Accounting Example

Accounting

1. What is Management Accounting? Management accounting:

Management accounting according to Chadwick (1998) can be defined as the evaluation and planning of accounting information, management accounting concentrates on planning business processes, cost allocation and budgeting. Weetman (2002) also state that management accounting is a process that involves preparation of both statistical and financial information used in decision making.

2. Identify which cost item above is fixed and variable and why? Fixed cost-building rent

Chadwick (1998) defines fixed costs as the costs incurred that do not depend on the level of activities in a business. On the other hand defines fixed costs as the costs incurred by a firm that do not depend on the level of sales or production. In this case building rent is a fixed cost and this is because it does not depend on the level of activity, therefore when the firm produces 1000 or 6000 units the rent costs will remain constant.

Variable costs- material cost:

Accounting

Chadwick (1998) defines these costs as the costs incurred that depend on the level of activity, in this case the raw material cost is a variable cost, this is because as the level of production increases the firm demands more volumes of raw materials and this increases the total cost of raw materials.

Economies of scale:

According to Stratton (2002) the cost of producing one unit of a product is determined by dividing total cost by the number of units produced, given that fixed costs remain constant then as the number of units increase the value of total cost divided by number of units produced will decline, this decline in unit costs due to fixed costs being distributed to more units is what economists refer to as economies of scale.

3. Unit cost when producing 1000 units:

Two costs are provided and they include raw material costs (650) and building rent (9000), raw materials in this example is the variable cost while rent in this case is the fixed cost, this is because if the firm decides to increase production then raw material cost will increase, however rent cost will remain constant.

Unit cost (1000 units):

Accounting

From the above discussion unit cost is derived from total costs divided by units produced, Drury (2000) states that the total cost is equal to variable cost plus the fixed costs, the following information is provided:

Units=1000

Variable cost=650

Fixed cost=9000

Total cost = 650 + 9000 = 9650

Therefore unit cost is =9650/1000 = 9.65

Variable cost per unit = 0.65

Fixed cost per unit=9

Total cost per unit = 9.65

Total annual cost = 9650

Accounting

4. Unit cost when producing 6000 units:

Previously number of units produced was 1000, variable cost (raw materials) was 650, and therefore each unit consumes the following variable cost (raw materials):

650/1000 = 0.65 per unit

Increasing the level to 6000 will increase the following variable cost:

6000 X 0.65 = 3900

Rent cost remains constant = 9000

Total cost = 9000 + 3900 = 12900

Total unit cost = 12900/6000 = 2.15

Variable cost per unit = 0.65

Accounting

Fixed cost per unit=1.5

Total cost per unit = 2.15

Total annual cost = 12900

Therefore the unit cost declines from 9.65 when producing 1000 units to 2.15 when the firm produces 6000 units.

5. Unit cost when producing 8000 units:

Variable cost =0.65 per unit

Rent cost remains constant = 9000

8000 X 0.65 = 5200

Accounting

Total cost = 9000 + 5200 = 14200

Total unit cost = 12900/8000 = 1.775

Variable cost per unit = 0.65

Fixed cost per unit=1.125

Total cost per unit = 1.775

Total annual cost = 14200

Therefore the unit cost declines from 9.65 when producing 1000 units to 1.775 when the firm produces 8000 units. The decline in the cost per unit as shown above is as a result of the firm realizing economies of scale. Stratton (2002)

Accounting

REFERENCE:

Colin Drury (2000) Management and cost accounting, New York: McGraw hill

Horngren, C., Sundem, G. and Stratton, W. (2002) Introduction to management accounting, New Jersey: Prentice hall

Leslie Chadwick (1998) Management accounting, NY: Blackwell

Accounting

Pauline Weetman (2002) Management Accounting: An Introduction