AC50030E Managerial Finance

Question:

You can calculate the price of a product/service using both traditional and modern methods such as Activity Based Pricing.

Understand the purpose and scope budgeting, and how to control it using variances.

Effective communication of management accounting information.

A) Use the traditional accounting approach for overheads to calculate the product cost per unit of each of the three products.

B) Calculate the product cost per unit using Activity Based Costing.

C) Describe the differences between your answers to (a), and (b) as well as the possible implications for DDT Ltd decision-making.

Keita, a client of the firm, operates a small courier company in the east region of Canada.

Keita is eager to grow the business and recently attended a seminar about management accounting for small businesses.

Although she is well aware of the importance of management accounting in the manufacturing industry, she is not sure if it is relevant to service industries like her courier business.

Identify the major objectives of budgeting.

Identify two areas where there is a difference between financial accounting and management accounting.

Explain the differences between flexible and fixed budgeting.

Formatting and bibliography of the report.

Structure and presentation will receive marks.

This includes appropriate use of an appendices, clarity in explanation and the ability to sum up your findings.

Question 1:

Particulars

Units

PS 748 800

Hours of labour for product X (B).

Hours of labour for product Y (C).

Product Z (D), labour hours

Total hours of labour (E) = (B), + (C), + (D).

PS 7.80

Calculation of the product cost

Particulars

X

Y

PS 64,000

PS 64,000

PS 72,000

PS 249 600

PS 124 800

PS 374,400

Production cost (C) = (A+ (B)

PS 313,600

PS 188 800

PS 446,400

Quantity (in units). (E).

PS 62.72

PS 23.60

PS 59.52

Particulars

Units

Material inspection (A).

PS 320,000

Raw materials for product X (B).

Raw materials for product Y(C)

Raw materials for product Z (D).

Total raw materials (E), = (B) +(C) + (+ (D)

Material inspection per kilogram (A)/(E).

PS 0.25

Machine Maintenance Rate

Particulars

Units

Machine maintenance (A).

PS 316 800

Machine hours for product (X) (B).

Product Y (C), machine hours

Product Z (D), machine hours

Total machine hours (E), = (B) +(C) + (+ (D)

Machine maintenance per hour (A/E)

PS 6.60

Production Scheduling Rate

Particulars

Units

PS 112,000

Production setups for product X (B).

Production setups for product Y (C).

Production setups for product Z (D).

PS 179.20

Calculation of the product cost

Particulars

X

Y

PS 64,000

PS 64,000

PS 72,000

Material inspection (B).

PS 100,000

PS 60,000

PS 160,000

Machine maintenance (C).

PS 158,400

PS 52,800

PS 105 600

PS 18,816

PS 54,656

PS 38,528

Production cost (E) = (B), + (C), + (D).

PS 341,216

PS 231,456

PS 376,128

Quantity (in units). (F).

PS 68.24

PS 28.93

PS 50.15

ABC uses a wider range of cost drivers to apply overhead costs to products, rather than focusing on one basis (Asongu 2015).

The activity that causes the cost is closely associated with it.

This association is key to ABC’s techniques and would result in efficient distribution of overhead costs.

This association is also valuable as it allows management to pay more attention to areas that are cost-intensive.

This could help to reduce cost and focus on the task instead of spending.

Incorrect costs can have severe consequences since cost is used to calculate the sale price.

The above tables show that the selling prices of X and Y can be closer to or lower than the true cost if the traditional cost approach is used.

Z is also sold at a higher price.

Despite the higher profits, the company might lose business to cheaper competitors.

Question 2

To: Keita Managing Director of a Courier Company

Subject: Management accounting’s usefulness

Here are some key objectives for budgeting in a service organization like a courier business:

Budget can be used to plan for the future of an organisation and also to judge employees based on the established standard (Downen & Hyde 2016, 2016).

Service organizations use budgeting to determine the areas where funds should be distributed to various tasks, such as purchase of fixed assets.

A set of budgets can be created based on different scenarios to predict the financial outcome of the strategic direction.

The budget should also be used to review staff performance using variances (Gitman Juchau, Flanagan 2015).

These are the main points to distinguish between financial accounting and management accounting.

Base of comparison

Management accounting

Information

It offers both monetary as well as non-monetary information.

It only provides monetary information.

Timeframe

These statements are prepared in accordance with the needs of an organization.

At the end of each accounting year, the financial statements are prepared.

Here are the main points to distinguish between flexible and fixed budgeting.

Base of comparison

Fixed budgeting

Definition

It tends not to change despite the activity level (Dyson 2010,).

It is susceptible to changing with changes in activity level.

It is stationary in nature.

It is dynamic in nature.

Activity level

There is only one level of activity.

There are many levels of activity.

Performance evaluation

If distinction is inherent in activity levels, it would be impossible to correctly contrast budgeted levels with actual levels.

This provides a solid base to compare actual and budgeted levels.

Rigidity

Modifications are not possible based on the volume.

Modifications are possible depending on the activity level.

It’s based on assumptions

It’s practical and realistic.

Here’s a quick overview of how variance is used within budgetary control:

Effective activity budgeting is made easier by variance analysis. The management wants to see fewer deviations from the budgets.

Managers can make more detailed budgetary decisions thanks to this analysis.

It is the control mechanism.

Keita could use the evaluation of large deviations of major items to gain a better understanding of the reasons.

This would allow Keita to identify the possible ways to avoid such deviation.

It assists in the attribution of responsibility and implimenting control mechanisms on the relevant departments.

Keita could be used to improve the control of departments that are affected by variances in labour efficiency or raw materials cost, for example, to increase overall efficiency.

New evidence from meta-analysis: Finance and growth.

Managerial Finance 41(6), pp.615-639.

T. Downen and B. Hyde, 2016.

Flipping the Managerial Accounting Principles course: Effects on student performance, evaluation, and attendance.

Emerald Group Publishing Limited.

Accounting for non-Accounting Students 8th Edition.

Prentice Hall.

Gitman L.J.J., Flanagan J., and Juchau R.

Principles of managerial financial management.

Pearson Higher Education AU.

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