Financial Accounting vs Management Accounting
Part a:
Financial accounting is an important function of accounting which is concerned with the preparation of entity’s financial statements such as its income statement, statement of final position and the statement of entity’s cash flows. The said statements are prepared with the objective of determining the true financial position of entity’s state of financial affairs so as to understand its overall financial performance in the given period of time. Whereas, management accounting is that branch of accounting which has a relatively broader scope as it not only emphasises on the financial matters but also on the non-financial concerns related to the company so as to enable the managers of the entity to undertake informed and sound decision making and formulate the adequate policies and strategies on the basis of such information. Financial accounting is generally considered as the compulsory requirement as it is the requirement of various regulatory provisions (Nuryanah & Islam, 2015). However, management accounting is generally not found to be compulsory for any organisation. Moreover, The information that is derived from the financial accounting is useful and relevant for both internal as well as various external parties i.e. the stakeholders of the firm (Van Horne James, 2002). However, the information that is obtained through management accounting is usually relevant for the internal management of the company. Furthermore, the reports that are prepared as a part of financial accounting are generally prepared on an annual basis or quarterly or half-yearly basis as per the requirements of the law whereas management reports are prepared as per the needs of the management of the entity.
Part b:
The key functions of management accounting are:
Planning:
Management accounting plays vital role in the planning function of the organisation as it involves various techniques and tools that can facilitate the financial as well as non-financial planning for the business. The tools and techniques like budgeting and forecasting, break-even point technique, activity based costing, setting of key performance indicators, cost volume profit analysis helps the business to provide the relevant information to the managers of the company so that they can formulate such strategies that can help in achieving the desired results. For example: The company can set its breakeven sales target of $ 25000 units and this planning will insist the employees to manufacture at least this much of units so as to recover the costs.
Organising:
Management accounting helps the managers to clearly assign the responsibility related to the business on the basis of management reports prepared through the various processes management accounting. For example: Reports under the system of management accounting can be prepared for different product lines on the basis of which managers can easily decide as to which product line must be continued and which must be eliminated by looking at their individual profitability status.
Key Functions of Management Accounting
Controlling:
This is the process related to measurement and evaluation of the actual results achieved by the business. Management accounting helps in the controlling function by providing the performance reports on the timely basis so that actual results and targeted results can be compared and evaluated. For example: The use of management reports can allow the entity to calculate the different types of variances that have resulted in the significant deviations from the budgeted results so that management can take necessary actions to fix such loopholes (Zimmerman & Yahya-Zadeh, 2011).
Decision making:
This is the most important function of management accounting as it allows the managers of the company to make those business decisions that are necessary for its growth as well as survival. It provides the database of the information that enables the top management to formulate the required strategies and policies such as resource allocation, setting targets and objectives for the business and also it provides the direction to the employees in which they must perform so as to positively contribute to the organisational success (Drury, 2013).
Part c
Michel Foucault has used the concept of panopticon as the metaphor of control. Panopticism is the system under which the employees are observed by their supervisors even without letting them know they are being watched. Management accounting also allows the managers to control the activities and resources used by the lower level employees of the company in the same way as it done under the system of panopticism. It promotes the sense of discipline across the organisation by its controlling function (Hansen, Mowen & Guan, 2007). For example: If the concept of function of management accounting is implemented in the organisation, it will work same as the system of panopticism because the employees will have to work according to the principles of management accounting and automatically the system of disciplined will be instilled in the organisation.
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Statement of Cost of Goods Manufactured |
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Lake Ltd for the year ending 30th June, 2017 |
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Opening Raw Material Inventory |
$ 183,000.00 |
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Add: Purchases |
$ 1,200,360.00 |
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Add: Freight Inwards |
$ 90,000.00 |
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Less: Closing Raw Material Inventory |
$ 186,000.00 |
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Material Used in Production |
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$ 1,287,360.00 |
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Direct Labour |
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$ 1,284,000.00 |
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Manufacturing Overhead |
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Indirect Material |
$ 52,500.00 |
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Indirect Labour |
$ 75,000.00 |
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Factory Rent |
$ 152,820.00 |
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Depreciation on Factory Equipment |
$ 90,000.00 |
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Total Manufacturing Overheads |
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$ 370,320.00 |
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Total Manufacturing Costs |
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$ 2,941,680.00 |
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Add: Opening Balance of WIP |
$ 60,600.00 |
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Less: Closing Balance of WIP |
$ 57,330.00 |
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Cost of goods manufactured for the year |
$ 2,944,950.00 |
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Add: Opening Balance of Finished Goods |
$ 264,000.00 |
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Less: Closing Balance of Finished Goods |
$ 345,000.00 |
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Cost of goods sold |
|
$ 2,863,950.00 |
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Income Statement of Lake Ltd. |
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For the year ending 30th June 2017 |
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Sales |
$ 6,751,500.00 |
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Less: Cost of Goods Sold |
$ 2,863,950.00 |
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Gross Profit |
$ 3,887,550.00 |
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Less: Operating Expenses |
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Administrative Expenses |
$ 600,000.00 |
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Selling and Distribution Expenses |
$ 1,200,000.00 |
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Total Operating Expenses |
$ 1,800,000.00 |
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Net Profit |
$ 2,087,550.00 |
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Budgeted Overhead |
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Budgeted Overhead |
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Total Machine Hours |
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Total Labour Hours |
|
57500 |
Department B |
62500 |
|
4000 |
8000 |
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$ 14.38 |
$ 7.81 |
Part b
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Material Control (Dept….. A) |
$ 110,000.00 |
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Accounts Payable Control |
$ 110,000.00 |
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Work in Progress Control (Dept….. A) |
$ 32,500.00 |
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Material Control (Dept….. A) |
$ 32,500.00 |
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Work in Progress Control (Dept….. A) |
$ 52,500.00 |
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Wages Payable Control (Dept….. A) |
$ 52,500.00 |
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Overhead |
$ 11,000.00 |
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Wages Payable Control (Dept…… A) |
$ 11,000.00 |
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Manufacturing Overhead Control (Dept….. A) |
$ 7,500.00 |
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Material Control (Dept….. A) |
$ 7,500.00 |
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Manufacturing overhead control department A |
$ 17,250.00 |
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Leaseholds payable control |
$ 16,250.00 |
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Utilities payable control |
$ 1,000.00 |
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Work in Progress Control (Dept….. A) |
$ 11,500.00 |
|
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Manufacturing Overhead Control (Dept….. A) |
$ 11,500.00 |
Part c
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Dept….. A |
Dept….. B |
|
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Direct Material |
$ 32,500.00 |
$ 13,500.00 |
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Direct Labour |
$ 52,500.00 |
$ 53,500.00 |
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Manufacturing Overheads (800*14.38) (300*7.81) |
$ 11,500.00 |
$ 2,343.75 |
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Total Cost |
$ 96,500.00 |
$ 69,343.75 |
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Total Cost of Job X |
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Dept…. A |
$ 96,500.00 |
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Dept…. B |
$ 69,343.75 |
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Total Cost of Job X |
$ 165,843.75 |
Part d
The two major cost related objects that are being focused by the managers while undertaking job costing are:
Products or Jobs
Centres of responsibility (Drury, 2013)
Part a
|
Amount |
Basis of allocation |
Department A |
Department B |
Total |
|
|
Maintenance Dept. |
180000 |
Maintenance Hours |
720 |
240 |
960 |
|
Personnel Dept. |
30000 |
Number of Employees |
60 |
120 |
180 |
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Direct Method |
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Allocation of Support Cost |
Department A |
Department B |
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Amount of Maintenance Dept. |
180000/960 |
$ 187.50 |
$ 135,000.00 |
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Amount of Personnel Dept. |
30000/180 |
$ 166.67 |
$ 10,000.00 |
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Total |
$ 145,000.00 |
Part b
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Step Down Method |
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Highest service cost |
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Maintenance Cost (a) |
$ 180,000.00 |
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Number of Machine Hours (b) |
1200 |
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Personnel |
240 |
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Dept. A |
720 |
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Dept. B |
240 |
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Rate per maintenance hours (a/b) |
$ 150.00 |
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Cost Allocation |
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Personnel Dept. |
Dept. A |
Dept. B |
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|
Maintenance Cost |
$ 180,000.00 |
$ 36,000.00 |
$ 108,000.00 |
$ 36,000.00 |
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(240*150) |
(720*150) |
(240*150) |
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Original cost of Personnel Dept. |
$ 180,000.00 |
$ 30,000.00 |
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Total Personnel Dept. Cost |
$ – |
$ 66,000.00 |
$ 108,000.00 |
$ 36,000.00 |
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Rate per employee |
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Total Personnel Dept. Cost (a) |
$ 66,000.00 |
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Total Number of Employees (b) |
180 |
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Dept. A |
60 |
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Dept. B |
120 |
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Rate per employees (a/b) |
$ 366.67 |
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Cost Allocation |
Dept. A |
Dept. B |
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Total Personnel Dept. Cost |
$ 66,000.00 |
$ 22,000.00 |
$ 44,000.00 |
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(60*366.67) |
(120*366.67) |
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Final Cost Allocation Sheet |
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Maintenance |
Personnel |
Dept. A |
Dept. B |
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Cost |
$ 180,000.00 |
$ 30,000.00 |
$ 80,000.00 |
$ 120,000.00 |
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Maintenance cost allocation |
-$ 180,000.00 |
$ 36,000.00 |
$ 108,000.00 |
$ 36,000.00 |
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|
Revised Cost |
$ – |
$ 66,000.00 |
$ 188,000.00 |
$ 156,000.00 |
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Personnel Cost allocation |
-$ 66,000.00 |
$ 22,000.00 |
$ 44,000.00 |
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Total Cost Allocation |
$ – |
$ 210,000.00 |
$ 200,000.00 |
Part c
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Reciprocal Method: |
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Maintenance Hours |
% of Total |
Number of employees |
% of Total |
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Maintenance Dept. |
20 |
10% |
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Personnel Dept. |
240 |
20% |
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Dept. A |
720 |
60% |
60 |
30% |
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Dept. B |
240 |
20% |
120 |
60% |
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1200 |
200 |
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Total Maintenance cost = Maintenance department cost + Cost allocated to personnel Dept. |
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Total personnel cost = Personnel department cost + cost allocated to maintenance Dept. |
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Total Personnel Cost= $ 30000 personnel department cost + (20% of total maintenance cot) |
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Let the total personnel cost be x |
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x= 30000 + 20%(180000+ (0.10 * x)) |
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x=30000+ (180000*20%) + (.10*20%*)x |
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0.98x=66000 |
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x=67346.94 |
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Total Personnel Cost |
67347 |
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Personnel Departmental Cost |
30000 |
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Allocated cost |
37347 |
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Maintenance Cost Total=180000+(37347*.10) |
183735 |
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Final Cost Allocation Sheet
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Part d
The managers must use budgeted overhead recovery rate than actual rates for the simple reason that when allocation of budgeted costs is undertaken, the inefficiencies of service departs of the entity are not forwarded to the production departments of such entity.
Further, allocation of costs on budgeted allocation rates is more beneficial when firms have two or more service departments and the cost of each service centre is transferred to other because of their interrelation. If actual rates for allocation are used, it amounts to over application or under application of such overheads (Adler, 2013).
Part a
|
Current Cost System |
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|
Standard |
Deluxe |
|
|
Direct Material |
$ 90.00 |
$ 120.00 |
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Direct Labour |
$ 40.00 |
$ 60.00 |
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Manufacturing Overhead |
$ 120.00 |
$ 80.00 |
|
Total Cost |
$ 250.00 |
$ 260.00 |
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Selling Price per unit |
$ 475.00 |
$ 690.00 |
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Total Cost per unit |
$ 250.00 |
$ 260.00 |
|
Profit per unit |
$ 225.00 |
$ 430.00 |
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Number of Doors |
400000 |
50000 |
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Total Profit |
$ 90,000,000.00 |
$ 21,500,000.00 |
Part b:
The estimated manufacturing overhead per unit for the deluxe units is less because of involvement of less labour hours in the deluxe brand. The overheads are allocated on the basis of labour hours which are more in the standard brand of doors. In deluxe units, more machine hours are used so as to make them by using the advanced level of technologies.
Part c
|
Activity |
Cost Driver |
Cost Driver Rate |
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|
Set Up Costs |
$ 2,900,000.00 |
Number of Set ups |
500 |
$ 5,800.00 |
|
Machine Related Costs |
$ 44,100,000.00 |
Number of Machine Hours |
600000 |
$ 73.50 |
|
Packing Costs |
$ 5,000,000.00 |
Number of Shipments |
250000 |
$ 20.00 |
|
Total |
$ 52,000,000.00 |
Part d
|
Standard |
Overhead Allocation |
Deluxe |
Overhead Allocation |
|
|
Set Up Costs |
100 |
$ 580,000.00 |
400 |
$ 2,320,000.00 |
|
Machine Related Costs |
300000 |
$ 22,050,000.00 |
300000 |
$ 22,050,000.00 |
|
Packing Costs |
200000 |
$ 4,000,000.00 |
50000 |
$ 1,000,000.00 |
|
Total Overheads |
$ 26,630,000.00 |
$ 25,370,000.00 |
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|
Number of Doors |
400000 |
50000 |
||
|
Manufacturing Overhead per unit |
$ 66.58 |
$ 507.40 |
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Part d |
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Total Cost per unit under ABC |
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|
Standard |
Deluxe |
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Direct Material |
$ 90.00 |
$ 120.00 |
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Direct Labour |
$ 40.00 |
$ 60.00 |
||
|
Manufacturing Overhead |
$ 66.58 |
$ 507.40 |
||
|
Total Cost |
$ 196.58 |
$ 687.40 |
||
|
Selling Price |
$ 475.00 |
$ 690.00 |
||
|
Total Cost |
$ 196.58 |
$ 687.40 |
||
|
Profit |
$ 278.43 |
$ 2.60 |
||
|
Total Profit |
$ 111,370,000.00 |
$ 130,000.00 |
Part e
No manufacturing of Deluxe doors under activity based costing is not as profitable as it is in traditional method of cost allocation because of the reason that the total manufacturing overheads that are related to the business have been allocated in more proportion to the Deluxe unit. This has also resulted in decline in the manufacturing overhead recovery rate for the Standard doors (Drury, 2005). Consequently, the profit per unit has increased in case of Standard units and overall profitability of Deluxe unit has decreased significantly when cost is allocated as per ABC technique. Using ABC approach, the total overheads are allocated on the basis of quantum of activities utilised in both the door units.
References:
Adler, R. (2013). Management Accounting. New York: Routledge.
Drury, C. (2005). Management accounting for business. London: Cengage Learning EMEA.
Drury, C.M. (2013). Management and cost accounting 3rd ed. Germany: Springer.
Hansen, D., Mowen, M. and Guan, L. (2007). Cost management: accounting and control 6th ed. U.S: Cengage Learning.
Nuryanah, S. and Islam, S. (2015). Corporate Governance and Financial Management: Computational Optimisation Modelling and Accounting Perspectives 1st ed. Germany: Springer.
Van Horne James, C. (2002). Financial Management & Policy 12th ed. India: Pearson Education.
Zimmerman, J.L. and Yahya-Zadeh, M. (2011). Accounting for decision making and control. Issues in Accounting Education, 26(1), pp.258-259.
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