Management Accounting Assignment 1

Unit OutcomesOutcome Evidence for Internal Verification First attemp t work Using different costing methods 1.2 Calculate costs using appropriate techniques 1.3 Analyse cost data using

BANKING ACADEMY, HANOI BTEC HND IN BUSINESS (Accounting)

ASSIGNMENT COVER SHEET

NAME OF STUDENT Nguyễn Thị Kiều Anh - Snow

UNIT TITLE Unit 9: Management Accounting: Costing and Budgeting

ASSIGNMENT TITLE Cost Information Analysis

NAME OF ASSESSOR Mr Jun Alejo Bathan

SUBMISSION DEADLINE 26th April 2013

I, Nguyễn Thị Kiều Anh _ hereby confirm that this assignment is my own work and not copied or plagiarized from any source I have referenced the sources from which information is

obtained by me for this assignment.

_ 26 th April 2013 Signature Date

-FOR OFFICIAL USE

-Assignment Received By: Date:

Unit Outcomes

Outcome Evidence for

Internal Verification

First attemp t

work

Using different costing methods

1.2

Calculate costs using appropriate techniques

1.3

Analyse cost data using appropriate techniques

Use performance indicators to identify potential improvement

2.2

Suggest improvements

to reduce costs, enhance value and quality

2.3

Outcome Evidence for

Internal Verification

Assignment

( ) Well-structured; Reference is done properly / should be done (if any)

Overall, you’ve

Areas for improvement:

ASSESSOR SIGNATURE DATE / /

NAME:

(Oral feedback was also provided)

STUDENT SIGNATURE DATE / /

Management Accounting: Costing and Budgeting

Cost Information Analysis

TABLE OF CONTENT

EXECUTIVE SUMMARY 6

INTRODUCTION 7

Task 1: A report of cost and control the cost in Binh An company 8

1 Classification of cost incurred in Binh An company 8

2 Calculation manufacturing overhead cost absorbed to jobs in the period 12

3 Prepare income statement for the period 13

4 Quality improvement and value enhancement for reducing cost 16

Task 2: The income statement in Hung Anh Company 18

Task 2a: Absorption and marginal costing 18

1 Absorption costing income statement for 2 options 18

2 Marginal costing income statement for 2 options 20

3 Explanation for difference raised 22

4 Discussion the relative usefulness of the variable costing income statements versus the absorption costing income statements 23

Task 2b: Overhead apportionment 24

1 Preparation a cost distribution sheet using the sequential (step-down) method 24

2 Comment on the possible distortions can arise from overhead apportionment 25

Task 3: Using the job costing and process costing method in Manh Hung Company 25

1 Calculation costs using appropriate techniques 25

2 Using different costing methods 28

CONCLUSION 30

REFERENCES 31

is divided into 3 tasks:

The first one is analyze the cost information within Binh An In this task, it involves 4 parts:

 Classify different types of cost incurred in Binh An company

 Calculate costs using appropriate techniques

 Use performance indicators to identify potential improvement

 Suggest improvements to reduce costs, enhance value and quality

The second task is requiring evaluating the manager’s performance based on provided

information of Hung Anh company by absorption costing and variable costing income statement This task divided into 3 parts:

 Calculate costs using appropriate techniques

 Analyze cost data using appropriate techniques

 Prepare and analyze routine cost reports

The last task mentions about the using of job costing and process costing method in Manh

Hung Company This task is just makes to be more clearly for the following 2 parts:

 Calculate costs using appropriate techniques

 Analyze cost data using appropriate techniques

Besides, in the case of Hung Anh Company - a division of Binh An Group whichmanufactures and sells special chromed parts and Manh Hung Company which manufacturesbicycles and tricycles, based on production data and cost data, this report also helps thelearners know how to use appropriate techniques for calculating and analyzing problemsabout cost as well as ways to solves it

Task 1: A report of cost and control the cost in Binh An company

1 Classification of cost incurred in Binh An company

Cost classification involves arranging costs into groupings of similar items in order to makestock valuation, profit management, planning, decision making and control easier (BPP,2010)

We can classify the costs incurred in Binh An company into 3 types of cost:

- Manufacturing costs (Product Costs)

- Non-manufacturing costs (Period Costs)

- Group of fixed costs, variable costs and Semi-variable Costs (Mixed costs)

1.1 Manufacturing costs

Manufacturing costs are the costs necessary to convert raw materials into products Theresulting units costs are used for inventory valuation on the balance sheet and for thecalculation of the cost of goods sold on the income statement [ CITATION Avend \l 1033 ]

Manufacturing costs are tupically divided into 3 categories: direct materials, direct labour, and factory overhead (manufacturing overhead).

a) Direct materials

Direct materials is cost of the materials which become part of the finished product[ CITATION Avend \l 1033 ] For Binh An company, they produces brass musical instruments,direct materials is therefore brass sheet metal and brass tubing

According to scenario:

 Requisitions No 112: 250 square feet of brass sheet metal at $5 per square foot (for job number T81)

 Direct material for T81= 250 × $5 = $1,250

 Requisitions No 113: 1000 pounds of brass tubing, at $10 per pound (for job number C40)

 Direct material for C40 = 1000 × $10 = $10,000

The total of direct materials is $1,250 + $10,000 = $11,250

b) Direct labour

Direct labour is the cost of the wages of the individuals who are physically in converting rawmaterials into a finished product [ CITATION Avend \l 1033 ]

According to scenario:

 Direct labor: Job T81, 800 hours at $20/hour

 Direct labor for T81 = 800 × $20 = $16,000

 Direct labor: Job C40, 900 hours at $20/hour

 Direct labor for C40 = 900 × $20 = $18,000

For Binh An company, the total direct labour is therefore $16,000 + $18,000 = $34,000

c) Factory overhead or manufacturing overhead

Factory overhead refers to all other costs incurred in the manufacturing activity which cannot

be directly traced physical units in an economically feasible way Factory overhead is also

described as indirect manufacturing costs [ CITATION Avend \l 1033 ] This types is divided into

7 smaller types of cost below

 Indirect material: Indirect materials are materials used in the production process, but

which cannot be linked to a specific product or job [ CITATION Cit13 \l 1033 ]

For the case of Binh An company, Indirect materials is lubricant so the cost of indirectmarterial is $100 (10 gallons × $10)

 Indirect labor: Indirect labor is the cost of any labor that supports the production

process, but which is not directly involved in the active conversion of materials intofinished products [ CITATION Cit13 \l 1033 ]

For the case of Binh An company, Indirect labour included general factory cleanup

-$4,000 and factory supervisory salaries - $9,000 The total indirect labour is therefore

$13,000 ($4,000 + $9,000)

 Depreciation: Depreciation of the factory building and equipment of Binh An

company during 1st quarter amounted to $12,000

 Rent expense: Rent paid in cash for warehouse space usage of Binh An Company

during 1st quarter was $1,200

 Utility costs: For Binh An Company, utility cost incurred during 1st quarter amounted

to $2,100

 Property taxes: According to scenario, property taxes on Binh An Company were

paid in cash, $2,400

 Insurance: For Binh An Company, the insurance cost covering factory operations for

the quarter was $3,100

1.2 Non - manufacturing cost (Period cost)

Non-manufacturing costs are costs that are not related to the production of goods; they are

also referred as period costs These costs have two components - Selling costs and

Administrative costs [ CITATION Hound \l 1033 ]

According to scenario:

 The cost of salaries and fringe benefit for sales and administrative personnel paid

in cash during quarter amounted to $8,000

 Depreciation on administrative office equipment and space amounted to $4,000.

 Other selling and administrative expenses paid in cash during quarter amounted to

$1,000

The total of period cost is therefore $13,000 ($8,000 + $4,000 + $1,000)

1.3 Fixed costs, variable costs and semi-variable

 Fixed costs

Fixed costs are costs which are incurred for a particular period of time and which,within certain activity levels, in unaffected by changes in the level of activity[ CITATION BPPnd2 \l 1033 ] Fixed costs include some costs: rent, depreciation andadministrative salaries

 Variable costs

Variable costs are costs which vary with the level of activity [ CITATION BPPnd2 \l

1033 ] There are some costs are determined as the variable costs: sales commission,advertising costs, and machine lubricants

 Mixed costs (Semi - variable)

Mixed costs are costs which contain both fixed and variable components and so arepartly affected by changes in the level of activity [ CITATION BPPnd2 \l 1033 ] Somemixed costs are electricity and gas bill, sales representative salary

cost cost Direct cost

material

DirectLabor

Manufacturingoverhead

Table 1: The different types of costs incurred in Binh An Company

2 Calculation manufacturing overhead cost absorbed to jobs in the period

Predetermined overhead rate is calculated by formula:

Budgeted yearly total factory overhead costs

Predetermined overhead rate =

Budgeted yearly activity (direct labor -hours, ect.)

According to the scenario, the company has estimated that the company’s budget for thecurrent year included budgeted total manufacturing overhead would be $426,300 andbudgeted total direct labor hours would be 20,300.

 Predetermined overhead rate = Budgeted total manufacturing overhead Budgetedtotal direct labor hours

= $ 426,300

20,300 = $21 per direct labor hour

 Overhead absorbed

Overhead absorbed is formula as follow:

Overhead absorbed = Predetermined overhead rate × Direct labor hours

 Manufacturing overhead absorbed T81 = $21 × 800 = 16,800

Manufacturing overhead absorbed C40 = $21 × 900 = 18,900

 Total manufacturing overhead absorbed = 16,800 + 18,900 = 35,700

 Actual manufacturing overhead = $33,900 (table 1)

Table 2: Valuation of absorbed overhead

As can be seen in the table above, the actual overhead is lower than the overhead absorbed

Therefore, manufacturing overhead is over-absorption To account the over-absorption

overhead, Binh Minh should debit it to actual manufacturing overhead cost and credit to theCost of goods sold

3 Prepare income statement for the period

3.1 Income statement

Binh An CorporationIncome statement for the period

+/- Under/Over absorbed cost (1,800)

 Total manufacturing cost = $1,250 + $16,000 + $16,800 = $34,050

According to scenario, during the first quarter of 200X, the firm worked on Job number T81, consisting of 76 trombones

 Manufacturing cost per unit = 34,050

76 = 448.026

 Cost of goods sold = 448.026 × 76

2 = 17,025

 Over absorbed cost = (1,800) (Table 2)

 Gross Margin = Sales – Cost of goods sold - Over absorbed cost

 Gross Margin = 30,400 - 17,025 - (1,800) = 15,175

 Operating cost (Administrative & Selling cost) = 13,000 (table 1)

 Net income = Gross margin - Operating cost

 Net income = 15,165 - 13,000 = 2,175

b) 4th quar 200x-1

According to scenario

- Sales = 28,300

- Cost of goods sold = 14,100

- Operating cost (selling and administrative cost) = 13,200

 Gross Margin = Sales - Cost of goods sold

 Gross Margin = 28,300 - 14,100 = 14,200

 Net income = Gross Margin - Operating cost

 Net income = 14,200 - 13,200 = 1,000

3.2 Calculate and evaluate indicator of productivity, efficiency and effectiveness

In order to understand about the productivity and efficiency and effectiveness within Binh AnCompany, need to calculate and evaluate 3 ratios; these are Profit margin, Gross Margin, andCOGS to sales

Net Profit Margin = Net income

Sales

2,17530,400 = 7.15%

1,00028,300 = 3.53%Gross Profit = Gross Margin Sales 15,17530,400 = 49.92 % 14,200

28,300 = 50.18 %COGS to sales = COGS Sales 15,22530,400 = 50.08 % 14,100

28,300 = 49.82%

Table 3: Calculation ratios of two period

Net Profit Margin Gross Profit COGS to sales

 Net profit margin: In the period 4th quar.200X-1, net profit margin = 3.53% Itmeans that the company has a net income of $3.53 for each dollar of sales As can beseen from chart above, net profit margin increase 3.62% (7.15% - 3.53 %), this is alsopositive change for this company although profit is not high

 Gross profit margin: Gross profit margin decrease 0.26% (50.18% - 49.92%) from

4th quar 200X- 1 to 1st quar 200X This is a negative change for Binh An Company

It can be said that, Binh An do not have an effective strategies in using materials andlabour in production process Therefore, Binh An should improve in the management

of material and labor to reduce costs incurred in production process

 Cost of goods sold to sales: COGS to sales increase 0.26% (50.08% - 49.82%) It

increases 0.52% compared with the last year (0.26/49.82 × 100% = 0.52%) It is veryeasy to recognize that COGS to sale have an increase but it only increases with smallratio Therefore, this still has effect not good on company The company need havesolutions to increase sales and reduce cost

In brief, in the period 1st quar.200X, sales is higher than the period 4th quar.200X-1 butoperating cost decrease, moreover profit is not high Therefore, the company’s managersshould find out ways to control and continue reducing the cost to increase more profit andrevenue for company Besides, managers can improve working methods and reassessingsources of finance to recognize shortcomings to improve it better and better

3.3 Some possible standard and control measures on the utilization of materials, labor and other manufacturing expenses.

In order to increase profit and revenue for the company, Binh An should control the costs

of goods sold, proposes some standard and control measures to reduce costs and reducelevel of wastage based on the utilization of materials, labor, and other manufacturingexpenses, for example:

- By negotiating with suppliers about price and quality of materials, the companycan perceived reasonable price for material costs Besides, the company can buildgood relationship with suppliers and become close customers to be receiveddiscount

b) Labor

- Machines or modern technology can be used instead of manual labor to cut labourcosts

- By hiring the right worker for the right job training and educating staff willincrease productivity and efficiency in working and reducing labor costs

4 Quality improvement and value enhancement for reducing cost

4.1 Quality

Quality means the degree of excellence of a thing – how well made it is, or how well it isperformed if it is a service, how well it serves its purpose, and how it measures up againstits rival [ CITATION BPPnd2 \l 1033 ]

From the point of view of the customers, they evaluate product’s quality based on thecharacteristics, function of product compared to other company’s product For companyview, quality’s product is evaluated based on levels of customer’s satisfaction to product

 Cost of quality

The cost of quality has two main components: the costs of good quality (or the cost ofconformance) including Prevention costs, Appraisal costs and the cost of poor quality (orthe cost of non – conformance) including Internal failure cost and External failure costs[ CITATION Cro79 \l 1033 ]

 Quality improvement for Binh An Company (Potential improvement)

Binh An can follow total quality management (TQM) to improve quality:

Benefit of TQM

- Reduce of defects

- Ease of problem solving

- Continuous improvements

- Lead to customer’s satisfaction

- Generate good reputation for the company

- Cost saving and profitability improvement [ CITATION BPPnd2 \l 1033 ]When Binh An Company use TQM, it will reduce costs of poor quality, however, thecost of good quality will increase because one of basic principles in using TQM is that

of cost of preventing mistakes is less than the cost of correcting them Thus, it is veryimportant for the company is that the company should ensure that the addition costswill never outweigh the cost savings

4.2 Value