Managerial accounting is concerned with providing accounting information Essay

Question 1 ( 1 )

Managerial accounting is concerned with supplying accounting information to section directors who direct and control the operations of an internal concern. Managerial accounting is besides termed as direction accounting or cost accounting. It provides the indispensable informations chiefly for determination devising with which the organisations are really run. Either little or big organisation, it has directors. It is necessary for directors to be responsible in doing programs, forming resources, directing forces, and commanding operations. Managerial accounting allows them to be informed, do better concern determinations and program section schemes in order to increase grosss while minimising costs. The accounting section prepares studies for section caputs, guaranting elaborate cost information is included. Some costs a section director has control over, while fixed operating expense costs leave small room for betterment.

In managerial accounting, there are following types of cost: fabrication costs, merchandise costs, and period costs. Besides, the costs can besides be classified into variable or fixed costs, direct or indirect costs, differential cost, chance cost and sunk cost. However, in this instance survey, we would wish to stress the four chief sorts of costs which are direct costs and indirect costs every bit good as variable costs and fixed costs.

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Direct costs and indirect costs concern on whether a cost can be traced specifically to a cost topic. Direct costs represent any cost that can be indentified straight on the merchandises itself. Natural stuffs, labor costs, and fabrication operating expenses are the common illustrations of primary direct costs. Raw stuff costs refer to the physical stuffs utilizations to bring forth the goods or services ; while the labors are the employees straight involved in the production and the fabrication operating expenses are the disbursals on the installations and equipments which used in the fabrication procedure.

On the other manus, indirect costs include disbursals which are incurred outside a company ‘s production procedure. For cases, office supplies, gross revenues forces and disposal fees are the common indirect costs in a company. The sum of indirect costs should stand for a really little proportion of the company ‘s overall outgos in order to maximise net incomes. How to cognize whether a cost is a direct cost or indirect cost? To be clear, we took an illustration of buying eggs. If a natural stuff of eggs is required for the devising of a peculiar nutrient point, it would be considered as a direct cost ; if the eggs would be used in one of several types of adust merchandises made by the maker, it would be classified an indirect cost since it could non be tied specifically to one object.

Associating to the above mentioned, direct costs and indirect costs are either fixed or variable. Fixed costs are the disbursals that can be budgeted easy and stay changeless, in entire, irrespective of the alterations in activity degree of production. Operating expenses such as depreciation, rent and administrative wages fall under fixed costs. This is because company still has to pay the fixed costs every month regardless of the sums produced or sold. Contrastingly, the costs such as natural stuffs purchases are classified as variable cost due to the alterations in the company ‘s production end product. Besides, hourly employees ‘ rewards are besides good illustration of variable costs because they vary depending upon the figure of hours worked and if overtime is involved.

In this instance survey, the Travel Company has the followerss identified possible costs:

Operating expenses



Tour managers Wages

Direct ;


Identified on the services provided

Vary harmonizing to the Numberss of Tourss guided

Administrative Wages

Indirect ;


Can non be identified on the services provided

Remain changeless regardless the figure of Tourss

Office Rent

Indirect ;


Not affect in the merchandises provided

Budgeted and remain changeless every month

Lighting and Heats

Indirect ;


Not affect in the merchandises provided

Budgeted disbursal

Transportation Fee

Direct ;


Involved in supplying services to clients

Changes upon the length of Tourss

Depreciation on Vehicles

Indirect ;


Can non be identified straight on the merchandises

Budgeted and remain changeless every twelvemonth

Ad Fees

Indirect ;


Difficult to be divided on each merchandise that provided

Budgeted disbursal

Flight Ticket Fees

Direct ;


Identified on the Tourss provided

Vary sing to the alterations of states

Adjustment Fees

Direct ;


Identified on the Tourss provided

Changes harmonizing to the topographic points of Tourss

Dining Expenses

Direct ;


Included in the Tourss provided

Changes harmonizing to the penchants of clients

Telephone Charges

Indirect ;


Difficult to split on each circuit that provided

Budgeted disbursal

Question 1 ( 2 )

Under managerial accounting, we learnt five parts of cost accounting system: ( 1 ) an input measurement footing, ( 2 ) an stock list rating method, ( 3 ) a cost accretion method, ( 4 ) a cost flow premise, and ( 5 ) a capableness of entering stock list cost flows at certain intervals. These five parts and the options under each portion are summarized in the below diagram. Note that many possible cost accounting systems can be designed from the assorted combinations of the available options, although non all of the options are compatible. Choosing one portion from each class provides a footing for developing an operational definition of a specific cost accounting system.

Cost Accounting System

From what we can see in this instance survey, the Travel Company uses pure historical cost system. As the diagram shown below, in a pure historical cost system, merely historical costs flow through the stock list histories. Historical costs, sometimes known as existent costs, refer to the costs that have been recorded. However, in order to find the cost of a goods or service requires many cost allotments. For cases, the Travel Company allocates the cost of fixed assets to clip periods, and allocates certain indirect operating expenses to length of Tourss. Since there are many alternate allotment methods, ( e.g. consecutive line or cut downing balance depreciation ) , the deliberate cost of a circuit merely represents an effort to come close the true cost.

Pure Historical Costing

The pure historical cost accounting is the state of affairs in which comptrollers record grosss, outgos and plus acquisitions or disposals at the historical costs. Under by and large accepted accounting rule ( GAAP ) , historical costs are required in all fiscal statement points be based upon original cost. They are the existent sums of money or value that received or paid in the minutess, but non just market values. In this instance, the Travel Company purchased vehicles to run its concern. This dealing is recorded on the balance sheet at its historical cost. It is non recorded at just market value that might be higher or lower than the original cost.

However, nil is perfect. Such method, over a period of clip has been capable to many unfavorable judgments. Obviously, as it merely interested in cost allotments ( the acquisition cost of an plus ) and does non recognize the current market value. Where there is an acquisition cost of an plus or it depreciates in the undermentioned old ages, it ignores the possibility that the just market value of that plus may be higher or lower than it expects.

In add-on, the Travel Company uses activity based costing ( ABC ) as an stock list rating method. This technique was developed to supply more accurate merchandise costs by following costs through activities. In other words, costs are traced to activities ( activity bing ) and so these costs are traced, in a 2nd phase, to the merchandises that use the activities. The construct of ABC is illustrated in the diagram below.

Activity Based Costing ( ABC )


Under activity-based costing ( ABC ) , overhead costs are allocated to merchandises on the footing of the resources consumed in each activity associating to the design, production, and distribution of peculiar merchandises. Costss are assigned to homogenous cost pools that represent specific activities. The allotment of these costs to merchandises is attempted through appropriate cost drivers. Cost drivers are transaction-related and volume-related, which represent the causes of costs incurred in specific activities. Table below represents certain operating expenses in the Travel Company.

Activity-Based Costing


Cost Drivers

Repairs, care

Repair hours or machine hours


Cost of an plus

Handling Charges

Number of Tourss provided

Personnel direction

Number of employees served

Transportation system Fees

Miles driven

Number of Tourss guided


Lines typed or measures processed

Selling costs

Proportionate to gross revenues in dollars

Administrative costs

Proportionate to gross revenues in dollars


Number of cheques issued

Apart from that, the Travel Company uses occupation orders as the cost accretion. Cost accretion refers to the mode in which costs are collected and identified with specific clients, occupations, batches, orders, sections and procedures. In occupation order costing, costs are accumulated by occupations, orders, contracts, or tonss. The key is that the work is done to the client ‘s specifications. As a consequence, each occupation tends to be different. Job order costing is used since the Travel Company accepts the customized Tourss by instructors. With this, the costs incurred in the Tourss provided are identified by specific orders from different clients.

Costss flow through the stock list histories by the occupation in a occupation order cost system which represents an illustration of specific designation. In the Travel Company, we can cognize that the demands of the Tourss determine the timing of the cost flows. Simple orders tend to travel through the system faster than more complex occupations.

At my point of position, I personally select the activity based costing as the best among all the cost accounting system due to the higher truth costing of all activities to be obtained throughout the concern. Furthermore, it enables accounting users to hold better apprehension on the operating expenses incurred in the company. In other words, it is easier to place the causes where the high or low costs are being incurred. Besides, it utilizes unit cost instead than merely a entire cost and hence, helps in future merchandise planning, pricing finding and etc.

( 1601 words )

Question 2 ( a )

S & A ; W

Income Statement for the twelvemonth ended 31 December 2009

Bolts Piston Valves Total


Gross saless Revenues 960,000 440,000 1,400,000

Less: Variable Production Costss

Materials 400,000 160,000 560,000

Labours 120,000 80,000 200,000

Variable Overheads 40,000 14,000 54,000

560,000 254,000 814,000

Gross Margin 400,000 186,000 586,000

Less: Variable Operating expenses

( WK1 ) Delivery Transport 71,000 13,000 84,000

Contribution 329,000 173,000 502,000

Less: Fixed Overheads

Administration 78,000 78,000 156,000

Selling Expenses 36,000 36,000 72,000

( WK1 ) Delivery Transport 42,000 42,000 84,000

( WK2 ) Factory Rent 60,000 40,000 100,000

( WK3 ) Depreciation 34,000 30,000 64,000

250,000 226,000 476,000

Net Net income 79,000 ( 53,000 ) 26,000

====== ====== ======


( WK1 ) Delivery Transport

Unit of measurements Variable ( 50 % ) Fixed ( 50 % ) Sum


( RM960,000/ RM0.8 ) 1,200,000 RM 71,000 RM42,000 RM113,000

Piston Valves

( RM440,000/ RM2 ) 220,000 RM 13,000 RM 42,000 RM 55,000

__________ ___________ ___________ ____________

1,420,000 RM 84,000 RM84,000 RM168,000

========= ========== ========== ===========

( WK2 ) Factory Rent

Ratio Expenses

Thunderbolts 3 RM 60,000

Piston Valves 2 RM 40,000




( WK3 ) Depreciation ( Straight line method over 5 old ages )

Costss Scrap Value Depreciation per twelvemonth

Thunderbolts RM170,000 NIL RM 34,000 ( RM170,000/ 5 old ages )

Piston Valves RM150,000 NIL RM 30,000 ( RM150,000/ 5 old ages )

Question 2 ( B )

Based on the fringy costing statement in ( a ) , bolts division shows a net net income of RM79,000 while Piston valves division make a loss of RM53,000. The loss that made in Piston valves division might due to the high in fixed operating expenses. Obviously, the gross revenues gross is unable to cover the operating expenses incurred in the division. Nevertheless, the overall net net income gives a positive figure of RM26,000 ; yet there is still room available for betterment.

In order to maximise the net incomes, direction has either to maximise gross revenues or to minimise costs. From my point of position, I personally think that the company should cut down their fixed disbursals such as administrative and selling disbursals. For case, they can take to publicize its merchandises via cheaper selling channels such as the circulars or cyberspace. In add-on, the company can cut down the monetary value or give publicities in order to hike the gross revenues. With this great combination, the company will deduce a favorable net net income.

Question 2 ( degree Celsius )

S & A ; W

Income Statement for the twelvemonth ended 31 December 2010

Bolts Piston Valves Total


Option 1- Increase Price

Gross saless 946,000 504,000 1,450,000

Less: Variable Costss 616,000 285,600 901,600

Contribution 330,000 218,400 548,400

Less: Fixed Costs 260,000 240,000 500,000

Net Net income 70,000 ( 21,600 ) 48,400

====== ====== =======

Option 2 – Reduce Price

Gross saless 1,170,000 432,000 1,602,000

Less: Variable Price 840,000 326,000 1,166,000

Contribution 330,000 155,600 485,600

Less: Fixed Costs 260,000 240,000 500,000

Net Net income 70,000 ( 84,400 ) ( 14,400 )

======== ======= ========


High Low Method:


Gross saless ( units ) Total Costss

High 1,500,000units RM1,100,000

Low 1,100,000units RM 876,000

400,000units RM 224,000

========== ==========

Piston Valves:

Gross saless ( units ) Total Costss

High 240,000units RM566,400

Low 210,000units RM525,600

30,000units RM 40,800

========== ==========

Variable cost = Total cost/ Gross saless ( units )

Thunderbolts = RM224,000/ 400,000 units

= RM0.56 per unit

Piston = RM40,800 / 30,000 units

=RM 1.36 per unit

Entire cost = ( units * Variable cost ) + Fixed cost

Thunderbolts: 876,000 = ( 1,100,000 * RM0.56 ) + Fixed cost

Fixed Cost = RM876,000 – RM616,000

= RM260,000

Piston Valves: RM 525,600 = ( 210,000 * RM 1.36 ) + Fixed cost

Fixed cost = RM525,600 – RM285,600

= RM240,000

Option 1

Option 2


Piston Valves


Piston Valves

Unit of measurements





Gross saless ( RM )





Variable cost ( RM )





Fixed Cost ( RM )





Question 2 ( vitamin D )


Option 1 – Addition Monetary value

Option 2 – Reduce Price

( I ) Contribution per unit ( WK1 )

RM 0.30

RM 0.22

( two ) Breakeven point ( units ) ( WK2 )

866,667 units

1,181,818 units

( three ) Margin of Safety ratio ( WK3 )

26.9 %

26.9 %

( WK1 ) Option 1:

Contribution = Gross saless – Fringy cost

= RM946,000-RM616,000

= RM330, 000

Contribution per unit = RM330,000/ 1,100,000 units

= RM0.30

Option 2:

Contribution = RM1,170,000 – RM840,000

= RM330,000

Contribution per unit = RM330,000/ 1,500,000 units

= RM0.22

( WK2 ) Option 1:

Breakeven point ( units ) = Fixed cost/ Contribution per unit

= RM260,000/ RM0.30

= 866,667 units

Option 2:

Breakeven point ( units ) =Fixed cost/ Contribution per unit

= RM260,000/ RM0.22

= 1,181,818 units

( WK3 ) Option 1:

Margin of safety ratio = [ ( expected gross revenues – breakeven gross revenues ) / Breakeven gross revenues ] ten 100 %

= [ ( RM946,000 – RM745,333* ) / RM745,333 ] x 100

= 26.9 %

*Breakeven gross revenues: 866,667 units x RM0.86= RM745,333

Option 2:

Margin of safety ratio = [ ( expected gross revenues – breakeven gross revenues ) / Breakeven gross revenues ] ten 100 %

= [ ( RM1,170,000 – RM921,818* ) / RM921,818 ] x 100

= 26.9 %

*Breakeven gross revenues: 1181818 units x RM0.78 = RM921,818

Question 2 ( vitamin E )

Option 1 – Increased Monetary value

Thunderbolts: Contribution to gross revenues ratio = Contribution/ Gross saless x 100

= ( RM330,000/ RM946,000 ) x 100

= 34.9 %

Piston Valves: Contribution to gross revenues ratio = Contribution/ Gross saless x 100

= ( RM218,400/ RM504,000 ) x 100

= 43.3 %

Question 2 ( degree Fahrenheit )

Thunderbolts division

Based on fringy costing statement in ( a ) , it shows that bolts division is doing a net net income of RM79,000. While the direction suggested the option 1 – to increase monetary value ; and option 2 – to cut down monetary value, it ends up demoing a same net net income of RM70,000 as in ( degree Celsius ) . Opposite with the gross revenues grosss, which it shows the option 2 is bring forthing higher gross revenues of RM 1,170,000 compared to option 1 ‘s of RM946,000. Meanwhile, if the company uses the original costing program, the gross revenues is RM960,000. From what we can see above, cut downing the cost per unit of Bolts is decidedly boosted the gross revenues ( Option 1 – 1,100,000 units and 1,500,000 units – option 2 ) . In decision, the direction should cut down the monetary value in order to pull clients to buy the merchandise.

Piston Valves division

Based on the fringy costing statement in ( a ) , it shows that Piston valves division is doing a loss of RM53,000. Unlike bolts division, while the direction suggested to increase monetary value, the loss is evidently understating to RM21,600. On the other manus, there will be higher loss of RM84,400 if the direction chose to cut down monetary value of the Piston valves. As a decision, in this division, the company can hike its gross revenues by increasing the monetary value, and therefore, understating the loss in the production.


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