# Management Accounting Essay Example

22Management Accounting

Question 1

John’s Paint Products

Cost of Production Report for the Mixing Department for the Month of March 2011 Using the Weighted Average Method

1. Physical flow of units of John’s Paint Products Mixing Department Report for March 2011

 Units Information Units (litres) Units (litres) Inventory in process, March 1 ( Materials 100%, 60% labour and overhead) Add Units started Total units to account for: Units completed Work in Progress March 31 ( Materials 100%, 35% labour and overhead) Total units to account
1. Equivalent units of John’s Paint Products Mixing Department for the month of March 2011 using the Weighted Average Method

 Work performed during the current period (stage of completion (%)) Equivalent produced units: input units × stage of completion in respect of Material Overheads Material Overheads Units transferred to next department Work in Progress March 31 ( Materials 100%, 35% labour and overhead) Total equivalent units accounted for
1. Calculation of unit costs for John’s Paint Products Mixing Department for the month of March 2011 using the Weighted Average Method

 Cost Information Cost to account for: Material Overheads Total cost Cost at the Beginning (work in progress ) Cost incurred during the period \$ 340,000 146,800\$ 578,237\$ Total costs to account for \$357,000 \$158,300 \$614,237 Divided by equivalent units to assign cost Cost per equivalent unit (Total costs to account for/ Divided by equivalent units) \$14.9000
2. Total Cost Accounted for

Costs accounted for the Mixing Department for the month of March 2011 using the Weighted Average Method. According to Hansen et al (2007, p. 175), costs of goods transferred out computed by multiplying completed units by cost per equivalent unit.

Cost per equivalent unit× Cost of goods transferred out = Completed Units

Cost of goods transferred out =(\$14.9000 × 38,000units)
=\$566,199.5199

Cost per equivalent unit× Cost of ending work in progress = Cost of ending work in progress of each input

\$37,800.00004,500) =× \$8.40 (= Materials

\$18,000.00004,500) =×\$4.00 (= Labour

\$11,249.9431 = 4,500)×\$2.50 (= Overheads

\$37,800.0000 + \$18,000.0000 + \$11,249.9431 Cost of Closing work in progress =

=\$67, 049.9431

John’s Paint Products

Cost of Production Report for the Canning Department for the Month of March 2011 Using the FIFO Method

1. Physical flow of units of Canning Department Report for March 2011

 Number of Units (completed or not) Units in process at the beginning as at March 1 (20%) Add units introduced from Mixing Department in March Total units in process to be accounted for:
1. for the month of March 2011 using the FIFO MethodEquivalent units for the Canning Department

 Work performed during the current period (stage of completion (%)) Equivalent produced units: input units × stage of completion in respect of Material Overheads Material Overheads Inventory in process, March 1 (20% completed) Add Started and completed in March (32,000-2,000) Transferred out of Canning department in March 2011 Add completed equivalent units in process as at March 31 (70%) Total equivalent units accounted for
1. Calculation of unit costs for John’s Paint Products Canning Department for the month of March 2011 using the FIFO Method

 Cost Information Cost to account for: Material Overheads Total cost Cost at the Beginning (work in progress ) Cost incurred during the period 0 \$120,000 \$280,000 \$400,000 Total costs to account for \$128,520 \$291,060 \$432,530 Divided by equivalent units to assign cost Cost per equivalent unit (Total costs to account for/ Divided by equivalent units)
1. Completed Units × Cost of goods transferred out = Cost per equivalent unit

38,000 units)× \$0.3408 (= Materials

\$12,950.4000 =

units)37,200× \$3.4548 (= Labour

\$128,518.5600 =

units)37,200× \$7.8242 (= Overheads

\$291,060.2400 =

\$128,518.5600 + \$291,060.2400+ \$12,950.4000 Cost of goods transferred out =

=\$432,529.2000

1. Cost per equivalent unit× Cost of ending work in progress = Cost of ending work in progress of each input

8,000 units)× \$0.3408 (= Materials

\$2,726.4000 =

units)5,600× \$3.4548 (= Labour

\$19,346.8800 =

units)5,600× \$7.8242 (= Overheads

\$43,815.5200 =

\$2,726.4000 +\$19,346.8800 +\$43,815.5200Cost of Closing work in progress =

=\$65,888.8000

Question 2

Blackbird Company has three support departments and two producing departments.

Blackbird’s Company Service proportion table for each department for 2010

 Department Machining Assemble Administration Maintenance Cafeteria Direct labour hours Service percentage 15.6250% 31.2500% 46.8750% Square meters Service percentage 32.7103% 60.7477% Number of employees Service percentage 11.7647% 29.4118% 49.0196%

Blackbird’s Company Sequential Cost allocation for each department for 2010

 Department Machining Assemble Administration Maintenance Cafeteria Budgeted overhead cost \$100,000 \$200,000 \$435,000 First step: Allocate Admin Cost \$ (60,000) Second Step: Determine allocation percentages Square meters Service percentage Number of employees Service percentage Allocate Plant Cafeteria (25,000) Third step: Determine allocation percentages Square meters Service percentage Allocate Plant Maintenance (50,000) Total overhead costs Divided by direct labor hours Departmental OH rate per DLH

Question 3

1. The activity level in direct labour hour for production at Sparrow Company = Expected production ÷ Number of hours per case

The activity level in direct labour hour for production of 50,000 cases for;

Formula 1 = 50,000 cases × 1hr/case =50,000 hours

Formula 2 =50,000 cases × 1.2 hr/case = 60,000 hours

1. An overhead budget for the expected activity level of 50,000 cases for each product

Sparrow Company’s overhead budget for the 50,000 cases of Formula 1

 50,000 cases Direct labour hours per case Total Direct labour hours 50,000 hours Fixed overhead costs Maintenance Utilities 0 Indirect labour Total Fixed costs Variable overhead cost Maintenance (0.2 × 50,000) Utilities (0.10 × 50,000) Indirect labour(1 × 50,000) Total variable overhead cost Total cost

Sparrow Company’s overhead budget for the 50,000 cases of Formula 2

 50,000 cases Direct labour hours per case Total Direct labour hours 60,000 hours Fixed overhead costs Maintenance Utilities 0 Indirect labour Total Fixed costs Variable overhead cost Maintenance (0.2 × 60,000) Utilities (0.10 × 60,000) Indirect labour(1 × 60,000) Total variable overhead cost Total cost \$100,500

3. Sparrow Company’s overhead budget for the 20% higher than expected activity level of 50,000 of Formula 1

 Direct labour hours per case Total Direct labour hours Fixed overhead costs Maintenance Utilities 0 Indirect labour Total Fixed costs Variable overhead cost Maintenance (0.2 × 60,000) Utilities (0.10 × 60,000) Indirect labour(1 × 60,000) Total variable overhead cost Total cost \$100,501

Sparrow Company’s overhead budget for the 20% higher than expected activity level of 50,000 of Formula 2

 Direct labour hours per case Total Direct labour hours Fixed overhead costs Maintenance Utilities 0 Indirect labour Total Fixed costs Variable overhead cost Maintenance (0.2 × 72,000) Utilities (0.10 × 72,000) Indirect labour(1 × 72,000) Total variable overhead cost Total cost \$116,101

Question 4

Hawk Ltd would like to evaluate how environmental activities affect the cost of Product A and Product B.

1. The activity rates for each activity.

 Activity Cost pools Total cost Total activity Activity rate Product A Product B Total Units Produced Process design \$5 per unit Waste management \$120,000 \$3 per unit Contamination testing \$2 per unit Waste clean-up \$4 per unit

A report for management showing the environmental costs per kilogram for each product. 2.

 Product A Product B Units produced 100,000 units 50,000 units Cost of production Process design Add waste management Add contamination testing Add waste clean-up Total cost of environment activities \$145,500 \$145,500 Cost per kilogram = (68,500/100,000 units) 145,500/50,000 units

3. The product that appears to be most environmentally harmful is product B. This is because the amount of money used for environment activities per unit exceeds that of product A by \$2.2250. This means that Hawk Ltd pays additional \$2.2250 for every product B produced as compared to product B produced.

Question 5

1. The Economic order quantity of Balmain Tea Company manufactures

Economic order quantity (EOQ) refers to the size of an order that enables the purchasing department obtains materials or products at the least cost possible (Khan and Jain 2005 p. 3.30).  =1095.4451

EOQ = economic order quantity

A =Demand for the year

C = Cost of placing a single order

Ch = Cost of holding one unit of inventory annually

2. If the company works 250 days per year, on average the number of bags of spice used per day

Bags per working day = Annual demand/ number of days

=50,000 units÷ 250 days

= 200 units

3. If the lead time for an order is normally 5 working days, the reorder point is

R = (D ÷ number of days) × L

= (50,000÷250) ×5

R = reorder level

D= the annual demand

L =the lead time in days

4. If the company normally carries 50 bags as safety stock, the reorder point for the spice, with lead time of 5 working days is;

R = ((DL) ÷ number of days) + safety stock

= ((50,000÷250) ×5) + 50

Question 6

Table showing machines time and contribution margins of each model.

 The standard model the deluxe model Unit contribution margin Required machine time 1hour of machine time 4 hours of machine time 200 hours of machine time available per week Contribution margin per hour of machine time
1. The optimal mix of the two models

Standard model yields \$25 of contribution margin per hour of machine time while deluxe model only yields \$12.5 of contribution margin per hour of machine time. So it is rational to devote all the available 200 hours to the production of standard model.

Units of standard model = 200 total hours / I hour per standard model= 200 units

Optimal mix is 200 standard models and 0 deluxe models

b. The total contribution margin for that optimal mix

Total contribution margin for that optimal mix= 200× \$25

2. Assume that market conditions will allow the sale of only 100 units of each product.

a. the optimal mix of the two models

Standard model yields \$25 of contribution margin per hour of machine time while deluxe model only yields \$12.5 of contribution margin per hour of machine time. So it is rational to devote all the available 200 hours to the production of standard model. However, if the market allows only 100 units each, then

Priority is given to production of standard models and remainder to deluxe model.

Units of standard model = 100 units. This leaves 100 hours remaining for production of deluxe model.

Deluxe model produced = 100 total hours / 4 hour per deluxe model= 25 units

Optimal mix is 200 standard models and 0 deluxe model

Total contribution margin for that optimal mix= 200× \$25

b. The total contribution margin for the revised mix

Total contribution margin for that optimal mix= 100× \$25

= 25× \$50

Total = \$3750

Question 7

Both activity based responsibility and strategic based responsibility accounting have similar elements. The common elements are assignment of responsibility, measuring performance, evaluating performance, and offering of rewards. According to Hansen and Mowen (2010 p. 636), strategic based responsibility added another element of a balanced score card. A balanced scorecard ensures that an organization converts its strategy into operational objectives and measures. The balance scorecard is comprised of financial perspective, the process perspective, the customer perspective, and learning and growth perspective. The perspectives are key in ensuring that company’s strategy is transformed into executable actions to ensure that the organization achieve its objectives.

Question 8

Units produced = 11,000 and 88000 hours

1. Materials price variance

Material price variance (MPV) is a measurement of differences in the actual and standard price of materials. It refers to the difference between the standard price (SP) and the actual price (AP) of materials, which is multiplied by the quantity of materials (QP) bought.

MPV = (SP-AP) × QP

= (\$14 -\$13.70) × 52,000 metres

=\$15,600 (Favourable)

2. Materials usage variance

Material Usage Variances (MUV) measures the difference between standard quantities (SQ) needed for actual production and actual quantities (AQ) used which multiplied by the standard material price (SP).

MUV = (SQ-AQ) ×SP

= (44,000 metres-40,000 metres) ×\$14

=\$56,000 (Favourable)

3. Direct labour rate variance

Direct labour rate variance (DLRV) is a measurement of differences in the actual and standard hour rate. It refers to the difference between the standard hour rate (SR) and the actual hour rate (AR) labour, which is multiplied by the number of hours actually worked. .

DLRV = (SR-AR) ×AH

= (\$10 -\$10) × 84,000 hours

=0 (Favourable)

4. Direct labour efficiency variance

Labour efficiency variance (DLEV) refers to difference between the standard labour hours for actual production (SH) and the actual labour hours worked (AH) multiplied by the standard wage rate per hour (SR). DLEV = (SH-AH) ×SR

= (88,000 hours-84,000 hours) ×\$10

=\$40,000 (Favourable)

5. Variable overhead spending variance

Variable manufacturing overhead spending variance

VOSV = (SR-AR) ×AH

= (\$8 -\$9) × 84,000 hours

=-\$84,000(Unfavourable)

6. Variable overhead efficiency variance

VOEV = (SH-AH) ×SR

= (88,000 hours -84,000 hours) ×\$8

=\$32,000 (Favourable)

7. Fixed overhead spending variance

FOSV = (SR-84,000 hours) ×AH

= (\$12 -\$11.9048) × 84,000 hours

=\$7,996.8000 (Favourable)

8. Fixed overhead volume variance.

FOVV = (ST-AH) ×SR

= (88,000 hours -84,000 hours) × \$12

=\$48,000 (Favourable)

References

Hansen, D. R., Mowen, M. M., & Guan, L. (2007). Cost management: accounting & control (6th ed.). New York: Cengage Learning.

Hansen, R. D., and Mowen, M. M., (2010). Cornerstones of Cost Accounting. New York: Cengage Learning.

Khan & Jain (2005). Cost Accounting & Financial Management (2nd ed.). New York: Tata McGraw-Hill Education.

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