T217 ACC202 MANAGEMENT ACCOUNTING ASSIGNMENT

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1 T217 ACC202 MANAGEMENT ACCOUNTING ASSIGNMENT

2 Table of Contents Part (a)... 3 Part (b)... 4 Part (c)... 5 Part (d)... 6 Part (e)... 7 Part (f)... 9 Bibliography... 10

3 Part (a) Traditional cost approach follows absorption costing approach i.e. it does not make any differentiation between fixed cost and variable cost. Under traditional cost approach cost per unit calculated by dividing total cost (whether fixed or variable) by dividing a total number of units produced (Cooper & Kaplan 1991). In the present case, the company is producing canisters. Calculation of cot per unit of producing canisters, Direct materials $ 300, Direct labor $ 180, Variable overhead $ 120, Fixed overhead $ 540, Total cost $ 1,140, Number of canisters produced Cost per canister $ 1.50

4 Part (b) In this part, the company has two option to produce its product one is inside production and other is purchase from outside supplier. In both cases company will get same revenue hence for making this choice between make option and buy option, the company will accept the option having lower relevant cost (Platts, Probert & Canez 2002). Hence, the Compression between the cost incurred in inside production and purchase of canisters In house production Purchase from outside Purchase cost (760000*1) $ 760, Direct materials $ 300, Direct labor $ 180, Variable overhead $ 120, Fixed overhead $ 108, Total cost $ 708, $ 760, The total cost of in house production is lower than the cost of purchase from outside hence it is recommended to the company to make canisters in-house and does not purchase from outside suppliers. Purchase from outside cost $ 760, In house production cost $ 708, Saving in in-house production $ 52, Working note Relevant Fixed cost under option of outside purchase Supervisor s salary $ 80,000 Machinery depreciation $ 28,000 Relevant Fixed cost $ 108,000

5 Part (c) Purely on financial grounds means that company is making a decision only on the basis of financial profits or loss made (Miller & Upton 1976). In the present case, the company is having an offer to sale its production to a special offer on a price lower than the normal market price of company s production. If a company is making a decision purely on financial grounds then the company would accept an offer if the offer will result in financial profits. Financial net profit/ (loss) from the acceptance of offer will be, Revenue from additional sale (20000*1.4) $ 28, Less: manufacturing cost Direct materials (20000*300000/760000) $ 7, Direct labor (180000*20000/760000) $ 4, Variable overhead (120000*20000/760000) $ 3, Total manufacturing cost $ 15, Net profit $ 12, Due to acceptance of this offer company would earn profits of $ hence acceptance of this offer is will be in favor of company from financial grounds.

6 Part (d) In the present case, the company accepts the offer to sale its product on a price lowers then the market price for making additional profits. This offer is good from the financial point of view but may not be good from other prospective. Hence company should take into consideration following factor which may influence the decision of company, 1. Customers: Due to acceptance of this offer, customers of the company may lose their loyalty to the company due to different prices for the same product hence company should consider this factor (Mohamed & Kamarudin 2013). 2. Capacity: Company should consider the capacity of machinery and present staff of the company. 3. Competition: Acceptance of special offer may increase the competition for the company hence this factor is also required to take into consideration.

7 Part (e) In the present situation, the company is having two options, one is in-house manufacturing of coffee cups and purchase of canister from the outside supplier and other is to continue with manufacturing canisters in-house. The company will take the option which will provide higher profits after incurring relevant costs. Relevant cost is a cost which influences the decision making relevant cost does not include sunk cost and irrelevant cost i.e. the cost which will remain same in all options. Calculation of profit under option one, in-house manufacturing of coffee cups and purchase of canister from the outside supplier, Revenue Canister (2.2*760000) $ 1,672, Coffee cup (1.2*400000) $ 480, Total revenue $ 2,152, Expenses Purchase cost (760000*1) $ 760, Direct materials (400000*.6) $ 240, Direct labor (400000*.2) $ 80, Variable overhead (400000*.1) $ 40, Fixed overhead (400000*.15) $ 60, Total cost $ 1,180, Profit $ 972, Calculation of profit under option two, continue with manufacturing canisters in-house, Revenue (2.2*760000) $ 1,672, Expenses Direct materials $ 300,000.00

8 Direct labor $ 180, Variable overhead $ 120, Fixed overhead $ 108, Total cost $ 708, Profit $ 964, Profit under option one is higher than in option two hence it is recommended to the company to continue option one i.e. in-house manufacturing of coffee cups and purchase of canister from the outside supplier. Working note: Calculation of relevant fixed overhead under option two Supervisor s salary 80,000 Machinery depreciation 28,000 Total fixed cost 108,000

9 Part (f) There are many non-financial factors which require consideration before making a decision regarding the in-house manufacturing of coffee cups and purchase of canister from the outside supplier. Some of those reasons are, 1. Customers: Inclusion of coffee cups in the sales mix may affect the present demand and loyalty of customers hence company should consider this factor. 2. Capacity: Company should consider the capacity of machinery and present staff of the company. 3. Quality: Quality of containers supplied by the outside supplier will affect the demand and loyalty of customers hence company should consider this factor (Berry & Jarvis 2005) 4. Supplier relation: Company should also consider its relationship with the supplier before making a decision of outside purchase of canisters. 5. Other factors: Any other factor which will be relevant to this decision like a trade secret, process control also taken into consideration by the company.

10 Bibliography 1. Berry, A & Jarvis, R 2005, 'Qualitative factors', in Accounting in a Business Context, Cengage Learning EMEA. 2. Cooper, R & Kaplan, RS 1991, 'Profit priorities from activity-based costing', Harvard business review, vol 69, no. 3, pp Miller, M & Upton, C 1976, 'Leasing, buying, and the cost of capital services', The Journal of Finance, vol 31, no. 3, pp Mohamed, MIBHP & Kamarudin, ARB 2013, NON-FINANCIAL FACTOR FOR MAKE- OR-BUY DECISION IN SME, viewed 9 september 2017, < 5. Platts, K, Probert, D & Canez, L 2002, 'Make vs. buy decisions: A process incorporating multi-attribute decision-making', International Journal of Production Economics, vol 77, no. 3, pp

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