Cost and Management Accounting Assignment Sem-3 June’22

Q1) Management accounting is focused on bringing a greater degree of efficiency to the

core business operations. Discuss, management accounting, and its role, and highlight if
you are working as a management accountant in an enterprise, what would be the
potential areas wherein you would like to bring more efficiency.

Introduction:

It is the process of measuring, analyzing, and reporting financial and non-financial

information that helps managers make decisions to fulfill the goals of an organization.
Managers use management accounting information to develop, communicate and implement
strategies and coordinate product design, production, and marketing decisions and evaluate a
company’s performance. It helps in computing the cost of production/ service systematically
to control cost and is an internal reporting system for the management to take decisions. Data
considers a futuristic approach and is classified basis the Functions, activities, products,
processes and internal planning and control, and information needs of the organization and
implies both quantitative and qualitative data.

Concept and Application:

There are four broad objectives that Management accounting accomplishes in an

organization:

1) Planning: Preparing a Plan and ensuring its execution to achieve short and long terms
goals through Budget preparations.
2) Allocation of resources: The resources in terms of raw materials, workforce, and
other requirements to facilitate production and services efficiently is allocated to
various divisions/units duly assessing their requirements.
3) Direction and Motivation: Once the resources are allocated in a required manner,
there is a need to direct and motivate people for optimum contribution. Since
efficiency is linked to incentives, the managers at different levels are engaged in
providing the required direction and motivating people to contribute in an optimum
manner.
4) Monitoring and Control: Proper monitoring at different intervals is very much
essential to achieve goals and optimize the cost. The management reviews the targets
about the actual state and assesses the reasons for the gap to take corrective actions in
the future.

It analyses different cost elements by allocating them in a very scientific manner to arrive at
the correct contribution from different products. Based on an in-depth analysis of costs,
revenue, capacity utilization, and contribution, it also decides whether to buy a particular
product from the market or produce on its own. It also suggests if various strategies can make
a product profitable and if not, whether it will be wise to shut down a plant or product.

Information and Use of Management Accounting:

1) Cost Measurement: It measures full cost including Direct (directly apportioned to

the products or services ) and Indirect cost (not allocated directly to the product or
services) which serves different purposes and is used for different decisions
2) Monitoring and Control: Another important use of management accounting
information is to monitor closely the cost aspect of a product or process and
 implement important effective control measures to optimize the cost while not
compromising on quality.
3) Facilitates Decision Making: It generates appropriate and required information for
future decision-making relative to various operations of a firm which may involve
Making or Buying decisions, further processing, Shutting down operations, increasing
production capacity, Determining the selling process, and other related decisions.

Tools and Significance of Management Accounting:

1) Strategy Formulation: Creating value for the customer through proper planning and
implementation of the strategies. The ultimate target is to reduce costs and improve
efficiency
2) Efficient Supply Chain: The flow of goods, services, and information enhance the
performance of the firm. Tools such as standard costing and Target costing are
effective for cost control and cost reduction and thus ensure enhanced customer
satisfaction.
3) Decision Making Science: Techniques such as Marginal costing help generate
information that is useful for taking managerial decisions such as Make or buy, drop a
product line, additional Working shift, Capital expenditure decisions, etc.
4) Analysis of Performance: Several tools such as Budgets and budgetary control,
standard costing, and marginal costing are used in measuring actual performance
5) Responsibility Centres: Fixing responsibility by creating different centers such as
cost, profit, investment, etc.

Conclusion:

If I was the management accountant of the firm the various decisions that I would take would
lower the cost and bring more efficiency to the system using automation of the processes
which are done manually to use the same manpower elsewhere whenever required. There
would be a leisure activity time for the employees in the company so that they need not sit
empty-handed and utilize their time saved in the leisure activities to keep the mind in a light
mood. Always I would like to incentivize the new ideas i.e. suppose an employee x comes
with an idea from end to end then if that gets implemented the portion of the profit would go
to the employee directly to the employee which would encourage overall growth of the
company as well as the employee. These are some of the key managerial decisions I would
like to take to reduce cost and increase profit quantitatively as well as qualitatively.
Q2) From the following information provided by Alfa Manufacturing Ltd, prepare a
statement of equivalent units and also, Discuss the concept of equivalent units
Particulars Quantity

Opening stock of inventory (60 percent complete) 500

Units introduced during the year 10000

Closing inventory of stock (completion percentage, 40% complete) 200

Introduction:

Equivalent units of production are work-in-development stock after an accounting year and is
used to determine the value of the units that are in process which are useful to calculate the
internal money flow in process costing . These describe the work completed on the under
process units. In other words, when you have 1000 devices in manufacturing but only spend
50% of the processing expenses on them, you appear to have five hundred comparable units
of production. Equivalent units are an accounting control concept. Because natural substances
are generally brought at the start of the procedure of production, while all different costs are
concerned as the materials go through the process, equivalent units of manufacture are
usually mentioned for my part for direct material and all extra synthetic expenses. As a result,
specific materials have more excellent equivalent units than different production costs.

Concept and application:

If there is no stock, unit expense may be computed using dividing the rate by the number of
merchandise finished in process costing. But, while there are starting and closing inventories,
computations get quite complicated. Raw materials are provided at various manufacturing
levels, together with the beginning of handling and the ending of processing, i.e., because the
process progresses. There's a shift in the unit price when substances are delivered to reinforce
the number of units. While a continous technique is used, there is constantly unfinished work
on each cycle's beginning and at the end until finished. Due to the fact, the work-in-
development cannot take in the cost of completed units; ignoring unfinished devices might
not represent the actual value. The work-in-development has to be translated into their
finished-unit equivalents.

Converting partially finished units within the work-in-procedure stock to completed units is
required for process costing (equivalent units). Equal devices might be the same as physical
devices if the actual units are 100 percent complete. At the same time, the same units might
be smaller than the physical devices if the existing devices are not a hundred percent overall.
The variety of education (or fundamental) devices handy is accelerated by using the
percentage of units finished getting equivalent units.
Calculation of the Equivalent Production:

Particulars Units

Opening Work-in-progress required to be completed (500 * 40%) 200

Add: Units introduced and completed during the period (10,000 – 9,800
200)

Add: Closing Work-in-progress (200 * 40%) 80

Completed Equivalent Units 10,080

While there is a commencement stock of labor-in-development, the finished output is split

into batches. Some might be units that have been completed in a prior period, and others that
can be new units introduced in the present duration. Because costs range over the years, each
pattern might also have various unit costs. Relying on which of those methodologies is
selected, the manner for figuring out similar production of work-in-development varies. The
costing approach additionally determines the cost disparities. Costing is typically
accomplished in ways. (1) Costing Averages (2) FIFO (First-in, First-out) costing.

The average costing technique combines work-in-manner within the preliminary period (both
units and charges) with new manufacturing starting inside the reporting area (each group and
costs) to achieve the commonality in keeping with the unit. Once they are begun, all devices
finished in a specific period are allocated the process cost. The truth is that a few processing
changes achieved in a previous length at a fee that could differ from the present duration
aren't always considered.

The FIFO estimating technique depends on the assumption that pieces in development inside
the initial undertaking would be completed first. This method of costing is extra complex
than making use of typical costs. The charges are documented in the chronological collection,
starting with bills brought forward as work-in-progress inventory from the previous region
and including the costs concerned in their entirety to establish the final finished charge. In
exercise, the FIFO approach is not observed all of the manners via. Expenses are separated
within batches, and fees are shifted from work-in-progress to the very last production.

Conclusion:

Work-in-process (WIP) inventory continue to be on the remaining of the accounting period,

process costing indictates that those partially finished devices be transformed to completed
items inventory (referred to as equal units). The following equation for calculating equal
completed units: The number of physical factors divided using percent crowning glory equals
equivalent devices. Because uncooked fees, labor hired directly, and overhead regularly input
the manufacturing procedure at wonderful phases, equivalent units for each production units
should be anticipated directly.

Q3 You are a manufacturer of tennis balls in the Mumbai Suburbs. Recently, you got
an order to supply 1200 units of the same every month. The cost of carrying an
inventory of such tennis balls is 1.80 per unit on yearly basis. The production process
requires a setup cost on a per run basis of Rs 1000.
Compute:
a) The EOQ, and define the need for computing the EOQ
Introduction:

This is a technique to determine how much should be the quantity to hold which is economic
in terms of cost. This helps the purchasing department to assess the quantity to be purchased
at any one time. This in essence is a measurement of how much quantity is to be ordered at
any one point in time. This assumes that throughout the course the demand cost, ordering
cost, and the holding cost remain the same.

Concept and Application:

Economic order Quantity can be defined as

Here,

A – Demand in units (on an annual basis)

O – Order Cost (per purchase order)

C – Holding Cost (per unit per year)

In the question given

A = 1200 (units/month) * 12 (month/year) = 14,400 units/year

O = 1000 rs.

C = 1.80 per unit per year.

units

The objective here is to identify the optimum quantity that needs to be ordered which in turn
will help in minimizing the overall cost which is of buying, delivering, and storing. This can
in turn be used to determine the no of orders that need to be ordered and the period after
which the order is being placed. This helps the company to place the order whenever required
thus reducing the inventory holding cost too much an extent. Thus the cash savings can be
utilized for other purposes.

This can be used to keep a minimum level of buffer stock and provides the time when the
order should be placed again that is a reorder point is determined. Thus, a company can never
go out of inventory and need not keep extra inventory in the warehouse. Thus, it can be said
this is very important as it tells the company about how many items to be ordered and when
to order.

When the holding cost increases there is a decrease in the EOQ whereas when there is an
increase in Demand or set up cost than the EOQ increases.

There are a few limitations with the EOQ formula that it assumes the customer demand is
constant and does not vary on a seasonal basis and also assumes the holding and ordering cost
remains the same every time. Thus it is not able to fulfill the scenarios of higher demand or
shortfall of demands.

Conclusion:

The Economic order quantity here is 4000 units.

Q3 b) The Optimum number of orders and optimum period of supply

Introduction:

The optimum number of Orders can be defined as the ratio of the yearly quantity order to the
quantity ordered in an order
Here Quantity per order is EOQ

Where orders are the optimum order quantity which is

Or Optimum orders can be said to be 4 orders.

The optimum Period of supply in days would be the number of days in a year to the total
number of optimum orders a company orders.

Thus the company should order after every 91 days.