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Management Accrounting

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Sample on Management Accrounting

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Introduction

Management accounting can be defined as the process of controlling, analysing, assessing and evaluating organisational processes in order to determine that company is performing well or not. It is very beneficial for the internal stakeholders such as managers, directors etc. to form strategic decisions for the betterment of the business entity (Agyemang and Broadbent, 2015). For all the enterprises it is very important to conduct management accounting regularly so that actual position can be evaluated. This report is based on Fitzgerald Limited in which a consultant is responsible to analyse profitability of the organisation. For this purpose different costing techniques such as absorption and activity based techniques are going to be discussed under this assignment. Recommendations regarding appropriateness of activity based costing is also provided in this report.

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A. Determination of profit per unit of each product using current overhead absorption system

Absorption costing: This method is used by businesses like Fitzgerald Limited in order to analyse that organisation is able to cover all its costs from the revenues that are spent on the production. It depends upon the companies the system they choose to absorb the overheads. Fitzgerald Limited has selected direct labour hours to cover all of them (Absorption costing,2019). Main purpose of using this method is to make sure that all the production related expenses are absorbed by the company or not. It is very beneficial for the managers as it may guide them to assess that enterprise is in a profitable situation or in a loss situation. It helps to analyse all the fixed costs that are involved in the manufacturing process of different business units. The calculation is as follows:

Formula: Overhead absorption rate = Overheads / labour cost *100

Total absorbed overhead / profit= Labour cost per unit * absorption cost *100

Particular

Tesla

Volta

Alpha

Overheads

570000

570000

570000

Labour cost (labour hour * labour rate * Production)

36000

108000

168000

Over head absorption cost

1583.00%

528.00%

339.00%

Labour cost per unit(labour hour * labour rate)

30

54

42

Total absorbed overhead / profit

474.9

285.12

142.38

Calculation of cost per unit:

Particular

Tesla

Volta

Alpha

Production

1200

2000

4000

Direct material

110

91

124

Direct labour

30

54

42

Machine hours

48

36

60

Variable overheads:

 

 

 

Cost per unit

188

181

226

Production cost (Production * per unit cost)

225600

362000

904000

Other overheads

 

 

 

Machine maintenance

66667

50000

83333

Machine set up  

7273

12121

60606

Purchasing

9935

22078

137987

Material handling

22500

22500

75000

Total cost

331975

468699

1260926

Absorption of overheads:

Particular

Tesla

Volta

Alpha

Production

1200

2000

4000

Selling price

220

298

315

Total sales

264000

596000

1260000

Less:

 

 

 

Total cost

331975

468699

1260926

Over / under absorbed

-67975

127301

-926

B. Calculation of profits by using activity based costing technique

Activity based costing: It is a costing method which is used by the organisations to allot overheads to different activities that are performed by the company. These are allotted according to their requirements and the cost driver. Most of the indirect expenses are mobilised with the help of this technique (Herremans and Nazari, 2016). It is mainly used by the managers of Fitzgerald Limited to assign costs in more logical manner as compare to traditional method in which expenditures are assigned in simple mode. Firstly these are allotted to the activities that are the main or real cause of overhead (Activity based costing,2019). Calculation of profits using this approach is as follows:

Particular

Costs

Cost driver

Tesla

Volta

Alpha

Production

 

 

1200

2000

4000

Machine maintenance (4: 3: 5)

200000

Machine hours

66667

50000

83333

Machine set up (30: 50: 250:)

80000

Machine Setup

7273

12121

60606

Purchasing (180: 400: 2500)

170000

Purchase orders

9935

22078

137987

Material handling (150: 150: 500)

120000

Material movements

22500

22500

75000

Total

 

 

106375

106699

356926

Per unit cost of overheads (Total / production)

 

 

89

53

89

Calculation of profits:

Particular

Tesla

Volta

Alpha

Sales

220

298

315

Less: Costs

 

 

 

Variable cost

188

181

226

Production cost

83

53

89

Profit / loss

-51

64

0

C. (1) Analysis of profitability of different products of Fitzgerald Limited using two different costing techniques

While calculating profits of three different units of Fitzgerald Limited the consultant of the company has analysed that total absorbed overhead of Tesla, Volta and Alpha are 474.9, 285.12 and 142.38 respectively. Total cost for the production of there different units are 331975, 468699 and 1260926. It has been analysed that for Tesla theses are under absorbed with (67975). All the expenses of Volta are being absorbed from its revenues. Total profits for this unit are 127301.

Alpha remains neutral as all the expenses are absorbed from the sales. Overall profitability of Volts is high as compare to other two units of the company. Tesla is resulting in higher losses for the organisation and there is a possibility that the third unit may result in profits in upcoming period. It will be very beneficial for the enterprise as it may help to overcome all the losses and enhance the profitability (Horngren and Harrison, 2015).

While using activity based costing the consultant has observed that per unit cost of overheads for Tesla is 89, for Volts it is 53 and for Alpha it is 89. When profits are calculated with the help of this model then it has showed that the first unit is resulting in loss second is creating profits and the third one if neutral. The organisation neither having any profits nor losses on Alpha. Performance and profitability of Volta is very good, for third unit it is zero and for Tesla it is very bad because it is creating losses for the company(Dyckman and Zeff, 2014).

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C. (2) Comments of consultant on the views of directors

Management of Fitzgerald Limited is planning to change the attributing method of overheads costs of the organisation. Three different persons such as accountant sales and production director have provided their views on this concept. The consultant have asked to provide comments on their discussion. All of them have different concepts regarding the decision of managers and have provided their point of view about adoption of activity based costing. It is proposed by the management as the traditional method was not able provide information regarding actual position and status of the company. All the remarks of consultant are as follows:

For sales director:

Sales director is not agree for the implementation of this new concept. According to the administrator this method is waste of time and the tradition mode which is being used by the company from past few years is good as it is a simple technique. The consultant think that concern of the director is right but it is not appropriate because this method doesn't waste the time but help to write off all the costs properly. Activity based costing helps to distribute all the expenses to the related units in an appropriate manner (Laine and et.al., 2016). It is very important for the sales manager to analyse benefits of this technique so that the point of view regarding it can be changed as it is a very good method as it guides to assess highly and least profitable units for a business entity.

For production director:

Fitzgerald Limited's production director is not sure for the adoption of activity based costing as there is no issues in the traditional method which is labour cost. According to the consultant the point of view of the director is right but if calculations of both the methods are analysed then it can be assessed that labour method is showing that all the expenses are absorbed but the activity based costing is showing that only Volta is profitable for the company Tesla and Alpha are not (Massaro, Dumay and Garlatti, 2015). It means that second technique helps to analyse actual profitability of all the units. Information regarding cost behaviour can also be determined with the help of this method. As the director said that money and time can be saved if traditional method is used but on some point the consultant is not agree with this concept as it is not able to provide accurate information of cost. Activity based costing will help to analyse the actual profitability of Fitzgerald Limited because overheads are allotted on the basis of appropriate cost drivers.

For accountant:

According to the accountant of Fitzgerald Limited the traditional method of absorption which is based on labour hours is not able to provide accurate results. Activity based costing will help the organisation to recognise more cost centres which will be beneficial for the accounts department of the company. The Consultant has commented that accountant should be aware of its benefits so that all the directors can be convinced to adopt this model for the betterment of business entity (Laitinen, 2014). The old approach is based on the statutory external reporting requirements of companies act and is complaint with international financial reporting standards. If the mode of absorption is being changed by Fitzgerald Limited then more accurate results regarding expenses can be gathered and the actual profitability of the organisation can be analysed.

According to the consultant of Fitzgerald Limited all the directors should assess advantages of activity based costing as it can help to analyse profitability of all the units that are produced by the company. It will help in better decision making, sot management, track overheads, cost reduction etc.

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C. (3) Recommendation to the management

The consultant of Fitzgerald Limited has recommended to the management to implement activity based costing technique rather then the traditional method. From the calculations of two methods the consultant has analysed that the absorption system doesn't show the actual status of the company but the second technique guides to measure actual profitability of all the units that are manufactured by a business entity. It has been recommended by the consultant of the organisation because from both the models profits has been calculated. One is resulted in profits but the second one shows fluctuation in the income of three business units that are Tesla, Volta and Alpha.

As the organisation was using traditional absorption system which is based of direct labour hours and this method results inaccurate results that does not provide right information regarding profits of losses (Ozturk and Coskun, 2014). When there is no data regarding actual position of the enterprise hence the directors haven't taken any appropriate action against it. While using activity based costing method the consultant has assessed that Fitzgerald Limited is not in good condition because one of the production unit is in loss, second has higher profitability and the third one is neutral. If activity based costing technique will be used by the managers of the organisation then right decisions for the betterment of the company can be taken that may help to overcome the critical situations.

Conclusion

From the above project report it has been concluded that management accounting can be defined as the performance measurement tool. It guides managers and other internal stakeholders to formulate strategic decisions in order to enhance operational efficiency of the company. There are various type of techniques that can be used by management of organisations to assess profitability of different units that are manufactured by the enterprise. These are absorption and activity based costing. The first method is used to make sure that all the costs are covered from the revenues and second method is used to assign costs to the activities according to their requirements. Both of them helps to determine actual profitability of the company.

References

  • Agyemang, G. and Broadbent, J., 2015. Management control systems and research management in universities: An empirical and conceptual exploration. Accounting, Auditing & Accountability Journal. 28(7). pp.1018-1046.
  • Dyckman, T. R. and Zeff, S. A., 2014. Some methodological deficiencies in empirical research articles in accounting. Accounting Horizons. 28(3). pp.695-712.
  • Herremans, I. M. and Nazari, J. A., 2016. Sustainability reporting driving forces and management control systems. Journal of Management Accounting Research. 28(2). pp.103-124.
  • Horngren, C. and Harrison, W., 2015. ACCOUNTING: BSB110. Pearson Higher Education AU.
  • Laine, T., and et.al., 2016. Boundary subjects and boundary objects in accounting fact construction and communication. Qualitative Research in Accounting & Management. 13(3). pp.303-329.
  • Laitinen, E. K., 2014. Influence of cost accounting change on performance of manufacturing firms. Advances in Accounting. 30(1). pp.230-240.
  • Massaro, M., Dumay, J. and Garlatti, A., 2015. Public sector knowledge management: a structured literature review. Journal of Knowledge Management. 19(3). pp.530-558.
  • Ozturk, E. and Coskun, A., 2014. A strategic approach to performance management in banks: The balanced scorecard. Accounting and Finance Research. 3(3). p.151.
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