Faridah Muri

Accounting for Business Decision Making (BMAC5203)

Accounting for Business Decision Making (BMAC5203) Question 1 a. Identification Managers or financial controller must identify the information that can be used to analyze the organization performance. Information needed might not only be from internal but can also external environment analysis or trends. Identification process is also required to the processes that could be re-engineered.

b. Measurement When the managers have identified the information to be used for further analysis, they will have to measure the organization performance and process efficiency with an intended purpose. Organization financial measurement requires financial and non-financial inputs by cost analysis but cost is not the only measurement elements. A proper accounting method might be needed to ensure that performance measurement is done correctly.

c. Analysis Proper analysis is required by using the information or report gathered on any period of time i.e. weekly, monthly, quarterly or annually. The result of the analysis and report generated using statistical tools to arrive at monetary value that can be used in future decision-making.

d. Preparation and communication Managerial accounting data provides internal organization members with the necessary information to improve continuously on many operations and processes through well-informed decision making using product and processes of specific financial data. Reports generated is appropriate for control and planning and will cover any time span that is relevant by those using and applying the data to improve operation and strategy.

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Accounting for Business Decision Making (BMAC5203)

e. Planning In Managerial Accounting, when we talk about planning, it is usually related to budgeting. Budgets are usually prepared and controlled by a controller, which is usually the manager of Financial Department of one organization. Budgets are usually prepared on annual basis and specific. However, budget can also be prepared for minor organization activities which later shall be included in the annual budget.

As

proposed

in

http://accountingformanagement.com,

the

planning

process must occur at all levels. There are three stages of planning:

i.

Occurs at high level if setting strategy. Strategy involves creating

core

values,

mission

and

objectives

which

organizations need to invest their time and money to develop one. ii.

Moves to broad-based thought about how to establish an optimum position to maximize potential for realization of goals

iii.

Planning must be undertaken from the perspective of thoughtful consideration of financial realities and constraints and anticipated monetary outcomes. Budget is one of the essential part in planning that outlines the financial plan for the organization.

f. Evaluation Cost that is incurred in any process of managerial accounting has to be evaluated, both future and in the long run and must be weighed against anticipated benefits. Evaluation can also be done on the impact of the operations to the employee behaviour and activity. Behavioral changes

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Accounting for Business Decision Making (BMAC5203) and expectations will also be changed when the management attempts to introduce, redesign and enhance the operation performance.

g. Controlling

As a financial controller in an organization, he/she must ensure that the budget allocated must be followed. Managers must request for feedback to ensure the budget are used on track. Various teams or units are to produce reports to be compared and analyzed on the usage of the budget.

Question 2

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Accounting for Business Decision Making (BMAC5203) 2(a)(i)

Activity Machine operation s & maintena nce Machine setups

Electric power

Activi ty cost pool

Cost driver

Cost driver quant ity

Po ol Ra te

P

Cost drive r qtty for prod 1920 0 3360 0 2160 0

H

960

D

1440

P

960

86400 19200 0 28800 0 19200 0

H

1200

16800

D

2400

33600

P

P

1800 1920 00 2400 00 1680 00

25200 15360 0 19200 0 13440 0

H

480

D

960

P

1200

67200 13440 0 16800 0

Prod uct H

192,0 00

440,0 00

49,00 0

Machine hours

Setup hours

Kilowatt hours

48,000

2,200

3,500

4

200

14

D

H Materials handling

Quality control

320,0 00

252,0 00

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Pounds

No.of inspectio ns

400,00 0

1800

0.8

140

D

Activi ty cost for prod uct 76800 13440 0

Prod line volu me 2400 0 2400 0 1200 0 2400 0 2400 0 1200 0 2400 0 2400 0 1200 0 2400 0 2400 0 1200 0 2400 0 2400 0 1200 0

Activit y cost per unit (RM) 3.20 5.60 7.20 8.00 12.00 16.00 0.70 1.40 2.10 6.40 8.00 11.20 2.80 5.60 14.00

Accounting for Business Decision Making (BMAC5203)

2(a)(ii)

Direct material Direct labor Supervision (0.10x Direct labor cost) Total direct cost per unit

Home 24.00 18.00

Delux e 30.00 30.00

Pro 36.00 40.00

1.80

3.00

4.00

43.80

63.00

80.00

3.20 8.00 0.70

5.60 12.00 1.40

7.20 16.00 2.10

6.40 2.80

8.00 5.60

11.20 14.00

21.10

32.60

50.50

Manufacturing overhead (based on ABC calculation) Machine operations & maintenance Machine setup Electric Power Materials handling Quality control Total overhead cost per 6 | Page

Accounting for Business Decision Making (BMAC5203) unit Total product cost

64.90

95.60

130.50

2(b) Home Selling Price (RM) Product cost (RM) Contribution

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Deluxe

Pro

80.00

120.00

160.00

64.90

95.60

130.50

15.10

24.40

29.50

Accounting for Business Decision Making (BMAC5203) Limiting factor = machine hours

0.80

1.40

1.80

15.10/0.8 0

24.40/1. 40

29.50/1. 80

18.88

17.43

16.39

1

2

3

Contribution per limiting factor (contribution / limiting factor) Production Rangking

Number of machine hours = 48,000 hours The company should optimize the machine to produce the product that gives contributes more per limiting factor, which is according to the product ranking mentioned above.

Therefore, the company will first produce Home module with the amount of 24,000

units:

24,000 x 0.80hours = 19,200 hours needed

To optimize the balance available machine hours= 48,000 -19,200 =28,800 hours

To produce Deluxe model requires: 24000x 1.40hours = 33,600hours

With the balance of 28,800 hours available, the number of Deluxe model can be produced: 28,800 ÷1.40hours =20571.42857 8 | Page

Accounting for Business Decision Making (BMAC5203) = 20,571 units Since the production of Deluxe model has used up the available machine hours, therefore the company will not produce any units of Pro Model. As a conclusion, the company will produce: 1. Home Model 24,000 units 2. Deluxe Model20,571 units 3. Pro Model

0 units

Question 2(c)

Home Direct material Direct labor ( x 50% overtime premium) Supervision (0.10x Direct labor cost) Total direct cost per unit

Deluxe

Pro

24.00

30.00

36.00

27.00

45.00

60.00

2.70

4.50

6.00

53.70

79.50

102.00

Manufacturing overhead (based on ABC calculation)

Machine operations & maintenance

3.20

5.60

7.20

Machine setup

8.00

12.00

16.00

Electric Power Materials handling

0.70

1.40

2.10

6.40

8.00

11.20

Quality control

2.80

5.60

14.00

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Accounting for Business Decision Making (BMAC5203)

Total overhead cost per unit

21.10

32.60

50.50

Total overhead cost per unit (x 20%manufactu ring support cost)

25.32

39.12

60.60

79.02

118.62

162.60

Home Selling Price (RM) Product cost (RM)

Deluxe

Pro

80.00

120.00

160.00

79.02

118.62

162.60

Contribution

0.98

1.38

-2.60

Limiting factor = machine hours

0.80

1.40

1.80

0.98/0.80

1.38/1. 40

-1.44

1.23

0.99

-1.44

Contribution per limiting factor (contribution / limiting factor)

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Accounting for Business Decision Making (BMAC5203) Since the company has fully produced Home Model, therefore, the additional machine hours will be used to produce Deluxe model and Pro model.

Production ranking:

1. Deluxe 2. Pro

Number of machine hours = 28,800 hours + 8000 hours = 36,800hours

Since the company has produced 20,571 units earlier, therefore, the company will maximize the additional machine hours by producing the balance of 3429 units.

24,000 -20,571 unit =3,429 units

Assuming that the additional machine hours are fully utilized to produce both models, the balance after the production of Deluxe model will be used for producing

Pro

Model.

Therefore:

36,800 hours – 33,600 hours [24000 of Deluxe model fully produced x 1.4 machine hours] = 3200hours ÷ 1.8 machine hours [machine hours for Pro model] = 1,777 units of Pro model

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Accounting for Business Decision Making (BMAC5203) From the table above, it illustrated that Deluxe model has positive contribution while Pro model has negative contribution. Therefore, Petrol Drill should not produce Pro Model under overtime premium.

The

number

of

machine

hours

to

the

company

to

work

overtime:

3429 units x 1.4 machine hours = 4801 hours

Question 3 a. Budgetary slack being defined by Hilton, R.W in his book “Managerial Accounting” as difference between the revenue or cost projection that a person provides and a realistic estimate of the revenue or cost. In a study done by Ramdeen c. et al (2007) , Williamson (1964) stated that managers try to control the budget process by introducing slack into their budget. Another author, Onsi (1973) stated that this slack represents either the amount of additional resources managers purposely construct in the budget, or the amount by which they wittingly understate productive capability. In the study, it also mentioned that managers built slack in their budgets as means of protecting their personal interest and it was rational economic behaviour for them to do so (Lowe & Shaw, 1968). The main purpose that managers build slack in the budgets is to increase their payoff chances. It was proposed by Schiff and Lewin (1970) that if subordinates perceive that their compensation depends on budget achievement, they might aim to have slack in

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Accounting for Business Decision Making (BMAC5203) their budget. The authors also find that the management can and does create slack to achieve attainable budgets. In addition, it secures resources for furthering their personal goals and desires. By doing so, it may give the managers to access to private information and it may leads to an increase in budget slack. b. (i) Cash collections for 4th quarter Cash Receipts (RM) October November December 1,300 9,000 1,950 3,500 7,500 1,625 5,600 12,000 9,800 13800 15,050 23,425

Sales (RM) August September October November December

10,000 15,000 12,500 20,000 35,000 Total

(ii) Cash disimbursement for 4th quarter

October

Cash disimbursement (RM) November December

January

Receipts Sales

13,800

15,050

23,425

0

Total

13,800

15,050

23,425

0

Payments

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Accounting for Business Decision Making (BMAC5203) Cash (20% paid in month of purchase, 2% discount) October November December

Balance b/f Surplus/Deficit Balance c/f

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4,000 6,000 5,000

784

3,216 1176

784

4392

4,824 980 5804

13,016 13,016

13,016 10,658 23,674

23,674 17,621 41,295

4,020 4020

Accounting for Business Decision Making (BMAC5203)

Question 4 (PART A)

a.

Volume Manufacturing cost Direct materials Direct labor Variable overhead Fixed overhead Total

1

2

3

Budget

Actual

Cost variance [1-2]

90,000

75,000

180,000 900,000 450,000 54,000 1,584,000

156,000 835,000 360,000 60,000 1,411,000

24,000 [F] 65,000 [F] 90,000 [F] -6,000 [UF] 173,000 [F]

From the report above, Fruity Bhd had compared the budget and actual manufacturing cost for the month ending 31 May 2009. The estimated volume for the month is 90,000 units while the actual amount produced is 75,000 units. From the comparison that they have made based on the units estimated to be produced and the actual amount produced, three manufacturing cost are favourable which are direct materials, direct labour and variable overhead. However, the calculation should not be made by comparing the estimated volume with actual volume. It doesn’t reflect the difference spending of each activity. Therefore, we have to apply flexible budgets to get the correct cost variance.

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Accounting for Business Decision Making (BMAC5203)

b. 1 Standard cost per unit (budget cost/unit)

2

3

Budget

Flexible [1 x 3]

Volume Manufacturing cost

4

5

Actual

Cost varian ce [2 - 4]

90,000

75,000

75,000

2.00

180,000

150,000

156,000

Direct labour Variable overhead Fixed overhead

10.00

900,000

750,000

835,000

5.00

450,000

375,000

360,000

24,00 0 65,00 0 90,00 0

0.60

54,000

Total

17.60

1,584,000

45,000 1,320,0 00

60,000 1,411,0 00

-6,000 173,0 00

Direct materials

6 New cost variance (75,000 units) [3 - 4]

-6,000 [UF] -85,000 [UF] 15,000[F] -15,000 [UF] -76,000 [UF]

From the report prepared above, it illustrated that the company has overspend from what they have estimated. They have overspend on direct materials with RM6,000 and direct labour with RM85,000. Hence, the total manufacturing cost in unfavourable with RM76,000.

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Accounting for Business Decision Making (BMAC5203) c.

A static budget is also known as master budget that is prepared by businesses at the beginning of the budget period. It incorporates expected values about inputs and outputs on a particular planned activity.

A flexible budget on the other hand is a budget prepared by business after the budget period has ended and it is been used to control overhead cost. Flexible budget uses actual output levels instead of budgeted output levels.

Even though static budget is suitable for planning, but it is insufficient for evaluating how well costs are controlled because the actual level of activity is unlikely to equal the planned level of activity.

Question 4 (PART B)

a. It is important to conduct cost variance analysis to identify which manufacturing cost being used inefficiently. This analysis helps managers in many ways. Certain times managers action may lead to the actual cost lower than what has been estimated, similar cost savings can be realized by repeating the actions in producing other jobs. If the situation is otherwise, the manager may take necessary actions to either eliminate or control them. By doing variance analysis, managers can better understand 17 | P a g e

Accounting for Business Decision Making (BMAC5203) what are the causes of the variances and correct them to reduce unnecessary expenses.

b. Standard costing

Direct Material

Direct labor

Standard Quantity (SQ) 2 gallons per can Standard Hour (SH) 0.5 hour per can

Standard Price (SP) RM2

Standard cost/unit (RM) 4

gallon Standard Rate (SR) RM15 hour

8

Actual Actual Quantity (AQ)

Direct material

Direct labor Actual Output

1)

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11000 gallons purchased and used Actual hour (AH) 3200 hours

Actual Price (AP)

Standard cost/unit (RM)

RM2.20 gallon Actual Rate (AR) RM14 hour Total

6,000 cans

Material price variance = [(SP-AP) AQ] = (SP x AQ) - (AP-AQ) = (2 x 11,000) - (2.20 x 11,000) = 22,000 – 24,200 = 2,200 [U]

24,200

44,800 69,012

Accounting for Business Decision Making (BMAC5203)

2)

Material usage variance = [(SQ of AO)-AQ] SP = [(2 x 6,000)] -11,000] 2 = [12,000 – 11,000]2 = 2,000 [F]

3)

Labor rate variance = [(SR-AR) AH] = (SR x AH) - (AR x AH) = (15x3,200) - (44,800) = 48,000 - 44,800 = 3,200 [F]

4)

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Labor efficiency variance = [(SH of AO) - AH] SR = [(SH x AO) - AH] SR = (0.5 x 6,000) – 3,200] 15 = 3,000 [UF]