The Role of Naser Saad, the Management Accountant of Halfords Pty Ltd - Assignment Example

Managerial accounting ID: Contribution of each member Member The project concentrates on two important methods of evaluating the sell and cost price of any product i.e. absorption and variable costing. These two methods are significant for this project as it will help the team members to evaluate the most valuable method for calculating the cost and sell price for Halford Pty Ltd. The main contribution of Member 1 in this propjet is to understand the calculations pertaining to two methods. Then the member has calculated the sell and cost price of the bikes of the company. Member 2 The second member of the team has taken the decision regarding the best method of calculating the sell and cost price of the bikes for Halford Pty Ltd. The decision is based on the calculations that are done by the first member. However, the decision taken by the second member is based on the assumptions, which are also depicted in the project. Member 3 The third member has prepared the income statement for the company by applying both the methods i.e. variable and absorption costing. The income statement has helped the member to examine the profit generated by the company by applying both the methods. Member 4 The fourth member has helped in preparing the reconciliation statement for the company. Member 5 The main contribution of the fifth member is to make conclusion by summarizing the results of the six questions. Table of Contents Contribution of each member 2 Question 1 5 Question 2 6 Question 3 7 Question 4 8 Question 5 9 Question 6 9 Conclusion 10 Reference List 11 Introduction The report aims at answering six questions that are done by assuming the role of Naser Saad, the management accountant of Halfords Pty Ltd. The two methods that are employed for analyzing the financial condition of Halford Pty Ltd are absorption and variable costing methods. These methods are applied in order to determine the cost and selling price of the bikes. Question 1 The selling and cost price of the bikes are determined with the help of both the methods such as absorption and variable costing. The absorption costing method is suggested by Ahmed Almarri and variable costing by Sara Al-Emadi. The result of both the methods is compared in order to determine the best method for setting the price of the bikes. Cost price per unit Absorption costing Variable costing   2013 2014   2013 2014 Direct Material 50 50 Direct Material 50 50 Direct Labor 30 30 Direct Labor 30 30 Direct manufacturing overhead 24 30 Direct manufacturing overhead 24 30 Fixed manufacturing overhead 7 13 Fixed manufacturing overhead     Cost price per unit 111 123 Cost price per unit 104 110 Selling price per unit Absorption costing   Variable costing   2013 2014     2013 2014 Sold bikes 2500 2000   Sold bikes 2500 2000 Selling price 333000 295200   Selling price 312000 264000 Selling price per unit 133 148   Selling price per unit 125 132 From the above table, the following results can be deducted. There are two scenarios where the cost and selling price of the bikes are determined with the help of two methods such as absorption and variable costing. Absorption costing refers to the costing method, where the manufacturing costs are absorbed by the number of units produced (Kinney and Raiborn, 2012). Cost of finished product includes direct labor, direct materials and also the manufacturing and fixed overhead. It is also referred to as full costing. This particular costing can be compared with direct or variable costing. However, in case of variable costing, fixed manufacturing overhead costs are not absorbed by manufactured products. These costing methods are employed by the companies in order to take decisions regarding pricing the products (Weygandt, Kimmel and Kieso, 2010; Kinney and Raiborn, 2012). If Halford Pty Ltd employs absorption costing to their business, then the cost price per unit and selling price per unit of the bikes are $111 and $123 respectively. Hence, the profit per unit is $22 in case of absorption costing. However, if the company uses variable costing, the cost price per unit and selling price per unit of the bikes are $123 and $148 respectively. Here, the profit per unit is $25. Thus, it can be concluded that Halford Pty Ltd should use absorption costing in order to incur higher profit. Therefore, it can be stated that the prediction of Ahmed Almarri in selecting the costing method is ideal for the company to incur adequate profit. Question 2 Both the methods of costing can be used for decision making purpose in an organization. Variable costing method is an appropriate technique for ascertaining the manufacturing overhead of the produced product that is incurred by the company over the period of time. This type of costing helps in eradicating the issues that cannot be identified by absorption costing. The main problem of such costing is that it allows the income to rise as the production increases (Kinney and Raiborn, 2012). The absorption costing assists the management to carry forward the cost to the next year’s income statement and thus it inflates the profit artificially. Absorption costing is generally used for internal reporting purposes and helps in providing proper decision to the management. However, variable costing is employed for preparing external reports (Jackson, Sawyers and Jenkins, 2009). The main assumptions underpinning both the methods are as follows: 1) Absorption costing: It is method of costing a product, where the variable and fixed cost is apportioned to cost centers, where they are absorbed at the absorption rate. The main assumption of this method is that the purchasers or consumers are not price sensitive in taking any decision regarding any purchase (Jackson, Sawyers and Jenkins, 2009). 2) Variable costing: It helps in determining the effect of fixed costs on net income. The standard costing and flexible budgets is quite similar to the variable costing system (Jackson, Sawyers and Jenkins, 2009; Garrison, Noreen and Brewer, 2003). In case of Halford Pty Ltd, variable costing will help in determining the cost price and the selling price of the bikes, which will assist the management to determine the appropriate costing method for the organization. Question 3 The marketing managers, Sara Al-Emadi, has challenged the management accountant to explain how the net operating profit of the organization is affected by the cost and selling price of the bike that is calculated with the help of both the methods i.e. absorption and variable costing. In order to calculate the operating profit of Halfords Pty Ltd with the help of both the methods, the income statement is developed. The following table depicts income statement of Halsford. Income statement (using absorption costing)   2013 2014 Sales 333000 295200 (-) Cost of goods sold 276667 246667 Gross Profit 56333 48533 (-) Sales and administrative expense (V+C) 22500 22500 Net Income 33833 26033 Income statement (using variable costing)   2013 2014 Sales 333000 295200 (-) Cost of goods sold 276667 246667 Gross Profit 56333 48533 (-) Sales and administrative expense (variable) 12500 12500 Net Income 43833 36033 The tables highlighted the net income that can be incurred by Halsford Pty Ltd if it uses the selling and cost price as calculated by the two methods. When the operating profit of both the methods is considered, it is observed that variable costing method is more profitable than absorption costing. However, in Question 1 it is observed that the most apporpriate method for the company is absorption costing. Hence, it can be stated that the units of production is significant for calculating the profit of a company. The profit in case of variable cost is higher than absorption costing as the cost of the manufacturing units is absorbed in the process. It can be concluded that variable costing will be profitable for Halsford Pty Ltd as the cost of manufacturing is not absorbed by the number of units just as absorption costing. Hence, it is an ideal method for ascertaining cost of product in an organization. The selling price of the bikes of Halsford Pty Ltd is assumed to be 120% of the product cost hence; the product has played a significant role in calculating the profit of the company. The cost of goods sold and sales are the two most important figures in the income statement, which directs the company operations and highlights whether the company is successful (Kinney and Raiborn, 2012). Question 4 Absorption costing is defined as the method that treats the cost of production as the product costs and does not consider whether they are fixed or variable. The cost of product calculated on per unit basis takes into account direct labour, direct materials and both the fixed and variable overhead. The costing helps in allocating the overhead cost (fixed) to each of the units of the product along with manufacturing cost (variable) (Bhimani, Datar and Foster, 2002). Moreover, the costing system can be compared to variable costing method. In this method, the cost of production of those products is considered whose output is treated as the product cost. The elements include direct labour, direct material and variable portion of the manufacturing overhead (Garrison, Noreen and Brewer, 2003). The fixed manufacturing cost is not considered as the product cost for this method of costing, instead it is observed to be period cost. The cost of goods sold considered for this method does not contain any fixed overhead cost. Moreover, the variable costing is also referred as the direct or marginal costing. Reconciliation statement   2013 2014 Net operating income under variable costing 46333 38533 Fixed manufacturing overhead 10000 10000 Net operating income under absorption costing 33833 26033 The income statement developed under the guidelines of absorption and variable costing identifies different net income data. The reason behind this difference is observed to be the exclusion of fixed manufacturing cost while calculating the net profit under variable costing. Question 5 According to the Quotation N25 – order, which offers $52,500 for selling 500 bikes, is examined in order to evaluate whether it is profitable for the company to undertake the pricing strategy. The selling price of each bike according to the quotation = $52,500/500 = $ 105. The following table draws a comparison between the results obtained from two methods and quotation: Absorption costing Variable costing Quotation $148 $132 $105 (=52500/500) From the above table it can be concluded that the quotation is not at all profitable for the company as they are not using any costing for determining the cost price of the products. Question 6 From the above calculations pertaining to the cost price and sale price of the bikes, it can be observed that both the methods have its own significance. However, one of the two methods is apporpriate for undertaking any pricing decisions and another is suitable for determining the profit of the company. The absorption costing method is ideal for pricing decision as the profit is higher in this case when compared to results of variable costing. However, after determining the operating income of the company by using both the methods, it is observed that the profit obtained from variable costing is higher than that of absorption costing. Hence, the company should use variable costing while reporting profit to the stakeholders. Conclusion The main goal of the project is achieved by highlighting on the methods that are apporpriate for the pricing decision making and profit determination. It is observed that absorption costing should be employed for determining the cost price of the bikes, whereas, the variable cost will be used for determining the profit that will be reported to the stakeholders. Reference List Bhimani, A., Datar, S. M. and Foster, G., 2002. Management and cost accounting. Harlow: Financial Times/Prentice Hall. Garrison, R. H., Noreen, E. W. and Brewer, P. C., 2003. Managerial accounting. New York: McGraw-Hill/Irwin. Jackson, S., Sawyers, R. and Jenkins, G., 2009. Managerial accounting: A focus on ethical decision making. Connecticut: Cengage Learning. Kinney, M. and Raiborn, C., 2012. Cost accounting: Foundations and evolutions. Connecticut: Cengage Learning. Weygandt, J., Kimmel, P. and Kieso, D., 2010. Managerial accounting: Tools for business decision making. New Jersey: John Wiley & Sons. Read More