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Information Technology Assignment Question
You are a junior member of staff, in a medium sized firm of accountants, you started about six months ago and are training.
Your Manager has asked you, as studying is fresh in your mind, to provide background information for a report he is going to write to justify and explain the nature and need for proper management accounting for a client.
The client is a small business Cakes for Occasions Limited (C4O) it specialises in producing speciality cakes for occasions such as weddings, birthdays and christenings. They have small bakery with 45 staff, including managers, who manufacture the products and do all administration.
You have been asked to write a memo for your manager, covering some of the questions the client has asked. This will then be used as the basis of a report for the client, which your manager will produce at a later date.
You are to include examples; there is guidance in the appendices provided, to illustrate the usefulness of management accounting. These completed appendices with workings, should be attached to the end of the memo as they will not be part of the word count
You are required to clarify areas where the client is unsure of the use of management accounting and complete examples given by your senior, to illustrate best practise in using your management accounting skills.
Read more in the complete solution PDF document at the end of this page.
Your memo should cover the following five areas, guidance is provided for each part:
1. MANAGEMENT ACCOUNTING
Management accounting covers a number of different aspects of the business, it has fundamental differences to the financial accounting discipline, including examples using C4O Ltds business your memo should include:
1.1 An explanation of four main areas of management accounting which make it different to financial accounting.
(2 marks for each valid explanation of main area which make the two disciplines different, including an example of for C4O Ltd, 1 mark for each example connected to the area explained, total 12 marks)
1.2 Define cost centres, justify and provide examples of a simple cost centre structure which would be useful for management accounting for C4O Ltd.
(2 marks for definition, 6 marks for justifying and providing examples of cost centres, maximum 6 marks only if are suitable for the context of the business in the analysis, total 8 marks)
2. COST TYPES AND BEHAVIOUR
Some businesses take great effort to distinguish between fixed and variable costs it is important to be able to define and explain the nature of cost behaviour to C4O Ltd. Explain a number of aspects of cost behaviour in the context mentioned below:
2.1 Define variable costs and fixed costs and provide a suitable example of each for C4O Ltd
(1 mark for each valid definition, 1 mark each example maximum of 2, total 4 marks)
2.2 Detail three assumptions underlying the principles of basic cost behaviour and provide a labelled graph of semi-variable costs in Appendix 1 and explain how the assumptions you have chosen are illustrated in the graph.
(3 marks graph, 3 marks assumption, 3 marks linking assumptions to the graph linked to the graph, total 9 marks)
2.3 C4O Ltd management are worried about using past cost behaviour patterns to predict confidently accurate costs for budgeting. Refer to your answer to 2.4, the calculations in your appendix, in your memo and explain one fact with regard to the data, which would make you more confident in the accuracy of your prediction and one fact with regard to the data, which would reduce your confidence in the accuracy of your answer.
(1 mark for each fact max 2 marks and 1 marks for using numbers in appendices, total 3 marks)
2.4 Complete the example in Appendix 1 to illustrate the use of cost behaviour concepts to predict budgeted costs. Incorporate the answer into your memo using it as an appendix and referring to it in your memo above in 2.1, 2.2 and 2.3
(total 4 marks)
3. ABSORPTION COSTING
Costing methods vary, the fundamental costing methods are absorption and marginal costing.
3.1 Define full absorption costing and marginal costing.
(total 4 marks for a valid definitions, 2 for each)
3.2 Explain two fundamental differences between these two costing methods.
(2 marks for each difference, total 4 marks)
3.3 Illustrate the usefulness of full absorption costing by completing Appendix 2. Incorporate the answer into your memo using it as an appendix and referring to it in your memo above in 3.2
(total 12 marks)
4. MARGINAL COSTING AND BREAK-EVEN-ANALYSIS
Decision making, in particular cost volume profit analysis, is an important part of management accounting.
4.1 Explain what the break-even point, break-even revenue and margin of safety are, why they are useful to C4O Ltd, refer to your answer to 4.2, the calculations in your appendix, in your memo.
(2 marks for a valid definition and 1 mark each for each reason why each one useful, total of 9 marks).
4.2 Calculate break-even point, beak-even revenue, contribution as required and margin of safety in Appendix 3. Incorporate the answer into your memo putting calculations into the appendix and referencing to the appendix in your memo above in 4.1.
(total 6 marks)
5. BUDGETING AND VARIANCES
Budgets are important for small businesses such as C4O Ltd, but they have to be planned correctly. C4O Ltd have provided you with details of expected sales and costs for the first week of next month, using marginal costing.
They have requested you to convert this information into a set of basic operating budgets.
They would also like to more fully understand, what budgets are and an idea of what are important issues when constructing operating budgets. To do this include in your memo the following:
5.1 Provide a definition of a budget
5.2 Explain two issues which must be considered when producing operating budgets, similar to the one in Appendix 4, refer to Appendix 4 when explaining the issues you consider.
(1 mark for each issue, 1 mark for reference to Appendix 4, total 4 marks)
5.3 Produce the Operating Budget and Standard Cost in Appendix 4. Incorporate the answer into your memo putting calculations into the appendix and referencing to the appendix in your memo above in 5.2.
5.4 Calculate the variances as listed in Appendix 4. Incorporate the answer into your memo using it as an appendix and referring to it in your memo below in 5.5
5.5 Explain one reason each variance you have calculated may occur for C4O Ltd, refer to your answer to 5.4, the calculations in your appendix, in your memo.
Read more in the complete solution PDF document at the end of this page.
Information Technology Solution
To: The Manager
From: Siluzia Ferraz Milengo
Date: 19 August 2014
Subject: Cakes for Occasions Limited (C4O) – Accounting clarifications
This memorandum will discuss various background information issues related to business accounting such as; the fundamental difference between business accounting and financial accounting; cost type and their behavior; absorption costing and budgeting & variance analysis. It is described that how cost behavior under various cost centers is giving the budgeted cost to finally prepare the budget for C4O Ltd.
Description of cost types, behavior and discussion on budgeting
1. Management Accounting
Accounting system takes note of economic activities happening in an organization. On the basis of information supplied by accounting system, different stake holders take actions for their benefits. One stakeholder is managers, using this information for the sake of administering the business activities in an organization. This is known as management accounting.
Difference between financial accounting and Management accounting
The goals of both are basically different. Management accounting helps managers in decision making, implementing the strategy; provides the way of performing a job in better way; and in doing cost-benefit analysis. Financial accounting mainly focuses on providing information to the external stakeholders. The main differences are given below.
Area 1) Management Accounting 2) Financial Accounting Example
Information users Useful for mangers help only in three areas viz. planning, implementation and control. Useful for both the insiders (Managers) and outsiders (shareholders, bankers) of the firm. 1) Production control
2) Credit appraisal
Measurement and reporting Do not need to follow accounting standards like GAAP but cost-benefit analysis is taken for decision making The reporting is done strictly in accordance with accounting standards like GAAP. 1) Break-even analysis
2) The income statement
Organizational reach Consider the cost centers, profit centers or say small departments and segments of the organization Considers the organization as a whole. 1) Cake parlor opened by C4O
2) The bakery C4O
Time span of report From very short period like hours to years and uses current figure for futures planning. Considers annual and quarterly information and figures are the past values. 1) Hourly wage rates
2) Sales of goods
Behavioral Implications on managers Affects and decides managers' behavior and actions within the organization. Though not direct implications but affects indirectly in the form of compensation plans when results are good (bad). 1) Manager decides to cut the cost after controlling for wastages.
2) Bad results and manager is fired for poor performance
1.2. Cost centers and their use in management accounting
In every organization to maintain coordination and achieving the goal, various responsibility centers like cost center, revenue center, profit center and investment center is opened where and the accountability of each center is given to the manager for managing and control purposes. A cost center is a responsibility center where the manager is accountable for the costs only. Cost center incurs costs and does not directly participate in the profit of the business. It even doesn't participate directly in the revenue generation.
Example of a Simple cost center
Taking the type and nature and business activities similar to those of our client C4O, I describe the cost center for a bakery as given below. I consider the ordering and delivery department of bakery as a cost center. Here though the activities incurs cost but not directly related to the revenue. The description is given below.
Cost center Activities involved Resources used Costs Involved
Ordering, delivery and service department Taking orders Front office Direct
Delivery at right time and place Packaging and Delivery boys Indirect and direct both
Customer feedback Manager of the department Indirect
2. Cost Types and Behavior
2.1. Variable and Fixed cost
Depending upon the types of resources involved costs can primarily be fixed and variable.
Variable cost – Changes completely in proportion to the level of total activity or volume.
For example- in C4O, suppose the activity is packaging the cakes and deliveries to the client and costs involved are the boxes involved. Here, number of boxes totally varies with number of orders and hence the cost of boxes is totally variable in nature.
Fixed Cost – These are the costs of resources involved, which does not changes in a given period of interval for whatsoever the level of activity is performed.
For example in C4O, one example of fixed cost is salary of the workers manufacturing the cakes in a given months. Here, if we consider the time span of one month, then whether 10 cakes order per day or 100 per day, the salary of the employee involve in manufacturing is fixed. Hence the salary give is the fixed cost in this case.
2.2. Assumptions in Cost behavior principles
• Changes in the level of single activity determine the variation in related costs.
• For a given range (time period) the cost function is linear in nature.
• We estimate the cost function in terms of two variables, i.e. dependent and independent and draw the graph in two dimensional spaces.
A semi-variable cost is known as mixed cost and has both fixed and variable costs elements. The Graph of semi- variable costs involved in manufacturing unit of C4O is explained in Appendix.
The cost classification and description is given below
Activity/resources Direct/Indirect Costs involved
Employee salary Fixed 3000
Raw material Variable £ 5 Per Pound
Total cost function Y = 3000 + 5 X, where X is the number of pounds, the time span is one month.
Fact in the favor of accuracy
When in Appendix 2 I calculated the value of coefficient A, i.e. fixed costs from high low method it is same for both lowest and highest values taken and I need not to approximate the fixed cost in this case. This provides me a base say that my calculations are accurate.
Fact against accuracy
Data given in appendix 2 denotes the batches of cupcakes but number of units or consumption of raw material is not mentioned. Problem may arise when unit of analysis is changed.
2.4. Calculation are given in Appendix 2
3. Absorption Costing
A method of inventory costing in which all fixed and variable manufacturing cost are taken as total inventory costs.
3.1. Full absorption costing- In full absorption costing we consider all manufacturing costs (Fixed and variable) excluding marketing and administrative costs as product costs.
Marginal costing- In this system, only variable cost is treated as product costs of reputational (for future clients) or legal implications in future.
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