Managerial Accounting (Act202)

Submitted to

Sheikh Mohammad Rabby (RBY)

ASSIGNMENT - 2

Submitted by

Section: 12

Name ID

Tahsin Kabir 1721826630

 1. In all respects, Company A and Company B are identical except that Company A’s costs
are mostly variable, whereas Company B’s costs are mostly fixed. When sales increase,
which company will tend to realize the greatest increase in profits? Explain.

Answer:

Here we can see, company A’s costs are variable mostly. And company B’s most costs are fixed.
We know that, when sales increase the variable cost increases as well. So it will not create any
effect in profits. Company B will have higher fixed costs and lower variable costs. So, it will
have higher contribution margin ratio. Here, Company B has mostly fixed cost. When sales
increases, fixed costs are fixed, there will be little increases in the variable costs. So, company B
will be earning more profits than company A.

2. Under absorption costing, how is it possible to increase net operating income without
increasing sales?

Answer:

Total cost is equal to fixed cost and variable cost, we know that. But the absorption cost is only
the product cost. It is neither fixed cost nor variable cost. Incurred cost is identified by selling
price of goods and services. Absorption costing strategy is actually formed to reduce expanses
that increase operating income. On contrary, net operating income is basically calculated by
subtracting operating expenses from revenue. There are two ways to increase net operating
income without increasing sales. They are-

Increase in production: More productivity will occur; more income or revenue can be generated.

Decrease in Expenditure: By doing this, company can increase savings. When the production is
fixed, we can be reducing the expenditure for maintaining the savings.
 3. In what fundamental ways does activity-based costing differ from traditional costing
methods?

Answer:

The most fundamental difference of traditional costing is one plant wide overhead rate by
calculating machine hours or labor hours on per unit basis. In activity-based costing it has
multiple activity rates. We calculate activity rates of various pools. Traditional costing is very
much easier to calculate rather than ABC. When we need to find out time for every individual
activity we should follow ABC. Traditional costing only works with product cost, ABC works
with period cost. Traditional costing can be used for external reports, ABC can not be used for
external report, it works with only the internal report. It is more accurate than traditional costing.

4. “The principal purpose of the cash budget is to see how much cash the company will
have in the bank at the end of the year.” Do you agree? Explain.

Answer:

Cash budget is basically prepared monthly wise. The budget period is being quarter or half of a
year. It approximates cash flows throughout a month which is going to mirror the balance at the
end of each month. The main goal of cash management is to match the receipt and payments and
expecting to have a desired surplus at the end of each month. If the payments of a particular
month could not be met with the expected receipts then the budget will indicate adequately in
advance in a negative digit. So then, the extra fund will need to be collected or arranged from the
external sources.

5. What effect, if any, would you expect poor-quality materials to have on direct labor
variances?

Answer:

Poor quality materials can crate production difficulties. Which will turn into extreme labor time
and unfavorable labor efficiency variance. Usually poor-quality materials will not disturb the
labor rate variance. If a company purchased poor quality materials, the workers need to spend
more time to make the best outcome of the final product by using those low-quality materials.