NMIMS

COST AND MANAGEMENT ACCOUNTING

APPLICABLE FOR JUNE 2022 EXAMINATIONS

1. Management accounting is focused on bringing a greater degree of

efficiency to the core business operations. Discuss, management accounting,
its role, and highlight if you are working as a management accountant in an
enterprise, what would be the potential areas wherein you would like to bring
more efficiency.

Answer:
Management accounting
The term ‘management accounting’ refers to accounting for the management, i.e.,
accounting which provides necessary information to the management for discharging
its functions. The functions of the management are planning, organizing, directing
and controlling. Thus, management accounting provides information to the
management so that planning, organizing, directing and controlling of business
operations can be done in an orderly and effective manner. The basic function of
management accounting is to assist the management in performing its functions
effectively. Management accounting is concerned with presentation of accounting
information in the most useful way for the management. Its scope is, therefore, quite
vast and includes within its fold, almost all aspects of business operations.
Management accounting is required to change to satisfy the demands of the current
economic environment. There is a need for more innovative and useful management
accounting techniques to improve productivity, to reduce costs, to improve quality, to
determine accurate product costs to satisfy managerial needs of planning, decision
making and control. Management accounting provides invaluable services to
management in all of its functions.

It is clear that management accounting streamlines all the functions of an

organization and needed to manage all the operations effectively. In the given
scenario, LLP implemented the financial accounting system for the business. Now,
they are deciding to work towards the franchisee business model and take their
business to the next level. However; they feel that they should systemize their
business strategies and functioning first so as to achieve the desired results. This
may help them in effectively plan the business operations, evaluate their finances
more critically, and can employ adequate capital budgeting tools to evaluate the
various decisions related to further expansion. While taking all the decisions,
management accounting will be quite being helpful to judge the feasibility etc.

Importance of management accounting

Management accounting has a cross-functional perspective and management
accountant must understand many functions of the business, from manufacturing to
marketing to distribution to customer service. When customer value is attempted to
be increased, all the functions of a business become interrelated; a decision
affecting one affects the others.A cross-functional perspective helps us to see the
forest, not just one or two of the trees. This broader vision allows managers to
increase quality, reduce the time required to service customers and improve
efficiency. In this perspective, management accounting helps other business
functions through providing useful information and analysis.

Continuous improvement is fundamental for establishing a state of manufacturing

excellence. Manufacturing excellence is the key to survival in today’s world-class
competitive environment. A philosophy of total quality management, in which
manufacturers strive to create an environment that will enable workers to
manufacture perfect (zero-defect) products, has replaced the “acceptable quality”
attitudes of the past. Quality cost measurement and reporting are key features of a
management accounting system for both manufacturing and service industries. In
both cases, the management accounting system should be able to provide both
operational and financial information about quality, including information such as the
number of defects, quality cost reports, quality cost trend reports, and quality cost
performance reports.

Advantages of management accounting:

(i) Provides data: Management accounting serves as a vital source of data for
management planning. The accounts and documents are a repository of a vast
quantity of data about the past progress of the enterprise which are a must for
making forecasts for the future.
(ii) Modifies data: The accounting data required for managerial decisions is properly
compiled and classified. For example, purchase figures for different months may be
classified to know total purchases made during each period product-wise, supplier-
wise and territory-wise.
(iii) Analyses and interprets data: The accounting data is analyzed meaningfully
for effective planning and decision making. For this purpose, the data is presented in
a comparative form. Ratios are calculated and likely trends are projected.
(iv) Serves as a means of communicating: Management accounting provides a
means of communicating the management plans, upward, downward and outward
through the organization. Initially, it means identifying the feasibility and consistency
of the various segments of the plan. At later stages, it keeps all parties informed
about the plans that have been agreed upon and their roles in these plans.
(v) Facilitates control: Management accounting helps in translating given objectives
and strategies into specified goals for attainment by a specified time and secures
effective accomplishment of these goals in an efficient manner. All this is made
possible through budgetary control and standard costing, which are an integral part
of management accounting.
(vi) Uses also qualitative information: Management accounting does not restrict
itself to financial data for helping the management in decision making but also uses
such information which may not be capable of being measured in monetary terms.
Such information may be collected from special surveys, statistical compilations,
engineering records, etc.

Main areas to be considered

Cost transformation and management: It sounds simple, but cutting waste

enhances value generation. By identifying and reducing waste generation, finances
can be freed up and diverted to areas of the business that will drive value
generation.
External reporting: This is defined by clarity of information. To predict future
performance, management accounting provides a comprehensive view of financial
and non-financial performance, business models, risks and strategy.

Internal control: Through comprehensive documentation of an organisation’s

policies, systems, processes and procedures for risk management, management
accounting can maximise value generation within the established framework.

Project management: Full integration of all aspects of a project means the project
delivery team have everything they need, when they need it, to meet the project’s
objectives on budget, on time – and to the required standard.

Risk management: This practice area takes internal and external factors into
account, to identify, assess and respond to risks that arise from an organisation’s
activities.

2. From the following information provided by Alfa Manufacturing Ltd, prepare

a statement of equivalent units and also, Discuss the concept of equivalent
units
Particulars Quantity
Opening stock of inventory 500
(60 percent complete)
Units introduced during the year 10000
Closing inventory of stock 200
(Completion percentage, 40% complete)

Answer:

Concept of equivalent units:

Equivalent units of production is a term applied to the work-in-process inventory at

the end of an accounting period. It is the number of completed units of an item that a
company could theoretically have produced, given the amount of direct materials,
direct labor, and manufacturing overhead costs incurred during that period for the
items not yet completed. In short, if 100 units are in process but you have only
expended 40% of the processing costs on them, then you are considered to have 40
equivalent units of production.

Equivalent units are a cost accounting concept that is used in process costing for
cost calculations. It has no relevance from an operational perspective, nor is it useful
for any other type of cost derivation other than process costing.

Equivalent units of production are usually stated separately for direct materials and
all other manufacturing expenses, because direct materials are typically added at the
beginning of the production process; while all other costs are incurred as the
materials gradually work their way through the production process. Thus, the
equivalent units for direct materials are generally higher than for other manufacturing
expenses.

When assigning a cost to equivalent units of production, you typically assign either
the weighted average cost of the beginning inventory plus new purchases to the
direct materials, or the cost of the oldest inventory in stock (known as the first in, first
out, or FIFO, method). The simpler of the two methods is the weighted average
method. The FIFO method is more accurate, but the additional calculations do not
represent a good cost-benefit trade off. Only consider using the FIFO method when
costs vary substantially from period to period, so that management can see the
trends in costs.

Statement of equivalent units:

In the absence of any information, I have calculated equivalent units using FIFO
method.

Opening stock has 500 units but only 60% of them are completed so opening stock
would be taken as 500*(100%-60%) = 200 units only.

Units introduced during the year are 10,000

But closing stock is 200 units. So units introduced and completed is 900 units
(10000-200).
= 100% * 9800 = 9800

Closing stock has 200 units but only 40% of them are completed so closing stock
would be taken as 200*40% = 80 units only.

Statement of equivalent units

Input units Item Output % of Equivalent
units completion units
500 Opening stock 500 40% 200 units
10000 Units 9800 100% 9800 units
introduced
200 Closing stock 200 40% 80 units
10700 10500 units 10080 units
units

For opening stock, as the FIFO method is used, we will take 40% as units
completing percentage.

3. You are a manufacturer of tennis balls in the Mumbai Suburbs. Recently,

you got an order to supply 1200 units of the same on a monthly basis. The
cost of carrying an inventory of such tennis balls is 1.80 per unit on yearly
basis. The production process requires a setup cost on a per run basis of Rs
1000.

Compute:
a. The EOQ, and define the need of computing the EOQ
b. The Optimum number of orders and optimum period of supply

Answer:
A) Concept of EOQ:
The economic order of quantity (EOQ) is a company's optimal order quantity for
minimizing its total costs related to ordering, receiving, and holding inventory. The
average number of units you will hold in stock is the average of your minimum and
maximum, minus lead time demand. Lead-time demand is your daily forecast times
the average number of lead-times days for vendor in question. EOQ Economic Order
Quantity, may be able to provide insight into your inventory situations and ultimately
locate ways to maximize profit and reduce costs within your organization on
manufacturing operations. Utilizing the Economic Order Quantity is commonly
utilizing elements of a continuous review inventory system. While utilizing Economic
Order Quantity, there are a series of advantages that can help you with deciding
whether or not you should utilize the metric for your inventory. The EOQ formula is
best applied when demand, ordering, and holding costs remain constant over time.

Economic Ordering Quantity = √(2A x O)/C

Where,
A = Annual consumption (units) during the year
O = Cost of placing an order
S = Annual cost of storage of one unit.

EOQ= √ (2*1200 units*12 ×Rs 1000)/1.80

=√28800000/1.80
= √16000000
= 4000

B)

The Optimum number of orders =Total demand (units)/Inventory order size

(quantity)
= 1200*12/4000
= 14400/4000
= 3.6
Optimum period of supply = 1/Optimum number of orders
= 1/3.6
= 0.28