Managerial Accounting - ABC Manufacturing Pty Ltd - Case Study Example

Managerial Accounting Name Date Course Table of Contents Table of Contents 2 Introduction 2 Discussion and analysis 4 Case study 1: ABC Manufacturing Pty Ltd 4 i). Cost of goods manufactured 4 ii). Income statement 5 iii). Current Asset 7 Case study 2: School Days Furniture Ltd 9 Scenario 1 9 Scenario 2 12 Conclusion 12 Bibliography 13 Introduction Management accounting provides detailed and disaggregated information about the products, individual activities, operations, tasks, divisions and plants (Burns, et al, 2013). The information generated is important to the managers within the organization. Confidential management decisions can be made based on the managerial accounting information. It is model-based and comprises of abstraction aimed at supporting the decision-making process. The managerial accounting information is also specific in nature. It is only generated based on the needs of the managers. Management information systems can also be used during the computation of management accounting information. The information is also used by the managers for the purposes of performing the control functions. Managerial accounting is also focused on three main areas of accounting. These include performance evaluation and analysis; cost accounting; planning and decision support (Burns, et al, 2013). Various calculations are carried out when dealing with managerial accounting concepts. Accounting standards have to be considered. ABC manufacturing Pty Ltd is a private corporation dealing with irrigation related products and services. The company requires some accounting information for decision making purposes. These include the cost of goods manufactured and current assets. School Day Furniture Ltd is a manufacturer of furniture sold to public school in Western Australia. The company also requires accounting information which includes sales budget, production budget, raw material purchases and direct labour budget. The paper discusses and analyses the managerial accounting concepts in relation to the two companies. Discussion and analysis Case study 1: ABC Manufacturing Pty Ltd i). Cost of goods manufactured The cost of goods manufactured is the expenses directly related to the production of goods. During the manufacturing process, cost of goods manufactured involves the cost of labour to manufacture the product, pre-manufactured components, raw materials, transportation costs and any other cost related to manufacturing and assembling of the products (Liapis, et al, 2014). As a manufacturer, ABC usually incurs the cost of manufacturing goods. The cost of goods manufactured is mainly based on the work in process completed. This includes cost of direct materials put into production, plus direct labour and overheads. ABC manufacturing Pty Ltd is a manufacturing company and it is involved a lot of processes during the production of the equipment. All the costs incurred during the production process must be accounted for. The following formula can be used for calculating the cost of goods manufactured: Cost of goods manufactured (COM) = Cost of beginning work-in-progress + Production costs – Cost of ending work in process At ABC Pty Ltd: Direct labour 42,000 Factory supplies used 16,800 Finished goods inventory November 30 68,800 Finished goods inventory October 31 72,550 Indirect labour 48,000 Raw materials inventory November 30 52,700 Raw material inventory October 31 38,000 Raw materials purchases 184,500 Work in progress inventory October 31 52,700 Work in progress inventory November 30 42,000 Cash 260,000 Advertising expenses 54,000 Sales Commission 40,500 Cost of goods manufactured (COGM) = Cost of beginning work-in-progress + Production costs – Cost of ending work in process =52,700 + [42,000 + 184, 500 + 16,800] - 42,000 = $ 254,000 ii). Income statement The income statement is important is determining the financial position of the business. Information from the financial income statement can be used for the purposes of determining whether be business is making profits or losses (Shah, et al, 2013). However, before the preparation of the income statement, some calculations have to be made and this includes the net sales and cost of goods sold. A net sale is the total of all sales minus any discount. Revenue is also an important aspect of the income statement. It is the income earned from the principal activities of the company. Income earned from the activities that not related to the core business activity is also considered as income. This may include the activities such as the disposal of the fixed assets. The distribution cost is the cost that is incurred as a result of delivering the goods to the customers in the market. The administrative expenses are also part of the income statement. This mainly involves the expenses incurred for running the operations of the company such as rent. The accounting period must also be highlighted clearly in the financial statement (Shah, et al, 2013). This is considering that organizations can develop income statement after specific period of time. The income statement is useful to the managers as it provides information about the financial position. The income statement information will provide the division with useful information that will be efficient as a result of informed decision making. The following formula can be used for the calculation of the cost of goods sold (COGS): COGS = Cost of goods manufactured + Opening finished goods inventory – Ending finished goods inventory. = 254,000 + 72,550 – 68,000 = $ 258,550 The net sales can be calculated by subtracting commission from the sales = 1,350,000 – 40,500 = $ 1,309, 500 Income statement ABC Manufacturing Pty Ltd November 2015 Revenues Net sales 1,350,000 Cost of Goods Sold 258,550 Gross profit 1,091,450 Operating expenses Advertising Expenses 54,000 Factory Utilities 10,200 Indirect Labour 48,000 Office Supplies Expense 1,600 Other Administrative Expenses 72,000 Prepaid Expenses 41,250 Rent—Factory Equipment 47,000 Repairs—Factory Equipment 4,500 Salaries 325,000 Total operating expenses 603,550 Net income 487,900 iii). Current Asset Current Asset is cash or any other assets that the company intends to convert into cash within the operating cycle of the asset. The operating cycle is considered as the time between the purchases of the raw materials and the sale of the actual product (James, & Michello, 2010). The current asset is usually presented in the balance sheet as it can be liquidated or turned into cash. The current assets can be highlighted in five major items in the balance sheet. The short term investment is considered as current asset as it can generate cash through trading, sale or held to maturity. Receivables also forms part of the current assets and it includes anything that is owed to the company by the consumers. Most of the customers may not pay the company immediately after the transaction has been completed and hence resulting to the accounts receivables. The inventories are also reported as current assets. This includes the raw materials as well as the products that are still works in progress. A proportion of the prepaid liabilities can also be considered as current assets (James, & Michello, 2010). At ABC Corporation, there are various types of current assets. The current assets are for the month of November and it can be converted into cash. The current asset can be used to measure the expected income that the company can generate incase it disposes the assets. The information about the liquidity of the company can be calculated through the use current assets together with other accounting variables. The current assets can be a source of money for the organization. Selling of some of the equipment may enable the company to finance other operations. The current assets of the company therefore highlight the cash held and assets that the company intends to convert into cash within the period. The following is a section for the current assets for ABC Corporation ABC Manufacturing Pty Ltd November 2015 Current Assets Accounts Receivable 275,000 Cash 260,000 Finished Goods Inventory, November 30 68,800 Finished Goods Inventory, October 31 72,550 Raw Materials Inventory, November 30 52,700 Raw Materials Inventory, October 31 38,000 Work In Process Inventory, October 31 52,700 Work In Process Inventory, November 30 42,000 Total current Assets 861,750 Case study 2: School Days Furniture Ltd Scenario 1 a). Sales budget July August September Sales units 5 000 6000 7500 Selling price per unit $200 110 110 Sales revenue $1 000,000 $660,000 $825,000 The sales unit for the months of July, August and September remain constant. This is the number of desks that the company intends to produce in accordance with its forecasts. To obtain the value of the sales revenue, the sales unit is multiplied by the Selling price per unit. The selling per unit in the month of August is $200. However, the selling price per unit in the staring the month of August reduces drastically to $110. The reduction in the selling price of each unit has negative impact on the sales revenue (James, & Michello, 2010). This has been highlighted in the calculations as the sales revenue in the month of August and September has reduced drastically. Despite the forecast indicating that a high number of units will be produced in the months of August and September, the sales revenue will be low. The sales revenue goes down when the unit price goes down while other factors of production remain constant. b). Production budget July August September Sales units 5000 6000 7500 Add: ending inventory 1200 1500 1 500 Total units required 6 200 7500 9000 Less opening inventory 1 000 1200 1500 Planned production 5 200 6300 7500 The sales units remain constant in the months of July, August and September. However, the ending inventory has to be considered in the production budget. During the production process, the division usually ends each month with enough finished goods to satisfy 20% of the following month’s sale. Therefore the enduing inventory has to be considered and added to the forecasted sales unit for each of the months. To obtain the value of ending inventory for a particular month, 20% has to be multiplied with the sales unit for the next month. The total units required for each month can be obtained by adding the sales unit to the ending inventory. The ending inventory can also be considered as the balance of the units carried forward from the previous month (Burns, et al, 2013). At the end of each month, there is usually enough wood remaining to cover 10% of the next month’s production requirement. To obtain the opening inventory values, the forecasted sales unit for each month has to be calculated be multiplied by 20%. The planned production values can be obtained by subtracting the opening inventory from the total unit required. The figure for the planned production is higher in order to ensure that the values for the next month equal the values that have been forecasted. In accounting, the opening as well as closing inventories has to be considered and accounted for. c). Raw materials purchases July August September Planned production 5 200 6300 7500 Raw material per unit 3 3 3 Raw material required for production 15 600 18,900 22500 Add ending inventory of raw materials 1 890 2250 2 700 Total requirements 17 490 21,150 19800 Less beginning inventory of raw materials 1 560 1890 2250 Planned purchases of raw material in meters 15 930 19,260 17550 Cost per meter $18 $20 $20 Planned purchases of raw material in dollars $286 740 $385,200 $351,000 When dealing with the raw materials for the manufacturing process, the planned production figures are utilized. This is to ensure that the material is enough to last to the next month. The raw material per unit which is 3 remains constant for all the three months. In order to obtain the value of the raw materials required for production, the planned production is multiplied by 3 which is the raw material per unit. The ending inventory for the month of July was obtained by calculating 10% of the raw material production for the next month which is August. This is because the company usually has enough wood remaining to cover 10% of the next month’s production requirement. The same calculation was also applied to obtain the figures for the month August and September. The total requirement for the month was obtained by adding the ending inventory of raw materials to the raw materials required for production. Since the division usually has 10% of the raw materials at the beginning of each month, the amount has to be determined and subtracted from the total requirements. The beginning inventory of raw materials is obtained by multiplying 10% to the raw materials required for production. The planned purchase of raw materials can be obtained by subtracting the beginning inventory from the total requirement. In the month of July, the cost of wood per meter was $ 18. To obtain the planned purchase of raw materials in dollars, the cost per meter is multiplied by the planned purchases of the raw materials. The cost per meter however increased starting August to $ 20. The increase in cost per meter increases the cost of raw materials by a wide margin. Scenario 2 d). Direct labour budget July August September Sales units 5000 6000 7500 Direct labour per unit 1.2 1.2 1.2 Direct labour hours required 6000 7200 9000 Cost per hour $25 $25 $28 Planned direct labour cost $150,000 $180,000 $252,000 In the calculation of the direct labour budget, the forecasted sales unit for the months remains constant. However, the direct labour per unit changes from 1.5 to 1.2 starting the month of July. To obtain the direct labour hours required, the sales unit is multiplied by the direct labour per unit. The cost per hour for the labour in the month of July and August is $25. However, starting from the month of September, the cost per hour increased to $28. To obtain the value of planned direct labour cost, direct labour hours required is multiplied by the cost per hour. A sharp increase in the planned direct labour cost is experienced in the month of September. This can be attributed to the cost per hour. An increase in the cost per hour is likely to increase the total cost of labour (Burns, et al, 2013). Conclusion In conclusion, it is evident that the managerial accounting concepts play an important role in planning. The managerial accounting concepts provide useful information that can be used by the managers to make operational decisions. The managerial accounting concepts can be used to establish the cost of goods manufactured at ABC Manufacturing Pty Ltd. It is evident that other variables have to be considered which includes production costs, cost of ending work in progress and cost of beginning work-in-progress. The income statement plays an important role in highlighting the financial position of the company. It is evident that the current assets involve the property that the company intends to convert into cash. The cash being held by the company is also considered as current assets. It is evident that the variations in factors of production have direct effects on the finances of the company. It is also evident that the changes in selling price per unit have negative impacts on the revenue generated by a company. An increase in the cost of labour also affects the amount of revenue that the company can generate. The management can make decisions to counter the negative effects of variations in the factors of production based on the management accounting information. It is evident that the concepts of managerial accounting ensure that all the activities within the organization are accounted for. It is evident that managerial accounting concepts can influence the success of the organization. Bibliography Burns, Q, et al, 2013, Management Accounting, McGraw-hill, London. Liapis, K, et al, 2014, Commercial Property Whole-life Costing and the taxation environment, Journal of Property Investment & Finance, 32(1), PP 56-77. Shah, S, et al, 2013, International Reporting Standards and the value relevance of R&D expenditures: Pre and Post IFRS analysis, International Review of Financial Analysis. Vol 30: pp158-169. James, K, L, & Michello, F, A, 2010, Pro forma versus GAAP reporting: An examination of differences in investor perceptions, Journal of Finance and Accountancy, 2, 1-16. Read More