Management Accounting

Management Accounting 2

Part one:

(a) Prepare the following budgets for each of the six months to 30th September 200Y:

Direct materials usage budget in units

Given that one unit of zip will require 2 units of A6 and 3 units of B9, given the budgeted production levels for product Zip we can determine the required level of product A6 and B9 as follows:

2 units

3 units

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zip

A6

B9

April

140

280

420

may

280

560

840

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June

700

1400

2100

July

380

760

1140

august

300

600

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900

September

240

480

720

total

2040

4080

6120

Therefore the budgeted material usage for product A6 is as follows:

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A6 material usage budget:

production budget

2040

usage of A6 per unit

2

total usage

4080

B9 material usage budget:

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production budget

2040

usage of B9 per unit

3

total usage

6120

Direct materials purchase budget in units and £’s

Material purchase budget:

This budget entails indicating the quantity of material A6 and B9 to be purchased so as to

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satisfy the quantity required in production of product zip:

Material A6:

targeted ending inventory of A6

direct material usage budget

expected beginning inventory

direct material purchase

April

110

280

100

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290

may

220

560

110

670

June

560

1400

220

1740

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July

300

760

560

500

august

240

600

300

540

September

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200

480

240

440

We add the ending inventory to direct material usage then subtract the expected beginning inventory to get the direct material purchase.

Material B9:

targeted ending inventory of B9

direct material usage budget

expected beginning inventory

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direct material purchase

April

250

420

200

470

may

630

840

250

1220

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June

340

2100

630

1810

July

300

1140

340

1100

august

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200

900

300

800

September

180

720

200

700

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In this case we also add the ending inventory to direct material usage then subtract the expected beginning inventory to get the direct material purchase.

The cost of the purchase is shown below:

Material A6

targeted ending inventory of A6

direct material usage budget

expected beginning inventory

direct material purchase

cost per unit in pounds

total cost of purchase in pounds

April

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110

280

100

290

5

1450

may

220

560

110

670

5

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3350

June

560

1400

220

1740

5

8700

July

300

760

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560

500

5

2500

august

240

600

300

540

5

2700

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September

200

480

240

440

5

2200

total

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4180

20900

Material B9:

targeted ending inventory of B9

direct material usage budget

expected beginning inventory

direct material purchase

cost per unit in pounds

total cost of purchase in units

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april

250

420

200

470

10

4700

may

630

840

250

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1220

10

12200

june

340

2100

630

1810

10

18100

july

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300

1140

340

1100

10

11000

august

200

900

300

800

10

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8000

september

180

720

200

700

10

7000

total

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6100

61000

(b) In approximately 50 words discuss the link between budgeting and motivation. Budgeting as a motivation tool:

A budget will act as a motivating tool in an organisation whereby the workers and the managers will work to achieve the goals of the organisation outlined in the budget, this way every worker will be motivated to achieve these goals and therefore motivation is encouraged through budgeting.

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(c) In approximately 50 words discuss the political-economy implications of budgeting: Political economy implication of budgeting:

A budget is a tool of control in an organisation where actual events and activites are compared with the budget and any deviation investigated and collective action undertaken, the budgets also act as a means by which the performance of managers can be evaluated and finnaly budgets are important in that they aid in coordination of activities of various departments and also communication of organisation goals and objectives to its workers.

Part two:

1) Calculate an overhead cost rate for the: (a) Machining department; (b) Assembly department.

Overhead costs are those costs that cannot be directly traced to the a particular unit produced, example insurance costs and depreciation, insurance costs and depreciation can be allocated on the basis of book value of machines while lighting and fuel can be allocated depending on area occupied. In our case our overhead costs include:

Indirect labour, maintenance, handling, supervision, canteen, rent and rate, fuel and light, insurance and depreciation

Depreciation and insurance are allocated in accordance with the cost of the plant in each department, fuel and light is allocated depending and machine hours and rent and rate is charged on area occupied. Supervision charges are charged with regard to labour hours and

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canteen depend on number of employees. The following is the overhead cost for each department:

overhead costs

machining department

assembly department

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indirect labour

20,000

8800

maintenance

11527

26903

handling

6636

9954

supervision

1225.263158

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4774.736842

canteen

2880

4320

rent and rate

14285.71429

10714.28571

fuel and light

6449.044586

1050.955414

insurance

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1410

470

depreciation

17437.5

5812.5

total overheads

81,851

72799.47797

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labour hours

3880

15120

overhead cost rate

21.09549537

4.814780289

The total overhead for the machining department is 81,851 and for the assembly department is 72799, the overhead cost rate for the machining department is 21.09 and for the assembly department are 4.81.

2) Calculate the total production costs for producing one unit of the special product, Sunset.

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assembly rate

4.815

labour hours

8

total overhead charge

38.52

machining rate

21.1

machine hours

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6

total overhead hours charged

126.6

direct labour and material cost

1256

total cost

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1294.52

3) Calculate the company’s desired selling price per unit for the special product, Sunset.

Selling price will include the desired profit level which is 25%, therefore if the cost of production is 1294.52 then the selling price will be

1294.52 X 125% = 1618.15

This selling price will earn the company a profit of 1618.15 – 1294.52 = 404.53

Therefore the desired selling price is 1,618 pounds

4) In approximately 100 words discuss what are the advantages and disadvantages of departmental versus company-wide overhead rates

One of the advantage of this type of overhead rates assigned to each department is that we are able to determine whether we have under applied or over applied overhead costs, the departmental costs also ensure that we do not overcharge products that do not require certain department because a product may only be required to pass through one department and therefore the selling price of products using the departmental overhead rates are cheaper and competitive. The departmental overhead costs also ensure that the problem of costs of production is resolved and each department is used effectively.

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A disadvantage of this type of costing is that a certain department may experience a reduction in profit levels whereby the company overhead rates may be higher ensuring high profits for a certain department but in the case where various departments are given their own stock then the overhead may be low leading to less profit.

References:

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