Management Accounting Assignment Essay

Management Accounting Assignment

 

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Introduction

 

This paper seeks to answer questions from a Management Accounting Assignment and perform necessary analysis and discussion.

 

Questions and Answers:

 

1 - Management Accounting Assignment Essay introduction. A) Explain the concept of Contribution & Limiting Factors and how it can be effectively used in Cost / Volume / Profit Analysis and Decision Making, Use suitable examples to illustrate your understanding of the applications (15 marks).

 

The concept of Contribution & Limiting Factors means that given under certain cases where resources are limited, the option that would give the highest advantage should be chosen.

 

Our idea is supported by Basic College Accounting.com (2006) when it said “As a result of limited supply of resources constraint, a company normally cannot produces as many products as it wish.  The limited supply of resources can be in many forms like limited cash, labor time, material/machine availability and others.  In line with the limited resources, the production manager therefore needs to plan the production “mix” in order to maximize its profit.  To establish the proper production mix, the rule is to rank the products according to the Contribution & Limiting Factors.”

 

As to how it can be effectively used in Cost / Volume / Profit Analysis and Decision Making, will involve the classification of the cost in into fixed and variable to afford us to compute for the contribution margin.  Basic College Accounting.com (2006) with us also when it said, “Whichever product that gives the highest UCM per LF will given the highest rank.  The highest rank will be given the highest priority to be produced using the available resources.  The remaining resources will then be used to produce the next ranking products until all the resources are used up.”

 

To illustrate, assume two products could be produced in production line, but the available machine hours is limited because of the limited capacity of the machine.  A wise management will need to have the product with the higher contribution margin to be given priority in production.

 

B)  The following questions pertain to Lextor Sdn. Bhd., a wholesale manufacturer of ladies-wear.  Additional facts are no longer shown here, as we go direct to the requirement as shown below:

 

a) Compute the contribution per unit and per limiting factor for each of the four styles of ladies-wear.

(5 marks)

 

 

The contribution margins per unit are RM 31, Rm34, RM79, and RM69 for styles 1, 2, 3 and 4 of ladies-wear respectively.  While the per limiting factors are RM 6.20, RM6.80, RM15.80 and RM13.80 for styles 1, 2, 3 and 4 respectively.  Please see Appendix A for details.

 

 

b) Determine which products should be produced /sold, and in what quantities in order to maximize profits for the next period.

(15 marks)

 

As to which product should be sold must be compute using product mix using the theory of limiting factor, are as follows:

 

Style
Ranking
Units
3
1
4,800
4
2
3,200
2
3
6,500
1
4
5,500
Please refer to Appendix A for details.  As we will notice the one that should be sold first should be those product or style that generates the highest contribution based on their ranking.  Please take note a 5 hour per unit of each style is assumed in the problem because the facts do not provide to complete the computation.

Note also that what is material in computing contribution margin per unit is the variable cost per unit.  Hence given the total cost per unit, we deduct from           it the fixed cost per unit.  The variable cost per unit for both production and selling were deducted from the selling price per unit to get the contribution margin per unit.

Note also that given the 100,000 available machine hours, the first to be produced in terms of ranking from first to last is as shown above.

 

c) Explain how the profit maximizing output / sales plan would be determined if, in addition to machine hours, direct labor hours were also a constraint (calculations are not required) (7 marks)

If in addition to machine hours, direct labor hours were also a constraint the same principle should be followed, by ranking first the products which of them should give the highest profit margin and prioritizing first those that have the highest contribution margin until the limited resources is exhausted.  Since there will be two resources that would be limited, the person scheduling production should make it sure that the constraints are not exceeded for it may results to products not completed on the basis the factors of production must all be there.

 

d) Suggest two courses of action which may be open to Lextor Sdn. Bhd. in order to

overcome the shortage of machine hours, stating any advantage or problem which might apply in each case.  (8 marks)

 

The two courses of action in order which may be open to overcome machine hour’s shortage would be as follows:

First.  The company can buy additional equipment.  This option will of course have its disadvantage since it will entail additional cost and additional cost would means another cost computation and its may change all the estimates as to fixed and variable costs, thereby changing the results of the analysis.

Second.  The company can force the machines to produce beyond normal capacity.

This has the advantage of meeting the demand for the products but at a certain point the machine will breakdown and it would be more costly for the company in the long run.

 

2. A).  Explain what you understand by Budgets, Fixed Budgets and Flexible Budgets in the context of controls and performance evaluation of an Organization of your choice.  (6 marks)

 

Budgets are financial plans and, hence they assist management in planning short term in terms of level of revenues and expenses.  Revenues and expenses are material indicators to measure how much the company will earn.  Companies however could adopt one or two kinds of budgeting.  Using the fixed budget, the management will not allow its production plans to be affected by the changing demands for company’s products in the market, they have decided to maintain it fixed.  Management has of course its own reason why it decides the same because it may have calculated that it may not have the capacity to adjust to demand, otherwise, it may be forced to change plans and have different variable and fixed cost.  The concept of flexible budget is the very opposite of fixed budged and under the former, management is ready to face changing situations is the market.  It is willing to adjust production, particularly to increase sales if contribution margin warrant and it has contingency plans to address such kind of situations. The objective of course is better profitability.

 

B). The following information relates to production and sales of a musical instrument by Classical Musics Ltd.

 

a) Prepare Classical Musics Ltd’s budgeted and actual profit statements for June 2006, using marginal costing principles and showing fixed budget, flexible budget and actual, with volume and flexible budget variances identified.

(30 marks)

 

Please see Appendix B.  One will observe that the statements are prepared on the basis of the given facts.  Each part of the schedule is carefully prepared giving due consideration to the actual data given.  That is how it should be in management, where accuracy is one the most important requirement of financial information to be used by decision makers .It is a fact that cost and revenues estimated in production are not the final thing in management, it has the stockholders to serve and that any action of management is actually reflected in the market as may be observe in the behavior of stick prices.

The statements are prepared under different assumptions.  One is where sales in units are the same throughout the year, while another involves and even increase monthly.  Note that fixed cost does not change over the 12 month period but the variable cost varies depending on the demand as reflected in sales in units per month.

Other assumptions could be made but what is important is the fact that we could illustrate a fixed budget using fixed level of production in units and under flexible budget; we could assume different levels of production.

Note also about the variances in the schedule which may be used to evaluated performance.  Under fixed budget, profit performance is favorable but under flexible budge profit performance is unprofitable

 

b) Provide a brief commentary on the company’s financial performance during June 2006 as revealed by your answer to (a) above.  (8 marks)

 

The financial performance of June if assumed that the annual budget was fixed would should June is under performance over performance.

 

It must be made now clear that the budget will have a very significant effect on evaluating business units in the organization because part of the basis of the evaluation of performance is the budget.  The basic question what will have to be answered will the fairness of the plan to evaluate performance?  It may be that the company overestimated demand for which it cannot hold managers accountable because macroeconomic factors Samuelson and Nordhaus (1992) have changed.

 

c) Explain how if a difference between the rates of inflation is incorporated into the

budget and that which actually occurred would distort the budget/actual comparison and suggest how such a distortion might be overcome.

(6 marks)

 

Inflation are actually additional cost of doing business and as to how if will affect the companies estimates in budget must be readily appreciated.  It will increase cost particularly the variable cost because they are affected by the market forces.  Inflation has a country wide effect and as a result price of commodities will increase.  If the different in rates of inflation is incorporated, it may or may not distort the comparison.  Distortion may be avoided if the same rate increase in costs will also be the same for revenues.  Hence comparability may still be attained by the use price index which may be used for both cost and revenues.

 

Distortion will result if the rate in increase will not be the same for revenues and expenses.  This could happen because higher prices because of inflation may result to lower demand for companies products, but the company may have decided to acquired or have acquired already part materials for production and labor cost have increase because of higher wages.  The distortion may still be overcome by properly adjusting the price indices that will be used to afford comparability of budget against actual information.

 

Conclusion:

The concepts of contribution & limiting factors and their use in cost / volume / profit analysis and decision making, budgets, fixed budgets and flexible budgets do constitute actually management tools in business.  They are part of the groups on knowledge in management accounting has are part of MBA programs. They effects and purposed were readily appreciated in the illustration made in the body of the paper.  The concepts may actually get deeper in facts get complicated when ore products where the concepts may have to adjust to other fields of study like finance, human resource and even economics.  The contribution limiting factor concepts gets their application because of the changing demand.  Corollary, management may react also using fixed to flexible budgeting activities.  Since budgets assume the functions of financial plans, their comparison with the actual result of operation is inevitable which lead us to the necessary conclusion that in business accountability is demanded for performance.

 
Appendices:

 

Appendix A – Contribution Margin, etc.  Computation, See excel file

 

Appendix B – Fixed and Flexible Budgets, See excel file

 

 

References:

 

1. World Education Council Assignment (2006), WORLD EDUCATION COUNCIL

B.A., (Hons) in Business Management

 

2. Basic College Accounting .Com (2006), Short Term Decision Making-Limiting Factor (Part 1) {www document} URL http://basiccollegeaccounting.com/short-term-decision-making-limiting-factor-part-1/, Accessed October 21, 2006.

 

3. Anthony, Reece & Hertenstein (1994), Accounting Text and Cases, Irwin, London

 

4.  Helfert, E. (1994), Techniques of Financial Analysis, Irwin, Sydney, Australia

5.  Samuelson and Nordhaus (1992), Economics, McGraw-Hill, London, UK

 

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