Cost And Management Accounting

Question: Discuss about the Cost And Management Accounting? Answer: STATEMENT OF COST PARTICLUARS ORIGINAL BUDGET FLEXED BUDGET ACTUAL BUDGET Direct material 480000 432000 454000 Direct Labor 240000 216000 17602.22222 Production overhead Variable 60000 54000 56000 Fixed 105000 94500 104000 Total Costs 885000 796500 631602.2222 iv) Total variances Variance Analysis FIXED OVERHEAD Absorbed Overhead = Actual Output*Standard Rate = 18000*5.25 = 94500 Fixed Overhead Volume Variance = Absorbed Overhead- Budgeted Fixed Overhead = 94500-105000 = -10500 Fixed Overhead Expenditure Variance= Budgeted Fixed Overhead-Actual Fixed Overhead = 105000-104000 = 1000 VARIABLE OVERHEAD Absorbed Variable Overhead- Actual Variable Overhead= (Actual Output* Standard rate)- Actual Variable Overhead = (18000*3)- 56000 = -2000 DIRECT MATERIAL VARIANCES Actual Material Cost = Actual Quantity*Actual Price = 113500*3.9 = 442650 Actual Quantity at Standard Price = Actual Quantity* Standard Price = 113500*4 = 454000 Material Usage Variance = Actual Quantity at Standard Price- Actual Material Cost = 454000-442650 = 11350 Standard Material Cost = Standard Quantity* Standard Price = 12000*4 = 48000 Material Quantity Variance = (Actual Quantity* Standard Price)-(Standard Quantity* Standard Price) = (113500*4)-(120000*4) = -26000 Material Price Variance = (Actual Price- Standard Price)*Actual Quantity = (3.9-4)*113500 = -11350 DIRECT LABOR VARIANCES Labor Cost Variance = ((Standard Cost/Standard Output)* Actual Output)- Total Actual Cost = ((240000/20000)*18000)-442650 = -226650 Labor Rate Variance = Actual Hours( Standard Rate- Actual Rate) = 17800(12-12.53) = -9434 Labor Efficiency Variance = Standard Rate(((Standard Hours/Standard Output)*Actual Output)-Actual Hours) = 12(((20000/20000)*18000)-17800) = 2400 (v) Note 1- Direct Material PARTICLUARS ORIGINAL BUDGET FLEXED BUDGET ACTUAL BUDGET Production Units 20000 18000 18000 Units Purchased 120000 108000 113500 Cost Per unit (Rs.) 4 4 3.9 Usage per unit of production 6 6 6 Total cost (Rs.) 480000 432000 442650 Note 2- Direct Labor PARTICLUARS ORIGINAL BUDGET FLEXED BUDGET ACTUAL BUDGET Production Units 20000 18000 18000 Total Hours Worked 20000 18000 17800 Cost per hour (Rs.) 12 12 12.52808989 Hours per unit 1 1 1 Total Labor Cost (Rs.) 240000 216000 223000 Note 3- Variable Production Overhead PARTICLUARS ORIGINAL BUDGET FLEXED BUDGET ACTUAL BUDGET Production Units (No.) 20000 18000 18000 Cost per unit (Rs.) 3 3 3.111111111 Total Cost Incurred (Rs.) 60000 54000 56000 Note 4- Fixed Production Overhead PARTICLUARS ORIGINAL BUDGET FLEXED BUDGET ACTUAL BUDGET Production Units 20000 18000 18000 Fixed Production Cost per Unit (Rs.) 5.25 5.25 5.777777778 Budgeted Fixed Production Overhead (Rs.) 105000 94500 104000 Working note: Direct Material 24 6kg* 4 per kg direct albour 12 1 hr# 12 per hr variable production overhead 3 budgeted fixed production overhead 105000 budgeted production 20000 units Actual: direct mat purchased and used 113500 kg 442650 Actual production 18000 units of X Direct labour 17800 hours 223000 Variable production overhead incurred 56000 fixed production overhead incurred 104000 (vi) The reason for material and Price Variances are a reduction in the per unit price of the materials purchased, and an increase in the per hour cost of labor. 1) Special selling price decisions Special pricing decision can be referred to be the fixation of a selling price in respect of a product or a service. The customers are charged based on the selling price for the product that is manufactured or the services that is being provided. Special pricing decisions are affected by the internal, as well as external factors (Needles Powers, 2013). Both financial, as well as non-financial issue arise when organization consider the special pricing decision. The financial issue are as follows: Variable cost When the special pricing decision is undertaken, it influences the cost of the product or the service. In this scenario, the cost of the product or the service is influenced. The variable cost is impacted considerably and the company needs to make provision for it (Needles Powers, 2013). It is an important element in pricing of the product and hence, comes under the financial issue. Costs The cost of the product or the service gets impacted. In turn, this leads to influencing the supply. When it comes to lower price, it leads to greater supply of the product. When the special decision-making leads to pricing of product below the cost it can lead to huge wastage of resources. Non-financial issues Customers Managers evaluate the special pricing problem through the vision of the customers. In, case of special pricing decision, there can be two problems. Firstly, if the price is enhanced it may lead to loss of the customer to a rival or the customer can vouch for a product that is less expensive in nature. Therefore, the pricing decision needs to be structured in an important manner otherwise; it may lead to decline in the number of customers. Competitors The reaction of the competitor also influences the pricing decision. The aggressive policy of the competitor forces a business to lower the prices. In this scenario, it becomes difficult to precede with the special selling price decisions. For a business, it is of paramount importance to understand the competitor action. Business cannot operate in isolation. It is therefore important that business must consider the domestic, as well as international competition. Special selling price decision is vastly influenced though this mechanism (Needles Powers, 2013). 2) Product mix decisions when capacity constraints exist. Product mix is an important factor that helps a company to enhance the reach and availability. It helps the company to attain better exposure. However, in case of capacity constraint it becomes difficult for the company to function smoothly. The capacity constraint puts a bar on the resources and therefore, stalls the progress. Both, financial, as well as non-financial issue can be stated in this regard. Financial issues Profit generation Profit generation becomes difficult when the product mix decision is done with the capacity being constraint. In this scenario, it becomes difficult to take a valid decision because there is limited capacity. Hence, profit generation becomes a big issue because the product mix decision will not fetch sufficient result (Horngren, 2011). Therefore, going by the product mix decision the alignment will be missing and hence not an appropriate one. Cost allocation It becomes difficult to allocate the cost of the product or the service when the resources are limited in nature. In this way the product, mix does not get a desired result and the company cannot diversify its products line. Cost allocation comes in the way because of the low level of capacity. This even devoid the company to grab further opportunities. Non-financial issues Devoid of Opportunity The company will not be able to grab the opportunity because under the theme of capacity constraint, the company will not be able to take product mix decisions. This will hamper the progress and will not lead to a strong action. It will become difficult for the company to stretch its line of activities and hence, the progress will be stalled. Growth The growth of the organization will be stalled when the product mix decision is taken under a limited capacity. In this scenario, it will be difficult to take a strong leap because the organization will face a crisis in many segments (Horngren, 2011). Therefore, the product mix decision will not be able provide a strong movement. Allocation of costs based on machine hours was simple and traditional but ABC has replaced the same as it can allocate costs in a more logic way. Firstly, it identifies all activities in an organization and secondly it gets the cost of every activity assigned to the products and services according to their actual consumption. ABC plays a very important role in costing as it helps the accountants to make an estimate of cost elements of entire products and services. In this way, those product or services that fetch very low profit or do not generate better yield can be successfully eliminated, thus increasing and improving the business effectiveness, as well as efficiency (Lanen et. al, 2008). In short, it is a very helpful management decision making tool, which ensures profitability of the business, and thereby increasing competition in the market. Allocation of resources to individual activities is ABB. It establishes relationship between the activities in an organization that incur costs and after that budget is allocated to each activity. There exists a higher refinement in cost planning when ABB is adopted. The main motive behind using this technique is to generate revenue and improve profits of the business and ABB allows the managers to have full knowledge of the processes of the company (Drury, 2011). Therefore, they can enhance the cost structure of the company when they wish to. Whether funds need to be allocated to or part of the business can be known and the management can even shift the allocation of funds from one part to another part of the business for greater emphasis. It means the costs of the activities become much more transparent for the management and the income generating areas are reflected so that better decisions can be taken (Vanderbeck, 2013). Need for budgeting and problem in implementation Without an effective budgeting system, one cannot decide activities to be done in the future. There exists a greater need to establish a clear line of authority in the business organizations for achieving the objectives and goals of the business and this cannot be possible if an effective budgeting system is not adopted. A company will know where to spend and allocate its resources for gaining better control over the business; management will stay focus on their plans and discrepancies if any could be avoided when a proper budgeting system prevails in the organization (Vanderbeck, 2013). A well-defined policy of the business is a pre-requisite for an effective budgeting system because it builds the employee morale and establishes a greater motivation amongst them to work harder. If debt exists in an organization, it is better to establish a budgeting system because it will keep the spending under control and the management will be reminded of the debt that must be paid off first. Thu s, an effective budgeting system must prevail in every company/business so that greater efficiency in all respects can be achieved. Sometimes budgets made prove to be unrealistic because actual spending crosses the authorized amount due to unfavourable conditions that are not under human control like war, natural disasters, famine etc. In addition, there exists corruption in many companies as because the funds allocated in this budget process are diverted by corrupt accountants to private accounts of their bosses or are diverted to some unauthorized purposes. Lack of proper incentives for effective budgeting implementation is also a major issue existing (Vanderbeck, 2013). Moreover, the problems arise because a budgeting system mostly depends on the fiscal conditions of the country, type of budget system adopted, and lack of correct prediction of the political, social, and economic scenario by the management etc. References Drury, C 2011,Cost And Management Accounting, Andover, Hampshire, UK: South-Western Cengage Learning. Horngren, C 2011, Cost accounting, Frenchs Forest, N.S.W.: Pearson Australia. Lanen, W. N., Anderson, S Maher, M. W 2008, Fundamentals of cost accounting, NY: Hang Loose press. Needles, Belverd E. Powers, Marian 2013, Principles of Financial Accounting. Financial Vanderbeck, Edward J 2013, Principles of Cost Accounting . Oxford university press