ACACT303A - Advanced Management Accounting

Part A

1. The reasons for choosing standard costing are:

a) Improvement in cost control: the companies will be more disciplined and will be better at controlling cost if they follow standard costing. We can calculate variances which help us in rectifying the mistakes and detecting the effectiveness of the managers.

b) Improved decision making and managerial planning: standard costing is useful in making more accurate budgets which will help the management to make the future decision and managerial planning valuable (Heralova, 2017).

c) Effective and reasonable inventory management: the standard cost system doesn’t include unusual cost and would charge the excess cost in the variance accounts.

d) Production cost can be reduced: the use of standard cost makes the employees aware of the various cost and the employees becomes cost-conscious and tries to reduce the cost as much as they can.

2. A budget that can be adjusted as per the no of units is known as a flexible budget. It includes the variable rates per unit and estimates the anticipated losses and gains in monetary terms.

The steps to create a flexible budget are:

a) Identification and segregation of the fixed and variable cost

b) The variable cost according to the estimated production cost.

c) The fixed cost should be set and will not change. The variable cost can be adjusted as per the revenue

d) As soon as the accounting period gets over the budget should be updated with the actual figures. The variable cost will automatically get adjusted.

e) The final flexible budget should be entered. The accounting software will do a comparison of the expenses that were anticipated initially.

3. Differences between static and flexible budgets

a) Nature: the budget which doesn’t change with the original volume is known as a static budget. The budget which changes and is designed to change according to actual volume is flexible (Esakova, Nalimova and Yakubenko, 2020).

b) Scope: flexible budgets are known to ascertain costs accurately whereas static budgets cannot.

c) Cost determination: the conditions will remain unaltered in a static budget. A flexible budget is made keeping in mind that the conditions will change.

d) Assumptions: static budget is ineffective and has limited application. Flexible budget, on the other hand, is considered to be an effective tool and has got a wide application.

4. The standards which are based on the most favorable or best circumstances are known as ideal standards.

The arguments in favor of ideal standards are that it acts as a motivation for hard workers and efficient employees. It facilitates TQM (total quality management) and fosters increased responsibility.

The arguments against ideal standard can act as a tool to hurt the motivation. The variances can be difficult to interpret. The ideal standards are too unrealistic as it doesn’t allow making any provision for inefficiencies. It cannot be used for planning and forecasting.

5. A flexible budget is more useful than a static budget as it allows us to adjust according to the actual volume. It is more realistic and can be used for planning and forecasting by the managers. Flexible budgets are adaptable which is not true for a static budget. The identification and segregation of fixed and variable cost in preparing a budget is done in the flexible budget (Ozyurek and Uluturk, 2016). Flexible budgets are considered to be more sophisticated and managers use it often.

6. The production manager can gain insight into the causes of a flexible budget variance by comparing the flexible budget with the actual budget. There can be various reasons for direct material variance like price and efficiency variance. Direct material price variance can occur if the material buying cost is more than the expected or budgeted amount. The efficiency variance can be unfavorable if the usage of direct material in making a product is more than the budgeted.

Part B

RUGBY COFFEE MUGS PTY LTD

 

STATIC BUDGET

 

 

 

 

 

 

Units

 

 

700000

selling price

 

 

$8.20

Sales Revenue

 

 

$5,740,000

Variable costs

 

 

 

          manufacturing

 

 

 

 

direct materials

$2,520,000

 

 

directlabour

$105,000

 

          selling and administration

 

$504,000

 

total variable cost

 

 

$3,129,000

contribution margin

 

 

$2,611,000

fixed costs

 

$990,000

 

total fixed cost

 

 

$990,000

operating income

 

 

$1,621,000

 

RUGBY COFFEE MUGS PTY LTD

 

 

 

VARIANCE

 

FLEXIBLE BUDGET

 

 

 

 

ACTUAL BUDGET

 

 

 

 

 

95%

85%

 

90%

95%

85%

Units

 

 

665000

595000

 

630000

-35000

35000

selling price

 

 

$8.30

$8.30

 

$8.30

0

0

Sales Revenue

 

 

$5,519,500.00

$4,938,500.00

 

$5,229,000.00

 $    (290,500.00)

 $     290,500.00

Variable costs

 

 

 

 

 

 

 $                      -  

 $                      -  

          manufacturing

 

 

 

 

 

 

 $                      -  

 $                      -  

 

direct materials

 

$2,593,500.00

$2,320,500.00

 

$2,457,000.00

 $    (136,500.00)

 $     136,500.00

 

Direct labour

 

$112,311.11

$100,488.89

 

$106,400.00

 $        (5,911.11)

 $          5,911.11

          selling and administration

 

 

$465,500.00

$416,500.00

 

$441,000.00

 $      (24,500.00)

 $       24,500.00

total variable cost

 

 

$3,171,311.11

$2,837,488.89

 

$3,004,400.00

 $    (166,911.11)

 $     166,911.11

contribution margin

 

 

$2,348,188.89

$2,101,011.11

 

$2,224,600.00

 $    (123,588.89)

 $     123,588.89

fixed costs

 

 

$20,000

$20,000

 

$20,000

 $                      -  

 $                      -  

total fixed cost

 

 

 

 

 

 

 $                      -  

 $                      -  

operating income

 

 

$2,328,188.89

$2,081,011.11

 

$2,204,600.00

 $   (123,588.89)

 $     123,588.89

 

DIRECT MATERIAL VARIANCE

 

 

 

 

 

PRICE VARIANCE

 

 

actual price

 

$0.039

budgeted price

 

$0.036

direct materials

 

63000

direct material price variance

 

$189

 

 

 

EFFICIENCY VARIANCE

 

 

actual usage

 

63000

budgeted usage

 

63000

standard cost per gram

 

$0.039

direct material efficiency variance

$0.000

 

 

 

 

 

 

DIRECT LABOUR VARIANCE

 

 

 

 

 

PRICE VARIANCE

 

 

actual direct labor cost

 

$15.20

budgeted direct labor cost

 

$15

total hours

 

7000

direct labor price variance

 

 $       (1,400.00)

 

 

 

EFFICIENCY VARIANCE

 

 

actual labor hours

 

7000

standard labor hours

 

6300

standard labor rate

 

$15

direct labor efficiency rate

 

($10,500)

 

 

 

 

Part C

1. The 3 possible reasons for direct material variance are:

a) When the buying price of direct materials is more than the budgeted amount this will create a difference in the direct material price and thus an Unfavorable direct material price variance will occur.

b) When the actual price of direct material is Lower than the standard price, a favorable variance will occur as the company will have to pay less than what they expected. This will save cost for the Company.

c) Direct material efficiency or material yield variance occurs when the actual direct material usage is more or less than the budgeted usage. If the material used is more it will create an unfavorable variance. If the usage is less than the budgeted it will have a favorable variance.

2.

The 3 Possible reasons for direct labor variance are:

a) When the actual labor rate is more than the Budgeted labor rate an unfavorable variance occurs.

b) When the actual labor rate is less than the budgeted labor rate a favorable direct labor variance occurs.

c) Direct labor yield variance occurs when the actual labor hours is more or less than the budgeted labor hours.

3. Variance analysis is one of the most important Tools used for management and budgeting process. Variance is the deviation between the actual and the budgeted values. Therefore if the actual is greater or lesser than the budgeted values a favorable or an unfavorable variance occurs (Marzlin Marzuki and Ismail, 2019). Variance analysis helps us in detecting the problems which are being faced by the organization and helps in mitigating the threats. It enables the top management to make decisions based on the figures that has been calculated in the variance Analysis. Variance analysis is a quantitative method in performance evaluation, checking the accuracy and taking remedial actions if any problem arises.

4.

Calculation of variance analysis gives us an estimated figure of the excess or lower expenditure incurred by the company (D'Onza, Greco and Allegrini, 2016). This is the first step in identifying the areas of problem. Only identification will not help, detecting and rectification of the potential problems will help the company in the long run. A manager must first calculate the variances. Then the next step is identifying and determining the possibility of the variances. The last and the most important Step is of rectifying the possible variances and making changes in the process so that the variances can be mitigated.

5.

The job of a management accountant is to calculate various variances and present it to the management. The duty of the management is to make sure that the variances are rectified. It's imperative for the company to listen to the management accountant about the various variances that have been reported for the efficiency and effectiveness and for the success of the company in the long run. The chairman should listen and understand carefully what the management accountant has to say and make sure to improve and rectify the possible inefficiencies in the process.

6.

The material price variance of a company is favorable whereas the material yields variance is unfavorable (Bai, 2016). As per the calculation it seems that the purchase manager is more effective than production manager. But the reality may be different. If we go deep down into the details then we can see that the purchase manager has bought cheap material thus the actual price of the material being lower makes the material price variance favorable. This has impacted the efficiency of the production manager as he has to use more material to make a single product which is leading to an unfavorable material yield variance. Therefore we can conclude that variances should not be evaluated in isolation as the variances are interconnected.

 

References

Bai, G., 2016. Applying variance analysis to understand California hospitals' expense recovery status by patient groups. Accounting Horizons30(2), pp.211-223

Esakova, E.E., Nalimova, Z.F. and Yakubenko, I.A., 2020, January. Improving the Relevance of the Budgeting System in the Transition to the Digital Economy Model. In International Session of Factors of Regional Extensive Development (FRED-2019). Atlantis Press

Heralova, R.S., 2017. Life cycle costing as an important contribution to feasibility study in construction projects. Procedia engineering196, pp.565-570

Marzlin Marzuki, N.A.R. and Ismail, J., 2019. Benefits and limitations of variance analysis in management accounting. ACCOUNTING BULLETIN, p.15

Ozyurek, H. and Uluturk, Y., 2016. Flexible budgeting under time-driven activity based cost as a tool in management accounting: Application in educational institution. Journal of Administrative and Business Studies2(2), pp.64-70

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