[ B71052] MANAGERIAL ACCOUNTING

INDIVIDUAL ASSIGNMENT

NORAIMAN BIN ROSLIM

5071211011
INSTRUCTIONS

You are required to identify an organization as basis of case study.

QUESTIONS:
Base on your choice of organization, as a consultant/ manager, you are required to:
1. Analyze the cost behaviors using alternative cost estimation techniques. Justify the reason
for choosing the respective cost estimations technique used.
2. Analyze the profitability of the organization using activity-based costing statements.
3. Analyze and evaluate performance of the organization using alternative performance
measures, and propose improvements that need to be undertaken by the organization.
Justify the reason for choosing the respective performance measurements used

Company Background

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Base on your choice of organization, as a consultant/ manager, you are required to:

1. Analyze the cost behaviors using alternative cost estimation techniques. Justify the
reason for choosing the respective cost estimations technique used.

The relationship between costs and activities, such as production and sales, is known as
cost behavior. Understanding cost behavior can aid managers in developing mathematical
models and formulas that can be used to assess the impact of managerial decisions.
Product costs are useful for inventory valuation and cost of goods sold calculations.
However, product costs are not very helpful for planning and making many business
decisions. With a change in sales volume, some costs will remain same (e.g., monthly rent
for the production facility). Some costs will change with a change in sales volume (e.g.,
materials for the product components). There are three most common cost behaviors in
managerial accounting, which are:
i) Variable costs
Variable costs are costs that are incurred for every unit of volume. A variable cost

describes a cost that varies in total with changes in volume of activity. Variable costs

include the cost of labor, material, or overhead that change in concert with the

change in the volume of production units.

or,

ii) Fixed costs

Fixed costs are cost that is fixed (does not change) or constant; they do not vary
depending on production, sales levels, or service levels. The amount doesn’t
change in total despite wide changes in volume of activity. Examples of fixed costs
are salaried personnel, rent, property tax, insurance, and interest expense. The cost
equation for a fixed cost is as follows:

or,
iii) Mixed cost
Described as mixed cost because it contains both variable and fixed cost
components. Managers can once again use a cost equation to express the mixed
cost line so that they can predict total mixed costs at different volumes. The equation
simply combines both costs together in one formula as calculated:

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 or,

where, y = total mixed costs

v = variable cost per unit of activity (slope)
x = volume of activity
f = fixed cost over a given period (vertical intercept)

Based on the given information and guidelines, the costs of the above financial statement can
initially be categorized as Table 1

Cost Behavior Types of Cost

Variable Cost Product Manufacturing Cost
Fixed Cost Personnel’s salaries
Shop rent
Company renewal licensee fee
Promotion & Ads
Premises equipment
Office stationaries
DBKL
Mixed Cost Utilities (electricity, water, phone coverage & internet)
Machine Maintenance
Transportation
Table 1

It is crucial to identify and determine each cost’s behavior prior to predict the further progress
subsequently for company’s future planning. Once, each cost behavior has been determined,
the financial data of the company can be analyzed for cost estimation of the product.

There are four common approaches are used in cost estimation techniques/methods. The
methods are:
a) Account Analysis
b) High-Low Method
c) Scattergraph Plot
d) Regression Analysis

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All four methods are briefly described next. The goal of each cost estimation method is to
estimate fixed and variable costs and to describe this estimate in the form of y = vx + f
formula equation as explained in earlier discussion. All four methods are summarized as
follow:
a) Account Analysis

In account analysis, each general ledger account is classified as either variable

or fixed based on the analyst’s judgement prior to the understanding of the cost
behavior concept and how the cost behaves in the account. For example, we were
able to gather some crucial data and information about the cost associated with
the product sales from the invoices from the suppliers. These data later will be
classified categorized from the way each cost behave,
The engineering approach to cost analysis entails a thorough examination
of how the cost behaving based on an engineering’s assessment of the production
efficiency process, specifications, labor requirements, equipment usage, energy
consumption, and other factors.

b) Scattergraph Plot

Managers can illustrate the link between cost and volume of activity (number of
guests, for example) using a scatterplot, which graphs historical cost data on the
y-axis and volume data on the x-axis. The scattergraph method takes into account
all data points, not only the highest and lowest activity levels, thus it is the key to
determine whether cost estimation method via Hi-Low technique is possible or not.
The purpose is to use the mixed cost equation to produce a fixed and
variable cost estimate. As mentioned, the scatterplot graph is a requirement before
doing the high-low, and it implies the same for squares regression computations.
If there is a strong association (correlation) between cost and volume, the data
points will fall in a linear manner, which means they will look like a straight line. The
data points will appear practically random if there is little or no link between the
cost and volume. If the scattergraph plot does not show linear cost behavior, there
is no point in continuing to analyze the data.
A scattergraph built from two essential fundamentals that lies over the its
axis X,Y which are :
i) The y-axis: The vertical axis, Y, is plotted by the total maintenance
cost. The cost of the y-axis is known as the dependent variable. The

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 value of this cost is inflicted depending on the activity volume at the
given time. The cost is parallel to the given activity during the period.
ii) The x-axis: The x-axis or the horizontal axis, X, plots the activity which
will result to y-axis value. It is also being referred as the independent
variable because it causes variations in the other costs.
c) High-Low Method

The high-low method uses historical information from several reporting periods to
estimate costs. This is the easiest way to estimate the variable and fixed cost
components of a mixed cost. The high-low method basically fits a mixed cost line
through the highest and lowest volume data points. This approach is looking for a
quick way predicting the costs.

The high-low method is based on the rise-over-run formula for the slope of
a straight line. The formula give rise to the variable cost equation:

or can be simplified as,

Therefore, when the high-low method is used, the variable cost is estimated

by dividing the difference in cost between the high and low levels of activity by the

change in activity between those two points.

d) Regression Analysis
Regression analysis is a statistical procedure using a series of mathematical
equations for determining the line and associated cost equation that best fit all of
the data points in the data set, not just the high-volume and low-volume data points.
Thus, tends to provide more accurate results than the scattergraph approach.
Since the statistical analysis considers all of the data points when forming
the line, it is usually more accurate than the high-low method. A statistic (called
the R-square) generated by regression analysis also tells us how well the line fits

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 the data points. Regression analysis is tedious to complete by hand but simple to
do using Microsoft Excel.

From all four list options to estimate the cost behavior of the company, I opt use the prior
two techniques from the list sequence in order to analyze the financial statement. There
are several reasons on choosing those techniques:

1. Firstly, as for the first estimation method which is the Account Analysis, it helps
me to challenge competency as an analyst in understanding the nature and
concept of cost behavior as well as cost estimation methods.
2. In addition, this account analysis framework theory is very much related with my
narration in cost behavior and tabulated cost behavior in which the account
analysis will result exactly the same as in Table 1.
3. High-Low Method is among the easiest and quickest method in order to estimate
the cost. It also simple and easy to understand from my point of view.
4. Apart from that, considering that the technique requires analyst to understand
theory and concept before the figures are correctly predicted. Rather than
depending solely on the technology to produce the estimated result, Hi-Low
Method brings the two entities – the analyst and the technology together in finding
the answer.

Cost Estimation Analysis

A. Account Analysis Method (refer Table 1)

B. High-Low Method
To analyze the given financial statement and to perform the cost estimation using the High-
Low method, some important data need to be collected from the statement in order to have
the estimated cost. Data that is required are:

• Highest Activity Cost (RM)

• Highest Activity Level (unit)
• Lowest Activity Cost (RM)
• Lowest Activity Level (unit)

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 Data Value

Highest Activity Cost RM 10,038.00

Lowest Activity Cost RM 7,172.00

Highest Activity Level * 1433 units

Lowest Activity Level* 1125 units
*Volume of activity is just an assumption figure. Value is assumed for calculation purpose in view of the data
unavailability from the given financial report.

Table 2
The data collected and tabulated in Table 2. Subsequently it was being analyzed and
calculated using the High-Low Method through several calculation steps as follow:

Step 1. Identify the high and low activity levels from the data set.
Step 2. Calculate the variable cost per unit (v).
Step 3. Calculate the total fixed cost (f).
Step 4. State the results in equation form y = f + vx

Step 1 – Data taken from Table 2

Step 2 – The variable cost per unit is calculated by:

so, variable cost per unit = RM 10,038.00 - RM 7,172.00

1433 units - 1125 units

= RM 9.31/unit

Step 3 – Total Fixed Cost equation can be derived from the equation [ y = f + vx ]

so, y - vx = f ; using the values given in Table 2 (both high or low is substituted)

RM 10,038.00 – (RM 9.31x1433units) = Total Fixed Cost

RM 10,038.00 – RM 13,334.00 = Total Fixed Cost
RM 3,296.34 = Total Fixed Cost

Step 4 – Therefore to estimate the cost for future sales from the statement is calculated by :
[ y = f + vx ] which is ;

y = RM 3,296.34 + 9.31x

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For example :
The estimated cost to produce 2468 units of product in a given period of time is ;
y = RM 3,296.34 + 9.31x
y = RM 3,296.34 + (9.31 x 2468 units)
y = RM 26,261.56

2. Analyze the profitability of the organization using activity-based costing

statements.

ABC is a costing method that is intended to be used for internal decision-making. As a

result, activity-based pricing differs in three ways from standard absorption costing. When
it comes to activity-based costing, important to understand that:
I) Both manufacturing and non-manufacturing cost might be appointed towards
the item product, however just on a circumstances and logical results premise.
II) Some assembling expenses might be rejected from item costs.
III) Various overhead expense pools are utilized, every one of which is assigned to
items and other expense objects using its own specific activity and process.

Each of these departures from traditional absorption costing will be discussed in turn.

Manufacturing expenses are ascribed to products in traditional absorption costing,

while nonmanufacturing costs are not. In contrast, realizing that many non-manufacturing
costs are related to marketing, distributing, and servicing specific items in activity-based
costing. As a result, when computing the total cost of a product, ABC considers both
manufacturing and nonmanufacturing costs, rather than only the manufacturing cost.

The ABC systems allocate two categories of nonmanufacturing costs to products:

i. ABC systems track all nonmanufacturing costs to products. For examples
Commissions paid, shipping costs, and repair costs. These nonmanufacturing
costs are easily identified or it can be directly traced.
ii. ABC frameworks designate indirect nonmanufacturing costs to products
whenever the products have presumably caused the costs to be incurred.

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Figure 1 below shows the comparison between the conventional traditional absorption costing
and ABC systems

Figure 1: Differences between the Traditional Absorption Costing and Activity-Based Costing

Using the Activity-Based Costing design the profitability of the company can be translated as
follow:

Identify costly activities required to

complete products

Assign overhead costs to the activities from

in step 1.

Identify the cost driver for each activity.

Calculate a predetermined overhead rate for

each activity.

Allocate overhead costs to products.

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As a schematic calculation review, the ABC analysis is calculated for first quarter (Q1) of year
2010. it is presumed for the company, which involving in publishing industry, the company
offers 3 main services which are:

i. Textbooks Publishing
ii. Workbooks Publishing
iii. Massive photocopy

Step 1. Identify costly activities required to complete products.

After scrutinizing the company’s working progress, I manage to sort few activities can be
considered as highly giving impact on the overhead cost which are:
a. Purchasing materials
b. Running machines
c. Assembling products thus,

Step 2. Assign overhead costs to the activities identified in step 1.

The following analysis values are assumptions in order to guide the calculation of ABC

Activity Cost (RM)

Continuous running machine (Xerox copies & paper printing) 13,500

Book assembling process 18,600

Inspecting finished products 4,200

TOTAL 36,300

Step 3. Identify the cost driver for each activity.

Activity Cost Driver (hours)

Continuous running machine 2,700

Book assembling process 2,550

Inspecting finished products 1,200

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Step 4. Calculate a predetermined overhead rate for each activity.

Estimated Cost Driver Predetermine

Activity
Cost (RM) (hours) Overhead Rate

Continuous running machine 13,500 2,700 5.0

Book assembling process 18,600 2,550 7.3

Inspecting finished products 4,200 1,200 3.5

Step 5. Allocate overhead costs to products.

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REFERENCES

1. Heisinger, K., & Hoyle, J. B. (2012). Chapter 3: How Does an Organization Use
Activity-Based Costing to Allocate Overhead Costs? In Accounting for
Managers: Vol. 1.0 (pp. 154–239). Creative Commons.
2. Braun, K., & Tietz, W. (2017). Chapter 6: Cost Behavior. In Managerial Accounting
(5th ed., pp. 307–380). Pearson.
3. Griffin, M. P. (2009). Part II (Chapter 10: Cost Behavior). In MBA Fundamentals
Accounting and Finance (pp. 145–160). Kaplan Publishing.
4. Noreen, E., Brewer, P., Garrison, R. H., & Peter C. Brewer, P. (2017a). Chapter
Four: Process Costing. In Managerial Accounting (16th ed., pp. 154–195).
McGraw-Hill.

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