ASSIGNMENT ON 09009

MANAGEMENT ACCOUNTING

SUBMITTED BY,
ARUNLAL.M
DATE: 13-10-2017
 INTRODUCTION
Cost accounting is a type of accounting process that aims to capture a company's expenses of
production via assessing the input costs of every step of production as well as fixed costs
consisting of depreciation of capital equipment. cost accounting will first measure and record
those costs individually, then evaluate input outcomes to output or actual outcomes to aid
company management in measuring financial performance. Cost accounting can be most
beneficial as a tool for management in budgeting and in setting up cost control programs, which
can improve net margins for the company in the future.
The Institute of Cost and Management Accounting, London defines “Cost accounting is the
process of accounting from the point at which expenditure is incurred or committed to the
establishment of its ultimate relationship with cost centres and cost units. In the widest usage, it
embraces the preparation of statistical data, application of cost control methods and the
ascertainment of profitability of activities carried out or planned”.

DECISION MAKING TECHNIQUES

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

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.
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. The latter utilize cost drivers to attach activity costs to
outputs."
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.
SELLING PRICE CALCULATION

PARTICULARS SD001 S002 SD003

Cutting cost/unit 1 1 1.5

Tailoring cost/unit 2 2 3

Stitching cost/unit 0.066 0.066 0.1

Material cost 34 35 40.5

Total variable cost 37.066 38.066 45.1

Contribution per unit 9.2665 9.5165 11.2

Spelling price 46.33 47.58 56.3

Working note calculation:

Working note 1

SD001 &SD002
OAR = Budgeted overhead/budgeted activity

OAR =100 / 1500 * 0.5 = $ 0.133/hr.

Overhead cost /unit= 0.133 * 0.5 = $ 0.066/unit

Working note2

SD003
OAR=100 / 1000 * 1= $0.1/hr.

Overhead cost/unit= 0.1 * 1= $0.1/unit.

Working note3
CONTRIBUTION
Contribution = 25% of total cost

Contribution of SD001 = 37.06 * 25% = 9.266

Contribution of SD002 = 38.06 * 25% = 9.516

Contribution of SD003 = 45.1 * 25% = 11.2

LIMITING FACTOR ANALYSIS

Limiting factor refers to the constraints that are available in the production resources which
include shortage in labour, raw materials or machine hours. There are six steps approach to
solve: Determine the maximum requirement, determine the limiting factor, Calculate
contribution per unit of each product, Calculate contribution per unit of limiting factor, Rank
products in order of priority, and calculate production quantities
Assumption:

Due to a unexpected strike Selin’s creations were unable to get sufficient fabric .As a result, they
couldn’t produce the required amount as per the plan. They applied limiting factor analysis and
made a new production plan: But after the strike, total available material fabric 3 was limited to
3250 m.

SD001 SD002 SD003

FABRIC 1 3m 2.5m 2m

FABRIC 3 2m 1.5m 2m

particulars SD001 SD002 SD003

Selling price 46.33 47.58 56.3

Variable cost 37.066 38.066 45.1

Contribution per unit 9.27 9.52 11.2

Limiting factor 0.5 0.5 2

Contribution/unit of LF 18.54 19.04 5.6

Ranking 2nd 1st 3rd

Production plan
product units consumption availability
SD002 1500 750m 2500m
SD001 1500 750m 1750m
SD002 875 1750m 0

CVP ANALYSIS
Cost volume profit (CVP) Analysis is used to determine how changes in costs and volume affect
a company’s operating income and net income

Sales mix 3 3 2

cpu per unit 9.27 9.52 11.2

Selling price 46.33 47.58 56.3

Weighted average c/s ratio = total contribution/ total sales revenue*100

Weighted average c/s ratio =(3 * 9.27) + (3 * 9.52) +(2 * 11.2) / (46.33 * 3) + (47.58 * 3 ) +
(56.3 * 2) * 100
=78.8 / 394 * 100 = 20%

Weighted average contribution per unit= total contribution/ total sales volume

Weighted average contribution per unit = 78.8 / 8 = 9.85

BREAK EVEN ANALYSIS
Break-even analysis entails the calculation and examination of the margin of safety for an entity
based on the revenues collected and associated prices. Analyzing completely different worth
levels with reference to varied levels of demand, an entity uses break-even analysis to see what
level of sales is required to cover total fixed costs. A demand-side analysis would provide a
seller bigger insight concerning selling capabilities. To perform cvp analysis in multiproduct a
constant sales mix is required

BREAK EVEN SALES VOLUME = total fixed cost/ weighted average contribution per unit

Total fixed cost = 700 + 200 + 800= 1700

Break even sales volume = 1700 / 9.85 = 173

BREAK EVEN SALES VOLUME FOR EACH SUITE

SD001 – 173 * 3 / 8 = 65

SD002 – 173 * 3 / 8 = 65

SD003 – 173 * 2 / 8 = 43

BREAK EVEN SALES REVENUE

= Total fixed cost/weighted average c/s ratio

Break even sales revenue = 1700 / 0.2 = 8500

BREAK EVEN SALES REVENUE FOR EACH SUITE

SD001 = 8500 * 3 / 8 = 3188

SD002 = 8500 * 3 / 8 = 3188

SD003 = 8500 * 2 / 8 = 2125

MARGIN OF SAFETY
Margin of safety is the difference between the expected (or actual) sales level and the breakeven
sales level. The measure is especially useful in the situations where large portions of a
company’s sales are at risk,

Margin of safety = Budgeted sales revenue – break even sales revenue

= (1500 * 46.33 + 1500 * 47.58 + 1000 * 56.3) – 8424.1

= $ 188575.9

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

= (3828 / 4000) * 100

= 95.7%

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

= (188575.9 / 197000) * 100

= 95.7%

TARGET PROFIT
Target profit is the expected amount of profit that the managers of a business expect to achieve
by the end of a designated accounting period

Selin’s creations target a profit of 53000 for coming period. Compute required level of sales
volume to reach target profit.

Total profit = total contribution – total fixed cost

53000= total contribution – 1700

Total contribution = 51300

Target sales volume = total contribution / weighted average contribution per unit

= 51300/9.85 = 5208 units

RELEVANT COSTING
The concept of relevant cost is used to eliminate unnecessary data that could complicate the
decision making process. A big decision for a manager is whether to close a business unit or
continue to operate the company division, and relevant costs are the basis for the decision. flows
Decisions taken using relevant costing principles are Outsourcing, One off contracts, Further
processing, Shut down.

A hotel management institute has assigned selin’s creation with an order or 110 SD001 suits for
their upcoming fest .a schedule has been prepared detailing the cost of new project as follows.

Room rent $700

Supervisor salary (note 1) $ 800

Tailor $220 (2 * 110)

Admin cost $3000

Heating and lighting $700

Depreciation $2500

Material cost fabric 1 $1650(3 * 110 * 5)

Fabric 2 $ 1540(2 * 110 * 7)

Fabric 3 $550(0.5 * 110 * 10)

Note 1: the supervisor is a employee who works on full time basis in Selin’s creations and his
salary is fixed to $800 per month

Note 2: Since the assistant mangers is not available on Sundays the manager have to work on
Sundays for that he is paid of bonus 2 % of his fixed salary.

The customer is ready to pay $2500for the suites.

Requirement
Decide whether they should accept this project or not.
RELEVANT COST
Room rent nil

Supervisory salary nil

Tailor $ 300

Manager’s bonus (wn1) $160

Admin cost nil

Heating and lighting nil

Depreciation nil

Material fabric 1 nil

Fabric 2 $ 2100

Fabric 3 $750

Wn1
Manager bonus

*2%=160

Relevant revenue =2500

Incremental profit = relevant revenue – relevant cost

= 2500 – 3310

Incremental loss = $810

There is an incremental loss they are not supposed to accept this project.