realistic basis and interest rate that is not provided should be the bank rate. References: Warlop, Lup, The value of Activity Based Costing in competitive pricing decisions, Journal of Management Accounting Research, January 1, 2004, http://www.allbusiness.com/sales/341214-1.html Read More