Management Accounting in Geeta Plc - Assignment Example

Management Accounting: Geeta plc Module Supervisor Problem (a) Budgeted profit Budgeted sales – budgeted costs Budgeted sales = 2130 units × £ 15 = £ 31,950 Budgeted costs Direct material L10 If 1 kg = £ 1.55 0.6 × 2130 = 1278 kg =? = 1278 kg × 1.55 = £ 1980.9 Direct material L17 If 1 kg = £ 1.75 0.68 × 2130 = 1448.4 kg =? = 1448.4 kg * 1.75 = £ 2534.7 Direct labour If 1 hour = £ 7.20 (14 × 2130) ÷ 60 = 497 hours =? = 497 × £ 7.20 = £ 3578.4 Variable production overhead cost If 1 hour = £ 2.10 497 hours =? = 497 × £ 2.10 = £ 1043.7 Fixed production overhead cost = 497 × £ 9 = £ 4473 Therefore, the budgeted profit = £ 31,950 – (1980.9 + 2534.7 + 3578.4 + 1043.7 + 4473) = £ 18339.3 Actual profit = actual sales – actual costs Actual sales = 2100 × £ 14.50 = £ 30450 Actual costs = £ (1680 + 2793 + 3675 + 1260 + 4725) = £ 14133 Actual profit = £ 30450 - £ 14133 = £ 16317 The variance between the actual profit and budgeted profit = £ 18339.3 - £ 16317 = £ 2022.3 Below is a reconciliation statement reconciling the two profit figures RECONCILIATION STATEMENT Favourable (F) Adverse (A) £ £ £ Budgeted profits 18339.3 Sales material price variance 1050 Sales material quantity variance 258.3 (1308.3) Cost variances Material price variance L10 52.5 Material quantity variance L10 325.5 273 Material price variance L17 220.5 Material quantity variance L17 73.5 (294) Labour rate variance 105 Labour efficiency variance 252 (147) Variable overhead spending variance 157.5 Variable overhead efficiency variance 73.5 (231) Fixed overhead efficiency variance 252 Fixed overhead volume variance 63 (315) Actual profit 16,317 Variance workings Sales material price variance = (standard price – actual price) actual quantity = (£ 15 - £ 14.50) 2100 = £ 1050 A Sales material quantity variance = (budgeted units – actual units) standard margin = (2130 - 2100) (£ 18339.3 ÷ 2130) = £ 258.3 A Material price variance L10 = actual quantity (standard price – actual price) = 1050 (£ 1.55 – £ 1680/1050) = £ 52.5 A Material quantity variance L10 = standard price (standard quantity – actual quantity) = £ 1.55 (0.6 × 2100 - 1050) = £ 325.5 F Material price variance L17 = actual quantity (standard price – actual price) = 1470 (£ 1.75 – £ 2793/1470) = £ 220.5 A Material quantity variance L17 = standard price (standard quantity – actual quantity) = £ 1.75 (0.68 × 2100 - 1470) = £ 73.5 A Labour rate variance = actual hours (standard rate – actual rate) = 525 (£ 7.20 - £ 3675/ 525) = £ 105 F Labour efficiency variance = standard rate (standard hours – actual hours) = £ 7.20 ((14 × 2100) ÷ 60 - 525) = £ 252 A Variable overhead spending variance = actual hours (standard overhead rate – actual overhead rate) = 525 (£ 2.10 - £ 1260/ 525) = £ 157 A Variable overhead efficiency variance = standard overhead rate (standard hours – actual hours) = £ 2.10 (490 - 525) = £ 73.5 A Fixed overhead efficiency variance = budgeted fixed overhead – actual fixed overhead = ((£ 9 × (14 × 2130) ÷ 60)) - 4725 = £ 252 A Fixed overhead volume variance = (budgeted units – actual units) standard fixed cost per unit = (2130 - 2100) × £ ((9 × 497) ÷ 2130) = £ 63 A Problem (b) Causes of the above variances Material price variance The size of lots purchased. If the size is larger than the standard one, the actual price will be higher than the standard price. Loss or gain of of quantity discounts. If quantity discounts are gained, the actual price will be lower than the standard price and vice versa. Rush orders- This may result to buying materials at high prices. Substitute materials- They are usually acquired at higher or lower prices when compared to that of the original product. If the prices in the market are either higher or lower than anticipated Material quantity / usage variance Faulty / efficient machines- Faulty machines will lead to consumption of more quantities than expected and the reverse is true. Inferior / high-quality products- The usage rate will apply for the case of quality goods which will not be the case if the goods are inferior. Untrained / trained workers- trained workers’ material usage rate is likely to be standard. Poor supervision- This will lead to wastages hence higher usage rate than initially planned. Greater / lower rate of scrap than anticipated Labour rate variance Higher / lower rates than initially budgeted for- Higher rates will lead to higher costs. Higher / lower grades of workers than planned- Higher grades will lead to higher labour rates. Payment of unplanned bonuses / overtime- This will increase the labour rate leading to variances. Other factors like strikes, labour turnovers etc. Labour efficiency variance Faulty equipment will lead to a variance between the actual hours incurred and the planned standard hours. Poorly trained workers or highly trained workers- the latter will consume lesser hours than the standard hours unlike the poorly trained workers. Poor quality materials will affect the normal operation and will thus lead to more consumption of labour hours. Poor supervision will lead to abnormal behaviors from the workers hence production will need extra hours to complete. The attitude of workers- if positive; lesser hours, if negative; more hours Idle time is always negative / adverse and affects the labour cost. Fixed overhead variances If the cost of services used increases, these overheads will also increase. More economical use of services will automatically lower this cost. Overtime working and machine break downs raise the fixed overhead costs. Variable overhead variances Its causes are usually similar to those which affect the labour rate variance. Sales margin variances Lower / higher quality of products than anticipated- Higher quality will lead to an actual price that is more than the standard one and vice versa. Different market than that was initially planned for. Varying economic conditions e.g. an inflationary period leading to higher prices Faulty machines which will lead to lower actual units produced than the planned ones. Note: untrained workers, faulty machines, low grades of workers, poor supervision and low quality products have adverse effects because they cause more than one variance. Problem (C) ABC Costing 1This type of costing system assumes that activities cause costs (White, 2004). These activities include material handling, ordering, machining, assembling, dispatching, product scheduling etc.. But these activities are caused by the production of goods/products. The intention of this system is to assign costs to the products based on the products’ consumption of activities. The principal idea of ABC is to focus attention on what causes costs to increase. Therefore, the costs that vary with the production volume are traced to products using production volume-related drivers. Overheads that do not vary directly with output but with some other activity should be traced to products using transaction-based cost drivers. This is an ideal method of costing products because it adopts a realistic apportionment of costs to products unlike the traditional method. Traditional costing systems allow overheads to be related to products in rather more arbitrary ways hence it is considered a less accurate product costing method. It follows the steps below: First, identify the organizations’ major activities. Identify the cost drivers i.e. the factors that determine the size of the cost of an activity. These include number of orders, no of production runs, number of machine hours, number of dispatches etc. Form cost centers i.e. collect costs of each activity into cost centers/ cost pools. Assign the costs of activities to the products by applying the cost driver rates to the products. Importance of this system It gives a clear idea on the efficiency of the service departments. It allows comparison with externally provided services. It greatly discourages unnecessary actions/ services by some managers because they know they will be charged. Comparison between costing method and absorption costing The two costing systems apply a two-stage cost allocation process. They apply direct costs straight into the products. They also allocate overheads to the production cost centers/ cost pools. What makes ABC superior is the fact that unlike the traditional method which does have only two cost drivers (machining hours and labour hours), the system uses many cost drivers. One crucial application of ABC costing system is in cases where there is lack of relevant management information provided by the traditionally analyzed fixed overhead variances. If ABC was adopted in problem (a) above, it will affect the calculations slightly because it will apply a costing method of products based on the specific cost drivers. The resultant costing will be more realistic. Bibliography WHITE, L.2004. Why look at German Cost Management? Strategic Finance, Vol. 86, Issue 3, pp.6-25. Read More