ASSIGNMENT ON

MANAGEMENT
ACCOUNTING
(09009)

SUBMITTED BY,
AKHIL NADH
DATE: 13-10-2017
 COST ACCOUNTING AND DECISION
MAKING TECHNIQUES
Cost accounting is the process of determining and accumulating the cost of product or activity. It
is a process of accounting for the incurrence and the control of cost. It also covers classification,
analysis, and interpretation of cost. In other words, it is a system of accounting, which provides
the information about the ascertainment, and control of costs of products, or services. Many
factors are considered while fixing the price of a product/item such as competitors’ price etc.
One of the basic factors is the cost of its production. Cost is essential not only to fix price but
also to ascertain the margin of profit. Knowledge of the cost determination is also necessary to
keep a check on the cost of product/control on wastages, etc. The accounting used to study the
various aspects of cost is known as cost accounting.

Methods of Costing:

Methods to be used for the ascertainment of cost of production differ from industry to industry. It
primarily depends on the manufacturing process and also on the methods of measuring the
departmental output and finished products.

Basically, there are two methods of costing (as per CIMA Terminology) viz.:

(i) Specific Order Costing (or Job/Terminal Costing) and

(ii) Operation Costing (or Process or Period Costing.)

1. Specific Order Costing:

CIMA defines specific order costing us “the basic costing method applicable where the work
consists of separate contracts, jobs or batches, each of which is authorized by a special order or
contract.”

The specific order costing is further classified into the following:

Job Costing:
It is applicable where work is undertaken to customer’s special requirements and each order is of
comparatively short duration. Job costing method is applied in manufacturing concerns where
production is carried on demand or order of customers such as machine tool

Contract Costing:
It is applicable where there is an agreement between contractors and contracted for
accomplishment of work or job, which refers to construct work, such as construction of building,
bridge, road etc.

The construction work is accepted to meet the special requirements of each individual customer
and the work is expected to be continued for a long period. Another important feature is that,
construction work is commenced on site and not at the premises of the contractor.

Batch Costing:

This method is suited in cases where a customer orders certain quantity of identical items or a
batch of identical parts or products produced within a concern for replenishing stocks.

DECISION MAKING TECHNIQUES

Decision making is the study of identifying and choosing alternatives based on the values and
preferences of the decision maker. Making a decision implies that there are alternative choices to
be considered, and in such a case we want not only to identify as many of these alternatives as
possible but to choose the one that best fits with our goals, objectives, desires, values.

The Institute of Cost and Management Accounting, London defines “Cost accounting is the
process of accounting from the point at which expenditure is incurred or committed to the
establishment of its ultimate relationship with cost centres and cost units. In the widest usage, it
embraces the preparation of statistical data, application of cost control methods and the
ascertainment of profitability of activities carried out or planned”.

1. SELLING PRICE CALCULATION

According to marginal costing principle, selling price calculation is:

Particulars SDOO1 SDOO2 SDOO3

Direct material 34 35 40.5

Direct labour 3 3 4.5

Overhead cost 0.02 0.02 0.04

Total factory cost 37.02 38.02 45.04

Selling price 46.275 47.625 56.3

[VC+25%]

Let FC per unit be as follows:

SD001-5
SD002-10
SD003-5

Working note calculation:

Working note: 1

Direct material:
SD001 = (3*5) + (2*7) + (0.5*10) = 34
SD002 = (2.5*2) + (2.5*7) + (0.5 * 10) =35
SD003 = (2* 5) + (1.5 *7) + (2 * 10) = 40.5

Working note: 2

OAR = BUDGETED OHDS

BUDGETED ACTIVITY
= 100

(0.5 *1500) (0.5 *1500) (1 *1000)

= $0.04 per stitching time

OH COST PER UNIT = OAR *ACTUAL ACTIVITY

SD001 = 0.04 * 0.5 =0.02 PER UNIT

SD002 = 0.04* 0.5 =0.02 PER UNIT

SD002 = 0.04 * 1 =0.04 PER UNIT

Working note: 3
Contribution = SD001 = 37.02*20%=9.255
 SD002=38.02*20%=9.505

SD003=45.04*20%=11.26

2. LIMITING FACTOR ANALYSIS

Limiting factor analysis is a technique which will maximise contribution for an organisation, by
allocating a scarce resource that exists to producing goods or services that earn the highest
contribution per unit of scarce resource available. In management accounting, limiting factors
refers to the constraints in availability of production resources.

Assuming fabric 3 being the limiting factor,

particulars SD001 SD002 SD003

Cutting time per suit 0.1 0.12 0.16
Stitching time per 0.5 0.5 1
unit

The availability of stitching time is limited to 3000 hrs. Determine a production plan.

Answer:

Particulars SD001 SD002 SD003

Selling price 46.275 47.53 56. 3

Less: Variable cost (37.02) (38.02) (45.04)

Contribution per unit 9.255 9.51 11.26

÷
Limiting factor 0.5 0.5 2

Contribution / unit @LF 18.51 19.02 11.26

RANKING 2 1 3

PRODUCTION PLAN
PRODUCTS UNITS REQURMENT HRS AVAILABILITY
SD001 1500 1500 * 0.5=750 750

SD002 1500 1500 * 0.5 =750 750

SD002 1000 750*2 = 1500 1500

3. CVP ANALYSIS
Cost volume profit (CVP) Analysis is used to determine how changes in costs and volume affect
a company’s operating income and net income. In performing this analysis, there are several
assumptions made, including; sales price per unit is constant, variable costs per unit are constant,
total fixed costs are constant, everything produced is sold, costs are only affected because
activity changes. If a company sells more than one product, they are sold in the same mix.

Sales mix 3 3 2
CPU per mix 27.78 28.53 22.52
Sales revenue 138.81 142.60 112.6
per mix
CPU per unit 9.26 9.51 11.26

TFC = 700 + 200 + 800 =1700

CPU = contribution per unit *sales mix (per unit) /sales mix
= (9.26*3) + (9.51*3)+(11.26*2)/8
= 78.83/8 = 9.85
Break even sales volume = TFC / WA CPU
= 1700/9.85 = 172
WA C/S RATIO = Total contribution/ total sales
= 9.26*1500+9.51*1500+11.26*1000
46.28*1500+47.53*150+56.3*1000
= 39415/197015 = 0.20

Budgeted sales revenue = TFC/WA C/S Ratio

= 1700/.20
 = 8500
MOS
MOS (in units) = budgeted units – break even units = 4000-172
= 3828
MOS (in %) =budgeted revenue –break even revenue *100
Budgeted revenue
= 197015-8500 * 100
197015
= 95.69

RELEVANT COSTING
Relevant cost is a managerial accounting term that describes avoidable costs that are incurred
when making business decisions. The concept of relevant cost is used to eliminate unnecessary
data that could complicate the decision making process. A big decision for a manager is whether
to close a business unit or continue to operate the company division, and relevant costs are the
basis for the decision.

Assume that his creations have got a new project to stitch 150 suites of SD001 for the
professional students of that institute. Their accountant has prepared a schedule detailing the
costs of new project are as follows:

Room rent $300

Supervisor salary (note 1) $ 900

Tailor $300 (2*150)

Cutter (note 2) 300(2*150)

Admin cost $3000

Heating and lighting $700

Depreciation $2500

Material cost fabric 1 (note 3) $2250(3*150*5)

Fabric 2 $ 2100(2*150*7)

Fabric 3 $750(0.5*150*10)
Note 1: the supervisor is an employee who works on full time basis in Gauthm creations and his
salary is fixed to $900 per month

Note 2: since all the 3 existing cutters are working with their daily projects in business. So
Gauthm creations decided to hire two new cutters. They are paid $2 per piece.

Note 3: Gauthm creations already have 450 metres of fabric 1, which is not regularly or
frequently used.

The customer is ready to pay $4000 for the suites.

Requirement

Decide whether they should accept the project.

RELEVANT COST
Room rent nil

Supervisory salary nil

Tailor $ 300

Cutter $ 300

Admin cost nil

Heating and lighting nil

Depreciation nil

Material fabric 1 nil

Fabric 2 $ 2100

Fabric 3 $750

Incremental profit = relevant revenue – relevant cost

= 4000 – 3450

Incremental profit = $550

There is an incremental profit they are supposed to accept this project.

Working note:
Since all other costs are not incurred only to the new project, so it will not considered as relevant
costs for this new project. Some of these costs are only incurred because of this new project.
However the company has an incremental profit of $550 they accept this project.