Accounting For Business And Managers Accounting Essay

Category: Accounting

Learning outcomes assessed:

1. Identify and evaluate the sources of information used in managerial decision making and their limitations. 2. Understand and apply and evaluate short-term decisions using variable costing techniques 3. Calculate key indicators used in evaluating performance produce forecasts of income and expenditure - using various techniques.

Skills Mapped:

As listed in the course handbook.

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Assessment Criteria

Weight

%

Actual

%

Strength

Areas of Improvement

Identify and evaluate the sources of information used in managerial decision making and their limitations.

(Task 1)

30

Understand and apply and evaluate short-term decisions using variable costing techniques

(Task 2)

30

Calculate key indicators used in evaluating performance produce forecasts of income and expenditure - using various techniques

(Task 3)

Identify and evaluate the sources of information used in managerial decision making and their limitations

Understand and apply and evaluate short-term decisions using variable costing techniques

Calculate key indicators used in evaluating performance produce forecasts of income and expenditure - using various techniques

(Task 4)

30

10

Self Presentation - please see hand in guidelines for reports, essays and presentations below.

Deduction: (Capped at 40%) for: Late Submission

Deductions : No Front Sheet

Total mark out of 100%

100%

Subject to ratification at the validating University Subject Board

Index

Task 1

Total contribution and net profit for 2008 and 2009 .................................... 5

Break-even point for 2008 and 2009............................................................. 6

....................................................................................................................... 7

....................................................................................................................... 7

Task 2

2.1. Absorption costing and Marginal costing March and April ........................ 8

Method Absorption Costing.................................................................... 8

Method Marginal Costing ....................................................................... 9

2.2 Reconciliation ............................................................................................... 9

2.3 Absorption costing vs Marginal costing ....................................................... 10

2.4 Recommendation ......................................................................................... 12

Task 3

3.1 Adsorption costing of overheads (traditional method) and selling price ..... 13

3.2 Activity based Costing of Overheads .......................................................... 14

3.3 Conclusions .................................................................................................. 15

Task 4

Cost Centre .............................................................................................. 17

Profit Centre ............................................................................................ 17

Investment centre ................................................................................... 17

Graphs ..................................................................................................... 18

Examples ................................................................................................. 20

Bibliography ....................................................................................................... 21

Task 1

Total contribution and net profit for 2008 and 2009.

2008

Sales 4,500 units * 420 = 1,890,000

Cost of sales 4,500 units * 240 = (1,080,000)

CONTRIBUTION 810,000 This is the contribution to pay Fixed Cost

Fixed Costs (360,000)

£ 450,000

2009

Sales 6,500 units * 390 = 2,535,000

Cost of sales 6,500 units * 248 = (1,612,000)

CONTRIBUTION 923,000

Fixed Costs (400,000)

£ 523,000

2008 2009

Total contribution £810,000 £923,000

Net profit £450,000 £523,000

Break-even point for 2008 and 2009.

2008

Contribution = Selling Price - Variable cost

The company will not make a profit or a loss but will cover its fixed cost selling 2,000 units.

Num. Unit

Fixed Cost £

Variable cost £

Total

cost £

Total Revenue £

Profit

Loss

2,000

360,000

480,000

840,000

840,000

 0

0

2009

Num. Unit

Fixed Cost £

Variable cost £

Total

cost £

Total Revenue £

Profit

Loss

2,817

400,000

698,616

1,098,616

1,098,630

 0

0

The company will not make a profit or a loss but will cover its fixed cost selling 2,817 units.

(c)

Profit in 2009 of £450,000

Fixed Cost = 400,000

Contribution = 390 - 248 = 142

The business will make a profit of £450,000 if it sells 5,986 units.

(d)

X = 130,000

130,000 pounds can be spent in fixed costs.

Task 2

2.1. Absorption costing and Marginal costing March and April

Method Absorption Costing

Â

March

Â

Â

April

Â

Â

Sales

1,750 units * £35

= 61,250

Â

2,800 units * £35

= 98,000

Â

Â

Cost of sales:

Â

Opening stock

0

Â

450 * 25 = 11,250

+ production

2,200 * 25 = 5,000

Â

3,500 * 25 =87,500

- closing stock

450 * 25 =(11,250)

Â

1,150 * 25 = (28,750)

Â

Total = (43,750)

Â

Total = (70,000)

Â

Â

Â

61,250 - 43,750

= 17,500

Â

98,000 - 70,000

= 28,000

Â

Â

(Under) Over

Bugdget overhead =

Â

Bugdget overhead =

Absuption (OA)

36,000 * 6 = 216,000

Â

36,000 * 6 = 216,000

Â

216,000/12 = 18,000

Â

216,000/12

= 18,000

Â

Â

Fixed overhead (FOH)

2,200 * 6 = 13,200

Â

3,500 * 6 =21,000

incurred

Under absorb of =

Â

Over absorb of=

Â

Â

Â

13,200 - 18,000

= (4,800)

Â

21,000 - 18,000

= 3,000

Â

Â

Gross profit

17,500 - 4,800

= 12,700

Â

28,000 + 3,000

= 31,000

Â

Â

Selling Cost

11,000

Â

11,000

Â

Â

Variable Cost

13% 61,250 = (7,962.5)

Â

13% 98,000 = (12,740)

Â

11,000 + 7,962.5 = (18,962.5)

Â

11,000 + 12,740 = (23,740)

Â

Â

Net Gross Profit

12,700 - 18,962.5 = (6,262.5)

Â

31,000 - 23,740

= 7,260

Method Marginal Costing

Â

March

Â

Â

April

Â

Â

Sales

Â

1,750 units * £35

= 61,250

Â

2,800 units * £35

= 98,000

Â

Â

Variable Cost of Sales

Â

Â

Opening Stock

Â

0

Â

450 * 19 = 8,550

+ production

Â

2,200 * 19 = 41,800

Â

3,500 * 19 = 66,500

- closing stock

Â

450 * 19 = (8,550)

Â

1,150 * 19 = (21,850)

Â

Total =

Â

Total=

Â

41,800 - 8,550

= (33,250)

Â

8,550+66,500-21,850 = 53,200

Â

Â

Â

61,250 - 33,250

=28,000

Â

98,000 - 53,200

= 44,800

Â

Â

Variable selling cost

Â

13% 61,250

= (7,962.5)

Â

13% 98,000

= (12,740)

Â

Â

Contribution

Â

28,000 - 7,962.5

=20,037.5

Â

44,800 - 12,740

= 32,060

Â

Â

Fixed Cost

Â

Â

Production

Â

36,000*6/12=18,000

Â

36,000*6/12=18,000

+ selling

Â

11,000

Â

11,000

Equal

Â

18,000 + 11,000

= 29,000

Â

18,000 + 11,000

= 29,000

Â

Â

Net profit

Â

20,037.5 - 29,000

=(8,962.5)

Â

32,060 - 29,000

= 3,060

Fixed production Oveheads off 25-6=19

2.2 Reconciliation

March

April

Marginal Cost

(8,962.5)

3,060

2,200 - 1.750 * 6 = 2,700

3,500 - 2,800 * 6 = 4,200

Absorption Costing Profit

(8,962.5) + 2700 = ( 6,262.5)

3,060 + 4,200 = 7,260

2.3 Absorption costing vs Marginal costing

A business which uses the technique of costing Marginal Cost to obtain the cost per unit of a product uses only variable manufacturing cost, such as direct labour, direct materials and other variable manufacturing overheads, that means, The product is attributed just the costs that vary only in relation to volume, so the value of inventories and cost of sales are only variable production costs. The fixed manufacturing overhead costs are treated as period costs.

This technique must be distinguished from Absorption Costing which uses all variable and fixed costs to compose the cost of manufacture and integrate the product inventory cost. The cost of the manufactured article is formed by the prime cost plus all indirect manufacturing costs that are applied.

Absorption costing

Advantages

Improved evaluation of inventories.

The pricing is determined based on production costs and fixed operating costs and variable (total cost),

The cost of production is real.

It is useful in some decision making, choice of alternatives, utility planning.

It is applicable in times of inflation, price changes, devaluation, etc.

Disadvantages

It is complex because it must make a classification of fixed and variable costs

The accounting records by integrating fixed costs and variable costs, difficult to establish the optimum combination of cost-volume-profit.

It is difficult to provide reliable estimates of fixed and variable costs.

At the direction of the company has difficulty understanding the effect of fixed costs on profits, this influence for making decisions.

Marginal costing

Advantages

There are no fluctuations in the Unit Cost.

It may be useful in some decision making, choice-making, planning short-term profits.

Allows fair comparison of units and values, even of different periods.

Disadvantages

It is an incomplete cost technique.

The valuation of inventories is lower than the other method, therefore is not recommended for financial information.

Fixed costs do not reflect the level of production made.

It disorients, making believe that the Unitary Costs are minor, and it is false.

2.4 Recommendation

I would recommend the absorption costing because this technique takes into account all the costs incurred for the product by the company, classifies costs according to their functions and the adjustment to under or over-absorption of expenses are realised before to get the profit. All these characteristics give better information to calculate the price of the products.

If we compare the advantages and disadvantages is more effective method of absorption of costs, but marginal cost would be useful for short-term planning, control and make decisions.

Task 3

3.1 Adsorption costing of overheads (traditional method) and selling price

UNIT COST/ TRADITIONAL METHOD

Â

Standard

Premium

Direct Material

15

20

Direct Labour

32

48

Overhead cost

36,36

54,54

TOTAL

83,36

122,54

Standard Premium

To produce1 unit £32 (£8/h) = 4 hours To produce1 unit £48 (£8/h) = 6 hours

1 unit -- 4 hours 1 unit --- 6 hours

40,000 units ---- X hours 10,000 --- X hours

X = 160,000 hours X = 60,000 hours

160,000 hours (standard) + 60,000 hours (premium) = 220,000 hours (total)

220,000 hours total - £2,000,000

1 hour ---- X

X = 2,000,000 / 220,000 = £9,09 per hour

Standard £9,09 * 4hours = 36,36

Premium £9,09 * 6hours = 54,54

Selling price has a profit mark-up of 20% on full costs.

Standard £83.36 * 1.20 = £100.32

Premium £122.54 * 1.20 = £ 147,05

3.2 Activity based Costing of Overheads

Number of machine set ups

To pay that cost the company £560,000. Total 100 Standard 20 Premium 80

Standard = 20/100 * 560,000 = 112,000

Premium = 80/100 * 560,000 = 448,000

Number of quality control inspections

To pay that cost the company pay £440,000. Total 2,000 Standard 500 Premium 1,500

Standard = 500/2000*440,000 = 110,000

Premium = 1500/2000*440,000 = 330,000

Number of sales orders processed

Cost 480,000 Total 5000 S 1500 P 3500

S=1500/5000*480,000 =144,000

P=3500/5000*480,000 =336,000

General production (machine hours)

Cost 520,000 Total 500,000 S 350,000 P 150,000

S=350,000/500,000*520,000 = 364,000

P=150,000/500,000*520,000 = 156,000

DETAILS

STANDARD

£000

PREMIUM

£000

TOTAL £000

machine set ups

112

448

560

quality control inspections

110

330

440

sales orders processed

144

336

480

General production

364

156

520

 TOTAL

730

1270

2000

Standard Premium

£730,000 --- 40,000 units 1,270,000 ---- 10,000 units

X ----- 1 unit X --- 1 unit

X = 18.25 X = 127

Â

Standard

Premium

Direct Material

15

20

Direct Labour

32

48

Overhead cost

 18.25

 127

TOTAL

65.25

195

3.3 Conclusions

The traditional method demonstrates no cause-effect relationship between direct labor and indirect manufacturing overheads because this base supposes that those products which consume more hours of direct labour in production also consumes more indirect resources and, therefore, they must absorb a major portion of their cost.

The above reasoning is valid in a production environment, 100% labour intensive, but this is not the case and these products need machinery for the production process. The continued use of hours of direct labour as the basis for apportionment introduces distortions costing of products, that is to say, the rate of apportionment is inflated by the technological costs.

The Activity Based Costing method analysis the activities of the indirect departments within the organization to calculate the cost of finished products.

This method analyzes the activities because it recognizes that not only products but the activities cause costs, so the ABC method assigns manufacturing overhead to products.

The recommendation for Morgan Company Ltd is to use the ABC technique for assigning costs to the finished product because the organization needs to have reliable, timely and accurate as possible on the cost of their products for proper decision making.

Task 4

Cost Centre

It is a unit or minimal subdivision in the bookkeeping process in which costs are accumulated in the activity of the enterprise for the purpose of facilitating the measurement of used resources and economic performance.Â

The determination of the cost centers should be focusing on the objectives to be achieved with the information they provide, as a basis for making decisions.

Profit Centre

These divisions are responsible for "profit."Â Within a frame prearranged in the top organ, they can choose certain means that they consider to be more suitable: procedures, investments, technology, etc.

The profit target is the main reference but also they attend to their relationship with the invested capital (Return on Investment), or the sales turnover (Return on Sales) and attend to the difference between benefit to obtaining and costs of capital.

Investment centre

The divisions have maximum autonomy and they can decide on investments. The top central organ provides the financing. It usually retains some control and possible influence with regard to the investment decisions of the divisions.

Graphs

Fixed Cost

Variable Cost

Semi-variable cost

Stepped cost

Examples

Fixed Cost

Rent of the local and

Insurance of the local.

Variable Cost

Direct material and

Direct labor.

Semi-variable cost

A company produces shelves, using rented equipment. The cost of renting the equipment is £ 10,000 a year plus £ 1 for every hour the machine is used more than 5.000 hours. For instance, if the machine is used 7.000 hours, the rental charge is a fixed cost £10.000 and £2,000 (2000 * 1) a variable cost.

Bill of the telephone. Fixed price for the rental of the line and variable cost due to consumption