Management accounting assessments

Please complete all two questions. Question 1

Patel Ltd is a small start-up family-owned business that manufactures and sells a single

product to customers in UK. The company has recently been approached by a UK university for an order of 75,000 office sets (easy desk & chair) for the opening of four new campuses, which is expected to be their total sales for the year. The CEO is currently reviewing the following information for this order:

 

Cost per unit £
Direct materials per chair 13
Direct labour per chair 9
Variable selling & distribution cost 5
Other variable production overhead 3
Total fixed cost 360,000

 

 

The CEO is evaluating the possibility of pricing £36 per office set.

Required:

As a team member of accounting department, you are required to provide the following information to the CEO:

  • Explain why it is important to classify cost in terms of behaviours, and how cost can be classified by different behaviours.

 

  • Calculate the break-even point and margin of safety if Patel Ltd prices their office set at

£36 per unit. Draw the break-even chart that shows break-even point and margin of safety.

 

 

The CEO has noticed the following details on the actual total fixed costs for the year ended 30 June 2019 and is keen to know the impact on profit if product is valued at either marginal cost or full cost (absorption cost):

  £
Factory Rent 46,000
Factory Power Consumption 40,000
Factory Wages 120,000
Storeroom Wages 36,000
Depreciation of factory equipment 28,000
Advertising Expenses 38,000
Administrative Expenses 32,000
Fixed selling & distribution cost 20,000
Total 360,000

 

 

The budgeted and actual production units for the year are as follow, with no opening inventory:

  Production units
Budgeted 90,000
Actual 91,000

 

 

  • Calculate the anticipated profit for the order of 75,000 chairs by using marginal costing. (Note that a full statement of profit or loss is not required)
  • Briefly describe all the steps required to calculate a full cost using absorption costing.
  • Prepare a statement of profit or loss for Patel Ltd for the year ended 30 June 2019 using absorption costing, assuming budgeted fixed overheads are equal to the actual fixed overhead. Explain how net profit figures are different under marginal and absorption costing. All workings must be clearly shown.

 

The senior management team is considering adopting a cost-plus pricing approach to improve Patel’s financial performance, which is to calculate the price based on cost plus a mark-up of 30%. Yet the management team is uncertain whether price should be based on full cost or marginal cost. Your line manager asked you to:

  • Explain the difference between mark-up and margin in cost-plus pricing.
  • Calculate the price based on full-cost plus and marginal-cost plus, provided that budgeted sales and production units, costs and expenditures remain constant.
  • State THREE advantages and THREE disadvantages of the company’s intended pricing approach.

 

Question 2

SunPower Ltd manufactures, sells, and installs solar panels that are sold to domestic customers. The industry is highly competitive, and the management team reviews the company’s performance on a monthly basis. The trainee Management Accountant has therefore produced a comparison of budgeted and actual performance for April and this is shown below:

 

Comparison of budgeted and actual performance for April

 

  Budget Actual
Sales volume (units) 1,300 1,180
  £ £
Sales revenue 383,500 348,100
Direct material 104,000 91,450
Direct labour 71,500 70,800
Production overheads 55,750 55,100
Selling & installation costs 109,750 95,280
Administration costs 26,500 26,800
Profit 16,000 8,670

 

 

Production overheads and administration costs are believed to be fixed, whereas selling and installation costs are semi-variable. The selling and installation cost budget was set by taking appropriate information from the results for the last three months of 2019, which are shown below:

Selling and installation costs

 

  Sales (units) Total cost (£)
October 1,250 106,000
November 1,550 128,500
December 1,400 118,500

 

The Finance Director is concerned that the selling and installation costs budget may have been padded, but the Installation Manager complained that the budget includes costs that she does not control.

 

Required

  1. Explain what a budget is and state THREE reasons why companies produce budgets.
  2. Calculate the selling and installation costs by using high-low method, with brief explanations of the method you use.
  3. Produce a performance statement for April using flexible budgeting principles. All calculations must be clearly shown.
  4. Explain what “padding the budget” involves and why it might occur.

 

  1. Discuss whether managers should be evaluated based only on costs and revenues that they control.

 

 

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