ASSIGNMENT ON 09009

MANAGEMENT ACCOUNTING

SUBMITTED BY
ADHARSH.S
DATE: 13-10-2017
COST ACCOUNTING AND DECISION MAKING TECHNIQUES
Cost accounting is a type of accounting process that aims to capture a company's costs of
production by assessing the input costs of each step of production as well as fixed costs such as
depreciation of capital equipment. Managers make decisions that govern how a company reaches
its goals. Many of these goals have financial aspects, such as revenue and profit targets. The
level of costs included in such decisions has a major impact on the finances of the company. The
following are different cost accounting approaches:
 Standard cost accounting
 Activity based cost accounting
 Throughput accounting
 Target costing
Decision making is the study of identifying and choosing alternatives based on the values and
preferences of the decision maker. Making a decision implies that there are alternative choices to
be considered, and in such a case we want not only to identify as many of these alternatives as
possible but to choose the one that best fits with our goals, objectives, desires, values. The
decision making process steps include:

 Identify the decision to be made

 Gather relevant information
 Identify alternatives
 Weight evidence
 Choose among alternatives
 Take actions
 Review decisions and consequences

Activity Based Costing

The Charter Institute of Management Accountants defines activity based accounting as, "an
approach to the costing and monitoring of activities which involves tracing resource
consumption and costing final outputs, resources assigned to activities, and activities to cost
objects based on consumption estimates”.
Marginal costing
Marginal cost is the change in the opportunity cost that arises when the quantity produced is
incremented by one unit, that is, it is the cost of producing one more unit of a good.
Absorption costing
Absorption costing is a cost accounting method for valuing inventory. Absorption costing
includes or "absorbs" all the costs of manufacturing a product including both fixed and variable
costs. That means that all costs including direct, like material costs, and indirect, like overhead
costs, are included in the price of inventory.

II. Questions

a. Computation of Selling Price of 3 Suits

SD001 SD002 SD003

$ per suit $ per suit $ per suit

Direct labour

Tailors (w1) 2 2 3

Cutters (w2)

1 1 1.5
Add: Direct material
(w3)
34 35 40.5

Add: Overhead cost 0.02 0.02 0.04

(w4)

Total variable cost 37.02 38.02 45.04

Add: Contribution 9.255 9.505 11.26

(25% of total cost)
( w5)

Spelling price 46.275 47.525 56.3

Working Notes

W1 and W2: Direct labour cost

Direct labour for tailors and cutters is given in the question directly.

W3: Direct Material cost

Direct material cost for:

SD001 = cost/metre*length of fabric 1 + cost/metre*length of fabric 2 + cost/metre

* length of fabric 3
=3*5+2*7+0.5*10
= $34 / suit
SD002 = 2.5*5 + 2.5*7 + 0.5*10 = $35 / suit
SD003 = 2*5 + 1.5*7 + 2*10 = $40/ suit

W4: Overhead cost

Overhead absorption rate = budgeted overheads / budgeted activity (stitching time)

= 100 / (0.5*1500 + 0.5*1500 + 1*1000)
= $0.04/stitching time
Overhead cost per unit = OAR * Actual activity
SD001 = 0.04*0.5 = $0.02 / suit
SD002 = 0.04*0.5 = $0.02 / suit
SD003 = 0.04*1 = $0.04 / suit

W5: Contribution

Contribution = 25% of total cost

SD001 = 37.02*25% = $9.255 / suit
SD002 = 38.02*25% = $9.505 / suit
SD003 = 45.04 * 25% = $11.26/ suit
 b. Limiting Factor Analysis
Assumption

Due to some technical problem with the machinery Selin’s creations were unable to produce any
suits for 2 days. As a result, they could produce the required amount as per the plan. They
applied limiting factor analysis and made a new production plan as follows:

2700 hours were available in stitching department monthly and 2500 hours were required for
producing SD001, SD002 and SD003 as per the plan. But after the machinery went down, total
available working hours in the stitching department was limited to 1800 hours.

Calculation of new production plan

Particulars SD001 SD002 SD003

Cutting time per suit 0.1 0.12 0.16

Stitching time per 0.5 0.5 1
suit

Ranking:

Particulars SD001 SD002 SD003

Selling price 46.275 47.525 56. 3

Variable cost 37.02 38.02 45.04

Contribution per unit 9.255 9.505 11.26

Limiting factor 0.5 0.5 1

Contribution per unit of 18.51 19.01 11.26

limiting factor

Ranking II I III

The new production plan will be based on the ranks

Production Plan

Particulars Production Hours used Hours remaining

SD001 1500 units 1500*0.5 = 750 1800- 750 = 1050

SD002 1500 units 1500*0.5 = 750 1050 – 750 = 300

SD002 300 units 300 / 1 = 300 0

c. CVP Analysis
Cost-volume-profit (CVP) analysis is used to see however changes in costs and volume have an
effect on a company's operational income and profits.

Compute breakeven sales volume, breakeven sales revenue and margin of safety. Further
compute sales volume when target profit = $33000.

Sales mix 1500 1500 1000

CPU per unit 9.27 9.52 11.2

Selling price 46.33 47.58 56.3

1. Weighted average contribution per unit

Weighted average contribution per unit = Contribution per mix / units per mix

Contribution per mix = (9*1500) + (9.5*1500) + (11*1000) = 38750

Units per mix = 1500 + 1500 + 1000 = 4000 units

Weighted average contribution per unit = 38750 / 4000 = $ 9.6875 per unit

2. Weighted average contribution to sales ratio

Weighted average contribution to sales ratio = (Contribution per mix / sales per mix )*100

Selling price = 46.275, 47.525, 56.3

Contribution per mix = (9*1500) + (9.5*1500) + (11*1000) = 38750

Sales per mix = (46*1500) + (48*1500) + (56*1000) = 197000

Weighted average c/s ratio = 38750 / 197000*100 = 19.67%

3. Breakeven Analysis

Breakeven sales volume = Total fixed cost / Contribution per unit. (Weighted average)

= (700+200+800) / 9.85

= 172.58 units

= 172 units

Breakeven Sales volume for each suit

SD001 = 172*3/8 = 64 units.

SD002 = 172*3/8 = 64 units.

SD003 = 172*2/8 = 43 units.

Breakeven sales revenue = Breakeven sales volume * Selling price

Breakeven sales revenue for each suit

SD001 = 64*46.275 = $ 2961.6

SD002 = 64*47.525 = $ 3041.6

SD003 = 43*56.3 = $ 2420.9

4. Margin of Safety

Margin of safety = Budgeted sales volume – Breakeven sales volume

= (1500+1500+1000) – 172

= 3828 units

Margin of safety = Budgeted sales revenue – Breakeven sales revenue

= (1500*46.275 + 1500*47.525 + 1000*56.3) – 8424.1

= $ 188575.9

Margin of safety = (Margin of safety / budgeted sales volume)*100

(As a % of sales volume)

 = (3828 / 4000)*100

= 95.7%

Margin of safety = (Margin of safety / budgeted sales revenue *100

(As a % of sales revenue)

= (188575.9 / 197000)*100

= 95.7%

5. Target Profit

Selin’s creations target a profit of 33000 for coming period. Compute required level of sales
volume to reach target profit

Target profit = Total contribution – Total fixed cost

33000 = Total contribution – 1700

Contribution / unit * sales volume = 34700

Sales volume = 3523 units.

d. Relevant Costing

Relevant cost accounting makes an attempt to work out the target price of a business call. an
objective measure of the cost of a business decision is that the extent of money outflows that
shall result from its implementation. Relevant costing focuses on simply that and ignores
different costs that don't have an effect on the longer term money flows. Decisions taken using
relevant costing principles are:

 Outsourcing
 One off contracts
 Further processing
 Shut down

Any result from relevant costing decision can be accepted when there is incremental profit.
 Assumption

Fly Co an airlines company has placed a huge order for the manufacture of suits for the air
hostesses. The order must be delivered within 1 month and the requirement is as follows:

Suits SD001 SD002 SD003

Required(in units) 500 500 350

Notes
1. Since this is a huge order the suits produced has to be delivered by a van and the
expenses must be met by Selin’s creations which is $ 500.
2. The staff and the manager need to work on Sundays in order to meet the requirement.
3. So the travelling expenses of Sundays include an amount of $ 800 which is met by the
company
4. Since it is an expensive order the company requires extra stitching accessories which
cost amount of $4000
5. FlyCo is ready to pay $ 63000 when the company accept the order

REQUIRED

a. Should Selin’s creations should accept the project?

b. If Selin’s creation is having an average profit of $ 6500. Compute its monthly profit.
a)
Relevant costs ($)
Labour cost(w.n.1) 53230
Travelling expenses 800
Stitching accessories 4000
Delivery van 500
Total 58530
Working note

Labour cost:

SD001= 500*37.1 = 18550

Sd002=500*38 =19000
Sd003=350*44.8=15680
Total =53230

Relevant revenue =63000

INCREMENTAL PROFIT= relevant revenue – relevant cost
=63000- 58530
= $4470
Here in the above scenario the relevant cost < relevant revenue and there is an
incremental profit so definitely the company can accept the project.

B) Average monthly profit + incremental profit

=$6500 +$4470
=$10970.