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InclassMgmt Accounting Examples
InclassMgmt Accounting Examples
Practical Examples
Example 1:
Practical Example of the Value of Financial V Management Accounting
(a)
The Financial Accountant has prepared a basic Income Statement for the year.
Revenue
Less: Cost of Sales
Materials
Salaries
Design Expenses
Gross Profit (20%)
Less: Expenses
Administration Expenses
Distribution Expenses
Net Profit (10%)
30,000
15,000
7,000
2,000
2,000
1,000
24,000
6,000
3,000
3,000
Based on the information shown above, it would appear that the enterprise is operating
successfully and is profitable. There are no warning signs that problems might exist and
that action is needed to safeguard future success. In simple terms this information is too
broad to be of general use to management.
(b)
The management accountant has done some further analysis of the financial records for the
year and by analysing costs to each of the three services provided, can produce a cost
statement as follows:-
Materials
Salaries
Design Overhead
Administration
overhead
Distribution overhead
Total Cost
4,800
1,500
500
6,800
700
3,700
2,500
600
6,800
800
6,500
3,000
900
10,400
500
TOTAL
15,000
7,000
2,000
24,000
2,000
300
7,800
400
8,000
300
11,200
1,000
27,000
10,240
10,800
8,960
Total Cost
7,800
8,000
11,200
27,000
Profit/(Loss)
2,440
2,800
(2,240)
3,000
Sales
Profit (%)
24%
26%
Loss
TOTAL
30,000
10%
Based on the further analysis conducted in (b), a very different picture emerges. The overall
profitability is still 10% however; Service C appears to be losing money due to the high
level of cost it incurs. This loss is being disguised by the other two services which would
appear to be far more profitable than at first thought.
A number of courses of action might be considered:
(a)
(b)
(c)
(d)
The Management Accountant provides the additional information and suggested solutions
to assist in planning, control and decision making. However, it is important to remember
that it is the senior management who must make the decision on what action to take.
Example 2
A SWOT Checklist - (Suitable for use in Analysing a Case Study)
Potential Internal Strengths
Having done this analysis, you will have generated both an analysis of the companys
environment and a list of opportunities and threats. The above table also lists some common
environmental opportunities and threats that you might look for, but the list you generate will be
specific to your company.
Example 3
World Class Manufacturing (WCM) An Illustration
A company has called you in as consultant on cost reduction. Currently, the Chief Executive has
refused to become involved in WCM because he considers it will cost too much to implement.
From the following list of costs you have drawn up, calculate the costs of production in total and
show what the total cost will be under a WCM system. Then calculate the product cost under
each system to persuade the Chief Executive that his view is mistaken.
Data Provided:
Annual production
10,000 units
Materials
50,000
Wages
Idle time
Losses due to poor training
Scrapped WIP
Cost of delays in production due to delivery of
non-quality materials from suppliers
Inventory-holding costs
30,000
5,000
2,500
10,000
2,500
10,000
Additional employee training and supplier liaison will cost 15,000 if WCM is introduced.
Suggested Solution:
You should have two columns, which summarise costs as follows:
Cost classification
Original Costs
WCM Costs
Materials
Wages
Idle Time
Losses from Poor Training
Scrapped WIP
Production Delays
Inventory Holding Costs
Additional Training and liaison
50,000
30,000
5,000
2,500
10,000
2,500
10,000
-
50,000
30,000
15,000
110,000
95,000
11.00
9.50
Example 4
Direct V Indirect
How might the following costs be classified?
(a)
(b)
(c)
(d)
(e)
(f)
Market research
(g)
(h)
(i)
(j)
Solution
(a)
(b)
(c)
Direct expense
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Example 5
Space Ltd is considering the introduction of one new product to its existing range. The product
design team has come up with two options and has provided the following forecast information:
Product 1 Jupiter
Sales price
Variable cost
40 per unit
32 per unit
Annual sales
Fixed costs (directly associated with the product)
10,000 units
50,000 per annum
Product 2 Venus
Sales price
Variable cost
20 per unit
15 per unit
Annual sales
Fixed costs (directly associated with the product)
10,000 units
30,000 per annum
Space Ltd does not have the capacity to produce both products.
Required
Calculate each of the following for each of the two products:
(a) (i) Annual forecast profit/loss.
(ii) Contribution/sales ratio.
(iii) Break even point in units.
(iv) The level of sales required to produce a profit of 40,000 to pay back the original
investment.
(b) Advise the company on which product it should introduce.
Solution
Tutorial Note:
Answering this question requires knowledge of Cost-Volume-Profit (CVP) Analysis (also known
as Break-Even Analysis). The basic principles underlying CVP analysis are that the variable cost
per unit remains constant and total variable costs increase or decrease in line with the volume of
goods sold. Fixed costs on the other hand, are unaffected by the volume of goods sold. In other
words, fixed costs remain the same (fixed) no matter how many units of product are sold.
The general format for a CVP statement is Sales less Variable Costs = Contribution; less Fixed
Costs = Profit. An example of a typical layout is included below for illustration purposes:
Sales
Variable Costs
Contribution
Fixed Costs
Profit
800
500
300
200
100
Note: These figures are fictitious and have nothing to do with the Space Ltd question which will
be dealt with below.
(a) (i) The calculation of the annual forecast profit/loss is calculated as follows:
Product 1 Jupiter
Sales
10,000 units @ 40 per unit
Variable costs
10,000 units @ 32 per unit
Contribution
Fixed costs
Profit
400,000
320,000
80,000
50,000
30,000
Product 2 Venus
Sales
10,000 units @ 20 per unit
Variable costs
10,000 units @ 15 per unit
Contribution
Fixed costs
Profit
200,000
150,000
50,000
30,000
20,000
10
expressed as a
ratio. Some textbooks refer to it as the Profit/Volume ratio. These terms are
usually interchangeable. It is calculated by dividing the contribution by the sales. The C/S Ratio
is usually expressed as a percentage.
The C/S Ratios for Jupiter and Venus are as follows:
Product 1 Jupiter
(Information taken from calculations in (a) (i) above)
(Contribution/Sales) x 100 = C/S Ratio
(80,000/400,000) x 100 = 20%
Product 2 Venus
(Information taken from calculations in (a) (i) above)
(Contribution/Sales) x 100 = C/S Ratio
(50,000/200,000) x 100 = 25%
(iii) The Break-even Point
Tutorial Note:
The break-even point is the point where the profit is zero. It is the sales level at which there is no
profit or no loss. In other words the firm is breaking-even. The break-even point can be
calculated in units or in monetary terms. In this question you are specifically asked to calculate
the break-even point in units.
The break-even point, in units, is calculated by dividing the fixed costs by the contribution per
unit. The contribution per unit is calculated by subtracting the variable cost per unit from the
sales price per unit.
The break-even points for Jupiter and Venus are as follows:
Product 1 Jupiter
Contribution per unit
Sales price per unit variable cost per unit = contribution per unit
40 per unit - 32 per unit = 8 per unit
Break-even point
Fixed costs/contribution per unit = break-even point
50,000/8 = 6,250 units
Product 2 Venus
Contribution per unit
Sales price per unit variable cost per unit = contribution per unit
20 per unit - 15 per unit = 5 per unit
Break-even point
Fixed costs/contribution per unit = break-even point
30,000/5 = 6,000 units
11
12
Example 6
A manufacturer of light fittings is preparing budgets and has provided the following draft
figures:
Sales Forecast (units)
January
February
March
April
May
6,000
7,500
8,500
7,000
6,500
13
Solution:
Part (a) - Production budget (in units) for the first four months of the year.
Sales
Closing Stock
Jan
6,000
750
Feb
7,500
850
Mar
8,500
700
Apr
7,000
650
Opening Stock
(750)
(750)
(850)
(700)
Production
6,000
7,600
8,350
6,950
Part (b) - Raw material usage and purchases budgets for the first three months of the year.
Usage (kg)
Jan
6,000
@ 2 kg
12,000
Feb
7,600
@ 2 kg
15,200
Mar
8,350
@ 2 kg
16,700
Closing Stock
Opening Stock
7,600
(5,800)
8,350
(7,600)
6,950
(8,350)
Purchases (kg)
13,800
@ 15
15,950
@ 15
15,300
@ 15
Purchases ()
207,000
239,250
229,500
Production
Apr
6,950
@ 2 kg
13,900
14
Example 7
THE CASH BUDGET COMPANY LIMITED
The monthly forecast of the income and expenditure of Cash Budget Company Limited is given
below:-
Materials used
Depreciation of plant and
equipment
Factory expenses
Rent and rates
Clerical wages and office
expenses
Advertising and stationery
Wages
Salesmens commission (June 4)
Sales income
Raw material stocks at end of
month
July
40
Aug
50
000s
Sept
Oct
60
80
8
10
2
8
10
2
8
10
2
28
14
30
6
138
120
28
16
40
7
161
140
70
80
Nov
100
Dec
90
8
10
2
8
10
2
8
10
2
28
10
30
8
156
160
28
12
30
10
180
240
28
20
40
12
220
280
28
14
40
9
201
250
90
100
80
60
Sales income is split 50:50 as to cash and credit. On average, debtors take two
months credit.
15
(12) (a)
(b)
(c)
(d)
(e)
(f)
(13) The taxation provision for the six months can be taken at 40,000 payable in full in
December of next year.
Required:
Prepare a cash budget for the six months to 31 December (figures to the nearest 000
should be used).
16
Solution:
THE CASH BUDGET COMPANY LIMITED
July
Aug
000s
Sept
Oct
60
40
-
70
40
-
80
60
-
120
70
-
140
80
6
125
120
-
100
110
140
190
226
245
40
10
6
28
50
10
28
60
10
28
70
10
6
28
90
10
28
80
10
28
12
30
4
-
14
37
6
-
16
33
7
-
10
30
8
38
6
12
37
10
-
20
40
12
-
Total outflow
130
1,435
154
206
187
190
Net movement
-30
-35
-14
-16
+39
+55
Opening balance
+42
+12
-23
-37
-53
-14
Closing balance
+12
-23
-37
-53
-14
+41
Inflow
Sales receipts - Cash
- Credit
Government grant
Total inflow
Outflow
Materials (Note 1)
Factory expenses
Rent and rates
Clerical wages and office
expenses
Advertising and stationery
Wages
Salesmens commission
Capital expenditure
Corporation tax
Nov
Dec
Closing stock
Add: Usage
Less: Opening
stock
Purchases
June
60
40
100
July
70
40
110
Aug
80
50
130
60
40
60
50
70
60
000s
Sept
Oct
90
100
60
80
150
180
80
70
90
90
Nov
80
100
180
Dec
60
90
150
100
80
80
70
17
Interpretation:
The cash budget indicates that the company has some serious cash deficits between
August and November before returning to a cash surplus in December.
The management should assess methods of coping with this position e.g. can short term
funds be obtained through a bank overdraft. They should also consider postponing the
capital expenditure from October to December. This would significantly improve the
deficit position in October and return the company to a surplus in November, one month
earlier than planned.
18
Example 8
Lynchberg Ltd. has provided you with the following budgeted and actual data for the period
ending 30th April 20X7.
The standard cost information at the beginning of the period was based on an expected activity of
10,000 units
Direct Material :
Direct Labour :
Overheads :
All Overheads are variable in nature and for the period they
are budgeted at 160,000. Company policy is to absorb
overheads at a predetermined rate per labour hour.
Required:
(a)
Prepare a standard cost card showing the cost and profit per unit and the overall budgeted
profit for the period.
(b)
(c)
Explain what you understand by the term inter-relationship between variances and
provide a simple example.
(d)
Prepare a statement reconciling the budgeted profit and the actual profit and in doing so,
calculate, in as much detail as possible, relevant variances for Material, Labour,
Overheads and Sales.
19
Solution:
Part (a)
Standard Cost Card for Lynchberg Ltd.
Sales Price
Less:
Materials (12 kg @ 10)
Labour (8 hrs @ 6)
Overheads (8 hrs @ 2)
200
120
48
16
184
16
160,000
Part (b)
Actual Profit
Sales
Less:
Materials
Labour
Overheads
Actual Profit
000
2,880
1,440
756
240
2,436
444
Part (c)
Variances, like ratios, should never be viewed in isolation when being interpreted. Interrelationship between variances means that there is often a natural connection between variances
which are calculated. This connection may become apparent when management are seeking
explanations to variances which have arisen in a period. Identifying these connections helps
provide assurance that the reasons being suggested are logical and are more likely than not to be
correct.
Examples might include:
A favourable labour efficiency variance being linked to an adverse rate variance. The
reason behind these might be the introduction of a bonus scheme which improved
productivity but increased the amount paid in wages.
A favourable material price variance may be due to buying a lower grade (and hence
cheaper) material. This would logically be linked to an adverse usage variance as a result
of higher wastage due to the poorer quality of the raw material.
20
Part (d)
Profit Reconciliation Statement with Variance Analysis
Budgeted Profit per Part (a)
Sales
Price
Actual
Expected
Volume
Materials
Labour
Actual
Expected
Price
Actual
Expected
Usage
Actual
Expected
Rate
Actual
Expected
Efficiency Actual
Expected
Overhead
Rate
Actual
Expected
Efficiency Actual
Expected
Actual Profit per Part (b)
000
160
240
200
40
12000
10000
2000
1440
1600
160
160k
144k
16
756
648
108
108
96
12
240
216
24
108
96
12
x 12000
480 (F)
x 16
32 (F)
160(F)
x 10
160(A)
108(A)
x6
72(A)
24(A)
x2
24(A)
444
21
Example 9
(a) The management accountant of Gatling Ltd has produced a print-out showing the variances
for production activity for March 20X8. Unfortunately, he has just been taken ill and has
been confined to hospital. However there is a meeting of the Board of Directors shortly and
an interpretation of the variance print-out is expected to be delivered at the meeting.
Required:
Prepare a formal report to the Board explaining each variance listed in the print-out below
and identifying one possible reason for the variance in question.
Ensure that the possible reasons you provide are consist with all the information given and
are not likely to be contradicted by any of the other variances in the print-out.
Reconciliation Report with Variances for March 20X8
Budgeted Profit
Sales Volume Variance
Sales Price Variance
Material Price Variance
Material Usage Variance
Labour Rate Variance
Labour Efficiency Variance
Actual Profit
000
6,000
242(A)
225 (F)
42 (F)
23(A)
37(A)
27(F)
294 (F)
302 (A)
8(A)
5,992
22
Solution:
REPORT
To:
From:
Management Accountant
Subject:
Date:
Further to your request for information on the Reconciliation Report for March 20X8. The profit
was 8,000 less than expected for month as a result of the following variances. In each case I
will explain the meaning of the variance and suggest a plausible reason as to why it occurred. In
each case (A) indicates an Adverse result and (F) indicates a favourable result.
Variance
Sales Volume
Sales Price
Material Price
Material Usage
Labour Rate
Labour Efficiency
Amount 000
Meaning
242(A) Profits are lower as
a result of selling
fewer units of the
product.
225 (F) Profits are higher
as a result of
getting a better
margin on each
unit.
42 (F) Profits are higher
as a result of
paying less per unit
of raw material
than we expected.
23(A) Profits are lower as
a result of using
more raw material
than we expected.
Possible Cause
Market demand for
the product may
have fallen.
There may have
been an increase in
selling price.
We may have
received a bulk
discount or used a
lower grade of raw
material.
There may have
been greater waste
due to the lower
quality of raw
material.
37(A) Profits are lower as We may have
a result of paying
introduced a bonus
more wages than
scheme or worked
we expected.
overtime.
27(F) Profits are higher
A bonus scheme
as a result of the
may have created
workers performing an incentive to
better than
work harder.
expected.
23
It should be noted that the causes indicated above are merely one plausible explanation for the
variance calculated. In all cases further investigation and enquiry should be undertaken prior to
any drastic corrective actions being implemented.
If you have any further queries in this regard, please do not hesitate to contact me.
Yours sincerely,
M. Accountant.
24
Example 10
Activity Based Costing V Traditional Absorption Costing
Aye Ltd. manufactures two products, Ics and Wye, using the same equipment and similar
production processes. An extract of production data for Period 1 is shown below for each
product:
Product Ics
5,000
1
3
10
15
Product Wye
7,000
2
1
40
60
220,000
20,000
45,000
Required:
Calculate the production overheads to be absorbed by one unit of each product using the
following costing methods:
(a)
A traditional absorption costing approach using a direct labour hour basis to trace
overheads to products.
(b)
An activity based costing approach using suitable cost drivers to trace overheads to
products.
Suggested Solution:
(a) Traditional Absorption Costing Approach
Product Ics (5,000 units @ 1 hour)
5,000
25
14,000
19,000
285,000
19,000
= 15 per hour
Overhead Absorbed:
Product Ics
(1 hour @ 15)
Product Wye
(2 hours @ 15)
15 per unit
30 per unit
15,000
7,000
22,000
Using ABC, overhead costs are absorbed using the concept of cost drivers:
Costs driven by machine hours
Costs driven by production set-ups
Costs driven by order handling
= 10 / mch hr
= 400 / set-up
= 600 / order
Product Ics
(15,000hrs x 10) = 150,000
(10 x 400) = 4,000
(15 x 600) = 9,000
163,000
5,000
32.60
Product Wye
(7,000hrs x 10) = 70,000
(40 x 400) = 16,000
(60 x 600) = 36,000
122,000
7,000
17.43
Example 11
Customer Profitability Analysis
Sound Wizard Ltd, manufactures a variety of sound equipment and sells one particular item, a
compact speaker, to sound centres and three HI-FI chain shops.
The speaker is sold for 40 per unit and has a variable production cost of 12 per unit.
Delivery costs vary according to the distance travelled and the cost has been estimated at 5 per
Kilometre. In addition, if a customers stock falls to a dangerously low level, an emergency
delivery, which is outside normal delivery schedules, is required. These emergency supplies cost
500 per delivery. Each customer also negotiates an individual trade discount on sales prices.
Order taking costs are estimated at 200 per order. Publicity costs are specific to each customer
as all publicity occurs on site in the shops and Sound Centres.
26
HI-FI Y
HI-FI Z
Sales in units
10,000
5,000
3,000
6,000
Km travelled
1,000
500
1,200
7,500
Emerg. Deliv.
No. Orders
10
Discounts
20%
15%
20%
6%
Sales Comm.
10%
10%
10%
10%
27,000
49,000
45,000
57,000
Publicity
Required:
What is the profitability generated by each customer segment? Advise Sound Wizard Ltd if they
should consider dropping any customer?
27
HI-FI Y
5,000
000
200.0
(60.0)
140.0
HI-FI Z
3,000
000
120.0
(36.0)
84.0
Other
6,000
000
240.0
(72.0)
168.0
Total
24,000
000
960.0
(288.0)
672.0
Delivery cost
Emergency delivery
Order costs
Trade Discount
Sales commission
Publicity costs
(5.0)
(1.0)
(80.0)
(40.0)
(27.0)
(2.5)
(0.6)
(30.0)
(20.0)
(49.0)
(6.0)
(1.0)
(1.4)
(24.0)
(12.0)
(45.0)
(37.5)
(2.0)
(14.4)
(24.0)
(57.0)
(51.0)
(1.0)
(5.0)
(148.4)
(96.0)
(178.0)
Profit
127.0
37.9
(5.4)
33.1
192.6
C/S %
Profit/Sales %
70%
32%
70%
24%
70%
(5%)
70%
14%
70%
20%
No of units sold
Sales
Variable prod cost
Contribution
Commentary:
The C/S ratio for all outlets is a constant 70%. However, the net profit to sales ratio varies from
32% for HI-FI X to a 5% for HI-FI Z. There are several reasons for this range in profitability.
HI-FI Z, though a small customer compared to the others, has managed to negotiate very
favourable terms (a 20% trade discount) and high publicity expenditure allowance. It also places
several small orders and is the only outlet in need of emergency deliveries.
Customer HI-FI X on the other hand, (Sound Wizards largest customer) is prudent in the number
of orders it places and publicity expenses are relatively low making it the most profitable of all
the customers. The profitability of Other Sound Centres is 14% as delivery costs are high. This
could be due to several deliveries being made to various Sound Centres rather to one central
warehouse.
A customer profitability analysis highlights loss-making customers such as HI-FI Z and enables
organisations to have the necessary information when negotiating new contracts.
Conclusion:
28
From the financial analysis above Sound Wizard may decide to drop customer Z as it makes a
loss.
They should however consider other important qualitative factors before such a serious decision
is made:
- Can they renegotiate the discount policy?
- Will they be able to reduce publicity expenditure in relation to customer Z?
- Should they start charging for emergency deliveries outside the normal delivery
schedule?
- Can the spare capacity that becomes available be put to better use?
Sound Wizard should also consider any impact this decision may have on the sale of its other
products and its long-term relationship with customer Z.
Remember it may be possible to hypothesise that Z is in fact a relatively new customer with
high future growth potential.
This might explain the high publicity costs and more erratic ordering history not to mention the
very favourable discounts granted and the apparent willingness of Sound Wizard Ltd to
accommodate the needs of this potential future Cash Cow.
29