RELEVANT COSTS AND THEIR APPLICATION TO SHORT TERM DECISION MAKING EXAMPLE 1 BAC BHD HAS THE FOLLOWING

COST & REVENUE STRUCTURE : FIXED COSTS 78,000 RM CAPACITY 10,000 UNITS CURRENT OUTPUT 5,000 UNITS CURRENT SELLING PRICE 40 RM VARIABLE COSTS PER UNIT 16 RM STATEMENT OF INCOME : TOTAL REVENUE 5000 X 40 = 200,000 RM TOTAL VARIABLE COSTS 5000 X 16 = 80,000 RM TOTAL CONTRIBUTION LESS: FIXED COSTS NET INCOME STATEMENT OF INCOME WITH ONE -ORDER INCLUDED TOTAL REVENUE 5000 X 40 = 3000 X 20 = TOTAL VARIABLE COSTS 8000 X 16 = 120,000 78,000 42,000 RM

200,000 RM 60,000 RM 260,000 128,000 132,000 120,000 12,000

TOTAL CONTRIBUTION ORIGINAL CONTRIBUTION INCREMENTAL CONTRIBUTION

PRESENTATION PROJECT : 20% OF TOTAL MARKS 1 EACH GROUP COMPRISES 5 - 10 PERSONS 2 EVERY MEMBER OF THE GROUP MUST PRESENT 3 PRESENTATION DATE : 17TH FEBRUARY 2012 4 SUBMISSION OF GROUP MEMBER NAMES MUS BE DONE BY : 20TH JANUARY 2012 5 PRESENTATION TOPICS WILL BE ALLOCATED ONCE THE GROUPS HAVE BEEN FINALISED ON THE 20TH OF JANUARY. THE TOPICS WILL BE FROM AMOUNG THE FOLLOWING. TOPICS : A IN A WORLD THAT IS BECOMING INCREASINGLY VOLATILE, ROLLING BUDGETS ALLOW COMPANIES TO ADDRESS CHANGES IN BUSINESS ENVIRONMENT WHEN PREPARING BUSINESS PLANS. B ACTIVITY BASED BUDGETS PROVIDE A FAIRER BASIS OF ALLOCATING COMMON COSTS AND OVERHEADS. (YOU MAY CHOOSE TO AGREE OR DISAGREE BUT MUST SUPPORT YOUR STAND WITH WELL BASED FACTS AND POINTS) TO BE EFFECTIVE, BUDGETS HAVE TO BE PARTICIPATIVE. PRE- BUDGET MEETINGS ARE ONE WAY TO MAKE BUDGETS PARTICIPATIVE. EXPLAIN HOW PRE-BUDGET MEETINGS WORK AND OTHER METHODS THAT CAN BE USED TO MAKE BUDGETS PARTICIPATIVE.

EXAMPLE ON OPPORTUNITY COSTS MATERIALS USED >>> 1 ORIGINAL COST

A 5

B 7

C 10

D 8

E 20

2 CURRENT MKT VALUE 6 9 10 10 18 3 CURRENT SELLING PRICE 4 5 6 7 12 PROFIT GIVEN UP 12 DESCRIPTIONS: A USED REGULARLY ON SEVERAL PRODUCTS B CAN BE CONVERTED & SOLD WITH FURTHER COST OF RM 3/ UNIT. SELLING PRICE = 15 C SURPLUS PURCHASES. NO IMMEDIATE USE IN THE COMPANY D THIS PRODUCT WAS EARMARKED FOR A SPECIFIC PROJECT EARNING PROFITS = 15 PER UNIT E CAN BE FURTHER PROCESSED AT RM 5 & SOLD AT RM20 RELEVANT COST TO USE : RELEVANT COST PER UNIT A REPLACEMENT COST 6 B PROFIT GIVEN UP IN NEXT BEST USE 15 - 3 = 12 C SCRAP VALUE = SELLING PRICE = 6 D PROFIT GIVEN UP IN NEXT BEST USE 15 E COST OF PURCHASE AVOIDED = CURRENT MKT VALUE 18

CT HONGREN MANAGEMENT ACCOUNTING

Product Selling price per unit Less variable expenses per unit Contribution margin per unit Current demand per week (units) Contribution margin ratio Processing time required on machine A1 per unit 1 60.00 36 24.00 2,000 40% 1.00 min. 2 50.00 35 15.00 2,200 30% 0.50 min.

PRODUCT 1 1 CONTRIBUTION PER MINUTE 2 TOTAL NUMBER OF MINUTES REQUIRED TO MEET DEMAND 3 MAXIMUM TOTAL CONTRIBUTION 24/1 = 24 RM 2,000 MIN 48,000 RM 15/0.5=

PRODUCT 2 30 RM 1,100 MIN 33,000 RM 81,000 RM

MAXIMUM CAPACITY AVAILABLE ON MACHINE A.1 = 2,400 MINUTES 4 IF MANUFACTURE OF PRODUCT 1 IS MAXIMISED : MAX NUMBER OF UNITS OF PRODUCT 1 = 2,000 UNITS CONTRIBUTION PER UNIT = 24 RM TOTAL CONTRIBUTION FROM PRODUCT 1 = 48,000 RM AAA TOTAL NUMBER OF MINUTES USED UP TO PRODUCE PRODUCT 1 2,000 MIN BALANCE AVAILABLE FOR PRODUCT 2 400 MIN UNITS OF PRODUCT 2 MANUFACTURED BASED ON AVAILABLE CAPACITY 400 / 0.5 = 800 UNITS CONTRIBUTION PER UNIT (PRODUCT 2) = 15 RM TOTAL CONTRIBUTION FROM PRODUCT 2 = 12,000 RM BBB TOTAL CONTRIBUTION WHEN MANUFACTURE OF PRODUCT 1 IS MAXIMISED
Product Selling price per unit Less variable expenses per unit Contribution margin per unit Current demand per week (units) Contribution margin ratio Processing time required on machine A1 per unit 1 60.00 36 24.00 2,000 40% 1.00 min. 2 50.00 35 15.00 2,200 30% 0.50

60,000 RM

= AAA + BBB

IF MANUFACTURE OF PRODUCT 2 IS MAXIMISED : MAX NUMBER OF UNITS OF PRODUCT 2 = CONTRIBUTION PER UNIT = TOTAL CONTRIBUTION FROM PRODUCT 2 = TOTAL NUMBER OF MINUTES USED UP

2,200 UNITS 15 RM 33,000 RM

Selling price per unit Less variable expenses per unit Contribution margin per unit Current demand per week (units) Contribution margin ratio Processing time required on machine A1 per unit

60.00 36 24.00 2,000 40% 1.00 min.

50.00 35 15.00 2,200 30% 0.50

TO PRODUCE PRODUCT 2 = 2200 X 0.5 BALANCE AVAILABLE FOR PRODUCT 1 UNITS OF PRODUCT 1 MANUFACTURED BASED ON AVAILABLE CAPACITY CONTRIBUTION PER UNIT (PRODUCT 1) = TOTAL CONTRIBUTION FROM PRODUCT 1 = TOTAL CONTRIBUTION WHEN MANUFACTURE OF PRODUCT 2 IS MAXIMISED

1,100 MIN 1,300 MIN 1,300 UNITS 24 RM 31,200 RM

64,200 RM

IF MACHINE A.1 CAN BE RENTED OUT FROM A MANUFACTURING SERVICE HOUSE, OUR VARIABLE COSTS WILL BE AVOIDED, BUT THE OUTSOURCED MANUFACTURER WOULD CHARGE RM 40 PER UNIT FOR PRODUCT 2 AND RM 30 PER UNIT FOR PRODUCT 2. WHICH PRODUCT SHOULD NOW BE OUTSOURCED ? OPTIONS : 1 PRODUCE ALL REQUIREMENT OF PRODUCT 1 & OUTSOURCE PRODUCT 2 2 PRODUCE ALL REQUIREMENT OF PRODUCT 2 & OUTSOURCE PRODUCT 1 1 PRODUCE ALL REQUIREMENT OF PRODUCT 1 & OUTSOURCE PRODUCT 2 TOTAL CONTRIBUTION FROM MANUFACTURING PRODUCT 1 = TOTAL CONTRIBUTION FROM MANUFACTURING PRODUCT 2 WITH BALANCE CAPACITY =

48,000 RM 12,000 RM 60,000

UNFULFILLED DEMAND FOR PRODUCT 2 = CURRENT DEMAND - CURRENT PRODN = 2,200 - 800 UNITS = 1,400 UNITS PURCHASE COST = 1,400 UNITS X RM30 = 42,000 RM SALES REVENUE = 1,400 UNITS X RM50 = 70,000 RM INCREMENTAL PROFIT FROM UNITS MANUFACTURED ON OUTSOURCED BASIS = RM 70,000 - RM 42,000 = 28,000 RM TOTAL PROFITS AFTER OUTSOURCING PRODUCT 2 = 88,000 RM 2 PRODUCE ALL REQUIREMENT OF PRODUCT 2 & OUTSOURCE PRODUCT 1 TOTAL CONTRIBUTION FROM MANUFACTURING PRODUCT 2 = TOTAL CONTRIBUTION FROM MANUFACTURING PRODUCT 1 WITH BALANCE CAPACITY =

33,000 RM 31,200 RM 64,200

UNFULFILLED DEMAND FOR PRODUCT 1 = CURRENT DEMAND - CURRENT PRODN = 2000 - 1300 = 700 UNITS PURCHASE COST = 700 X RM40 = 28,000 RM SALES REVENUE = 700 X RM60 = 42,000 RM INCREMENTAL PROFIT FROM UNITS MANUFACTURED ON OUTSOURCED BASIS = RM 14,000 RM TOTAL PROFITS AFTER OUTSOURCING PRODUCT 2 = 78,200 RM DECISION : MAXIMISE PRODUCTION OF PRODUCT 1 & OUTSOURCE PRODUCT 2

GROUP PRESENTATION
NAMES OF GROUP MEMBERS: GROUP 1 1 ALIF G GANDHI 2 VINOD 3 TAN KUAN LI 4 TOONG CHUI SAN 5 SHARIFFAH 6 YOUSIF 7 JESLYNE GROUP 2 1 DEBBIE GOH 2 CARRIE HO 3 CHOW YIK YEEN 4 AUBREY YUI 5 JACKSON LIM 6 VISNU 7 MANJIT 8 YUVANESWARY 9 ISHA 10 SERAH VERONICA GROUP 3 1 THUSHANDRAN 2 JACOB 3 4 5 6 7 8 9 SARVESH BHAVIN RIZAL ZAK CHRISTOPHER YUEN KHEK MONG AMANDA ACTIVITY BASED BUDGETS (B) TOPIC ALLOCATED ACTIVITY BASED BUDGETS (B)

PARTICIPATION IN BUDGETS

GROUP 4 1 SARA 2 BALA 3 NG PUI MOON 4 RAINY 5 ALIYAA

BUDGET FORMATS
1 CASH AVAILABILITY 2 PROJECT BASED 3 FEASIBILITY CASH AVAILABILITY BUDGET FORMAT A THERE ARE 5 PARTS TO IT : 1 BUDGETED REVENUES 2 BUDGETED DISBURSEMENTS (OR PAYMENTS) 3 BUDGETED NET CASH FLOWS PER PERIOD 4 OPENING BALANCE (TARGET) FOR EACH PERIOD 5 CUMULATIVE CLOSING BALANCE CARRIED FORWARD

} Based on Debtors Ageing } Based on Treasury Management

EXAMPLE : SHOW THE ACTUAL CASH FLOWS ARISING FROM THE FOLLOWING AGEING SCHEDULE CREDIT TERMS BUDGETED 1 MTH 2 MTH 3 MTH previous MTH CASH BAD DEBTS SALES AGO AGO AGO cash flow RM RM RM RM RM RM RM JAN 68,000 10% 30% 40% 19% 1% 40,000 Up to t0 FEB 128,000 5% 25% 30% 38% 2% 50,000 Up to t1 MAR 188,000 5% 20% 30% 43% 2% 60,000 Up to t2 APR 333,000 3% 30% 50% 15% 2% MAY 268,000 5% 40% 40% 14% 1% JUN 300,000 5% 35% 45% 14% 1% REVENUE 1,285,000 CASH AVAILABILITY BUDGET BUDGETED REVENUES 1 SALES 3 MTHS AGO 2 SALES 2 MTHS AGO 3 SALES 1 MTHS AGO 4 CASH SALES 5 TOTAL CASH FROM SALES RM JAN 40,000 RM FEB 50,000 17,000 6,400 73,400 RM MAR 60,000 20,400 25,600 9,400 115,400 RM APR 10,200 64,000 56,400 9,990 140,590 RM MAY 17,920 75,200 133,200 13,400 239,720 RM JUNE 26,320 149,850 93,800 15,000 284,970

6,800 46,800

CASH 900,880

BUDGETING FOR DISBURSEMENTS 1 COST OF SALES IS 60 % OF MONTHLY SALES AND PAID ONE MONTH LATER. 2 SALES FOR THE PREVIOUS DECEMBER = RM100,000 3 BUSINESS MANAGEMENT EXPENSES ARE RM 8,000 PER MONTH 4 INSURANCE IS PAID QUARTERLY } AMT: RM 7,500 EACH TIME 5 IN MAY, SPECIAL DIVIDEND OF RM20,000 WILL BE PAID

JAN FEB MAR APR MAY JUN RM MAY 199,800 8,000 20,000 227,800 239,720 RM MAY 11,920 96,290 108,210

68,000 128,000 188,000 333,000 268,000 300,000 RM JUNE 160,800 8,000 7,500 176,300 284,970 RM JUNE 108,670 108,210 216,880 166,880

CASH AVAILABILITY BUDGET BUDGETED PAYMENTS 1 COST OF SALES 2 BUSINESS MGMNT EXP 3 INSURANCE 4 SPECIAL DIVIDEND 5 TOTAL CASH PAYMENTS TOTAL CASH FROM SALES CASH AVAILABILITY BUDGET MONTHLY CASH FLOW MOVEMENTS NET CASH FLOWS OPENING BALANCE / TARGET BALANCE CUMULATIVE BALANCE CARRIED FORWARD

RM JAN 60,000 8,000 68,000 46,800 RM JAN (21,200) 50,000 28,800

RM FEB 40,800 8,000 48,800 73,400 RM FEB 24,600 28,800 53,400

RM MAR 76,800 8,000 7,500 92,300 115,400 RM MAR 23,100 53,400 76,500

RM APR 112,800 8,000 120,800 140,590 RM APR 19,790 76,500 96,290

734,000 ++++