Administration Techniques in Management Accounting - Assignment Example

Management accounting By Geeta plc recorded the following actual results for Product Geeto for the last month: Actual ($) Budgeted ($) Sales 30450 30885 Cost of goods sold Direct materials 1050 1981 Direct labour 3675 3578 Direct overheads 1260 1044 Fixed overheads 4725 4473 10710 11076 Trading profit 19740 19809 The budget profit per unit sold was expected to be as follows ($) Standard selling price 14.50 Production cost Direct materials 0.6 kg@ 1.55…………0.93 Direct labour 0.23 hrs@ 7.2……….1.68 Direct overheads 0.23 hrs@ 2.1………0.49 Fixed overheads 0.23 hrs @9.0……….2.1 5.2 Budgeted profit 9.3 The sales and production had been set at 2130 units but only 2100 units were produced and sold at a price of 14.50 per unit. Actual inputs and cost incurred were as follows 1050 kg of materials purchased at 1.6 per kg 525 hours were paid at 7 per hour Variable overheads incurred 1260 Fixed overhead incurred 4725 We are required to prepare a statement that reconciles budgeted profit with actual profit for Product Geeto for the last month. You should calculate variances in as much detail as allowed by the information provided (a) MPV = AQ (AP-SP) MUV = SP (AQ-SQ) 1050(1.6-1.55) 1.55(1050-1260) = 52.5 (u) =325.5 (u) (b) LRV =AH (AR – SR) LEV=SR (AH – SHP) 525 (7 – 7.2) 7 (525 – 490) 105 (f) 245(u) c. VOEV= AVOH- (AH * VOAR) VOEV = VOAR (AH – SHP) 1260 - (525*2.1) 2.1 (1260 – 490) 157.5 (u) 1617 (u) (d) FOEV = AO (AFO –BFO) FOEV= FOAR (AP – BP) (4725 -4473) 2.1 (2100 – 2130) 252 (u) 63 (u) (e) SMPV = AQ (ASP – SSP) SMQV =SSM (AQ – SQ) 2100 .5 – 14.5) 9.3 (2100 – 2130) 2100 (f) 279(u) PROFIT RECONCILIATION STATEMENT Budgeted profit 19809 Add: SMPV 2100 LRV 105 Less: MPV 52.5 MUV 325.5 LEV 245 VOEV 157.5 VOEFV 1617 FOEV 252 FOEFV 63 SMQV 279 ACTUAL TRADING PROFIT 19740 B. MPV Material cost variance occurs due to real material cost differing with the standard material cost. This may be influenced by rise or fall in flight charges, cost of materials and change of supplier. MUV . This variance occurs due to material usage differing from material used differing from material allowed from actual output, it is influenced by; increase or decrease in units produced. LRV This variance due to the actual wage rate paid per hour differing from standard wage rate allowed for the actual work done. This may be due to a rise in wage rate payments or change in number of working hours (Drucker, 1999). LEV This occurs due to actual hours used by production workers differing from the allowed for actual output. This is caused by change in working hours of the employees or change in number of units produced. VOEV (e) This is the portion of overhead cost variance that arises due to the actual variable overheads differing from the allowed variable overhead. This arises when the company uses more time to manufacture the product due to defects in production. VOEV (f) This variance arises due the efficiency the allowed production differing from the actual. This may be as a result of improved technology and therefore improved efficiency. SMQV This arises due to actual number of units sold differing from the budgeted number of units at standard sales margin per unit this may be due to increased taste and preference of consumers, or increase in quality and advertisements. SMPV SMPV arises as a result of real selling charge differing from the standard selling cost. This is influenced by prices of competitors, demand for the product or even the price of compliments to the product. C. Activity Based Costing (ABC) With ABC, a corporation can decisively approximate the cost essentials of whole products, activities and services. That may assist enlighten a companys decision to either: (Turney, P 2005) recognize and get rid of those products and services that are unbeneficial and bring down the prices of those that are high-priced categorize and eradicate manufacture of service processes that are unproductive and assign processing concepts improve the very same product to better yields Traditionally, overheads have been absorbed to products based on direct labour hours used direct labour cost machine hours utilized or number of units produced. This traditional method of absorbing overheads emerged when factor overhead constituted a small proportion of the manufacturing cost. There was an assumption of a linear relationship between the volume of production and the use of this activity basis. However overheads have recently grown significantly as a proportion of production cost in a decline in direct labour cost and the computerization of the production or manufacturing systems. Consequently, the relevance of continued use of the traditional overhead costing method has been watered with the emergence of new methods of production such as robotic technologies. Flexible manufacturing systems, computer manufacturing kaizen costing and activity based costing. Activity based costing is the cost attribution to cost units on the basis of the benefit the product receives from the activity performed such as ordering, material receiving and handling, setting up machines, scheduling of jobs or assurance of quality. ABC argues that overheads are incurred because of the activities being performed to support production, thus in order to achieve equitable distribution of overheads to products management must activities are performed in the process of manufacturing. An activity is a discrete unit of a firm which a inputs and outputs whereas a cost driver is measureable that is, what causes the cost to be incurred. Therefore activities are cost drivers because the more they are performed the more the indirect cost are driven upward.( Friedman) ABC is performed in a number of steps: 1. Activities are analyzed and associated to departments where they are performed and classified under broad headings. (In order to identify what is happening in each department) such analysis would identify some activities that do not add value to the product being produced so they can be changed or done away with. 2. Determine and cost the cost drivers by considering the total activity cost and the amount of the activity that was performed. This is done through dividing the total activity cost for the period by total quantity of activity performed for the period. This will give the cost per activity. Overheads are then absorbed to products based on the amount of the activity consumed by the product. Once the above is done the overheads would be spread to different products equitably according to the proportion in the overheads contribution. Benefits •ABC provides a extra accurate technique of quotation of products. •It allows for a improved and more all-inclusive understanding of overheads and what brings them about. •It makes expensive and non-value adding activities more noticeable, so allowing managers to spotlight on these areas to diminish or eliminate them. •It supports other administration techniques such as incessant development, scorecards and presentation management (Mowen, 2006). References Allott, A 2004. Activity Based Management can work for your company, CIMA Insight. Friedman, A and Lyne, S 2010. Success and failure of activity-based techniques: a long-term perspective. London: CIMA Publishing. Hansen, D and Mowen, M 2006. Cost management: accounting and control, Mason, OH: London: Thomson/South-Western. Kaplan, R and Anderson, S 2007. Time-driven activity-based costing: a simpler and more powerful path to higher profits, Boston, MA: Harvard Business School. Turney, P 2005. Common cents: how to succeed with activity-based costing and activity-based management, London: McGraw-Hill. Read More