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Assignment 2

ACC00724 ACCOUNTING FOR MANAGERS

Name | ID
Question 1:
Bonza Handtools Ltd have three possible strategies that the can implement in the future. We will go
through each of the possible options in detail and evaluate them accordingly. Currently, the company’s
performance is as below:

Sales $ 26,00,000.00 20,000 x 130


Cost:
Variable Cost $ 10,00,000.00 50 x 20,000
Fixed Cost $ 4,00,000.00
Fixed selling and administrative costs $ 3,00,000.00
Variable Selling and administrative costs $ 6,00,000.00 30 x 20,000
Profit $ 3,00,000.00 Sales – (fixed + variable costs)

Option 1:
The suggestion by the accountant of increasing the price of each unit by $10 is against the hypothesis
that the increase in price would not affect the demand. Hence, he is assuming that the price elasticity
of the product is low and the customers are price averse. In case it is not true, the price increase might
have an overall negative impact on the volume and hence decrease the revenue in the long run. In
case the volume is unaffected, the company will increase its profit by $75,000 as seen below:

Sales $ 28,00,000.00 20,000 x 140


Cost:
Variable Cost $ 10,00,000.00 50 x 20,000
Fixed Cost $ 4,00,000.00
Fixed selling and administrative costs $ 4,25,000.00 (300000+125000)
Variable Selling and administrative costs $ 6,00,000.00 30 x 20,000
Profit $ 3,75,000.00 Sales – (fixed + variable costs)

Option 2:
The production manager suggests improving the quality of product and increase promotions to
increase the sales. He considers price increase to be an incorrect approach. While the accountant
leverages price to influence demand, the production manager is focused on improving the utility of
the product. Investing in quality of the product will increase the volume sales as more people demand
the product. Also, promotions will increase awareness and therefore hel reach out to a wider audience
increasing demand. The strategy aims to increase profits through an incremental volume. The issue
here is the effectiveness of the campaigns. The increase in quality might not result in increased utility
as expected. Also, the promotion activities might not be impactful. In case the campaigns work,
according the manager the company will increase its profit by $75,000 as seen below:
Sales $ 32,50,000.00 25,000 x 130
Cost:
Variable Cost $ 13,75,000.00 50 x 20,000
Fixed Cost $ 4,00,000.00
Fixed selling and administrative costs $ 3,50,000.00 300000+50000
Variable Selling and administrative costs $ 7,50,000.00 30 x 25,000
Profit $ 3,75,000.00 Sales – (fixed + variable costs)

Option 3:

The strategy proposed by the sales manager is that of providing discounts to increase the sales
volume. The strategy works only if the customers are price sensitive. Hence, despite the decrease in
price, the overall profitability increases as more customers buy the product due to increased demand.
If implemented, the company is predicted to register a revenue of $400000

First 3 Months After 3 months


10000 x (130-10) = 14000 x 130 =
Sales $12,00,000.00 $18,20,000.00
Cost:
Variable Cost 5,00,000.00 $ 7,00,000.00
Fixed Cost 3,00,000.00
Fixed selling and administrative costs 5,00,000.00 $ 7,00,000.00
Variable Selling and administrative costs 4,00,000.00
Profit $ 4,00,000.00

Overall, all three proposals provide different approaches to increase the profit. However, the third
option is the highest profit generating option. Even though the risks associated are present. Hence, it
is the most viable option for the company.

https://pubsonline.informs.org/doi/abs/10.1287/mksc.10.2.172

http://www.emeraldinsight.com/doi/full/10.1108/09574091211289219

Question 2
The company has an existing source of revenue and plan to expand into a new project with the
government. We consider the calculations given below to analyse the total profits with the two
given situations. If the capacity is at 200,000 then the total profit is $555,000. Whereas, when the
company has the capacity of 180,000 the profit is around $510,000.
Government Project
Current Natural Sales
Situation 1 Situation 2
Units Sold 150000 40000 30000
Selling price (per unit) $ 15.00 $ 15.00 $ 15.00
Revenue $ 22,50,000.00 $ 6,00,000.00 $ 4,50,000.00
Total cost (per unit) $ 12.50 $ 10.50 $ 10.50
Total cost $ 18,75,000.00 $ 4,20,000.00 $ 3,15,000.00
Profit $ 3,75,000.00 $ 1,80,000.00 $ 1,35,000.00

http://host.uniroma3.it/facolta/economia/db/materiali/insegnamenti/588_3930.pdf

http://www.sciencedirect.com/science/article/pii/S1751324307030088

Question 3
1. Overhead Allocation Rate:

Labor Hr Rate $12.70014


Indirect Cost $98400
Labor Cost $17780.19
Material Cost $33810
Others $6667.571
Overhead Allocation Rate $5.534249

2. Total Cost of Special Order:

Costs:
Material $43810
Labor $17780.19
Other $6667.571
Total $58257.76

3. Cost of special order with machine time as the base for overhead allocation:

Costs:
Overhead rate per hour $10
Material $33810
Labor $14000
Other $5250
Total $53060

4. Minimum Price/ Trailer


Total Cost $58257.76
Total unit $350
Minimum per unit cost $166.4507

5. In order to achieve accurate costing for pricing purposes, we can leverage segmented
overheads and activity based budgeting. Segmented overheads help us detail extensively the
costs that occur due to manufacturing and operational activities. Identifying these variables
and distinguishing between different types of costs helps us to identify opportunities for
cost reduction and is integral for developing an effective pricing strategy. Segmented costs
can be directly attributed to assets and hence establish an association with real expenditure.

https://www.pwc.com/gx/en/ifrs-reporting/pdf/segment-reporting.pdf

Question 4

Segmented overheads helps us in identification of costs associated with different phases of


manufacturing and operations and hence is an important part of allocating overhead costs. In order
to see this in play, we look at Toyota’s costing practices. They leverage segmenting overhead costs in
order to increase the efficiency of the overall process of costing. The company practices consider it
very important to categorise costs and identify different overhead costs such as manufacturing
overhead, administrative overhead etc. Administrative overheads has various activities like the
different office supply categorisations. Similarly, indirect overheads include activities like the fees
paid for legal expenditures, accounting expenditures, audits. Various other overheads can be
considered when classifying activities like production supplies, wages for labour work etc. Effective
segmentation results in reduction of overhead cost risks and brings in efficiency in the costing
process.

It is very critical to develop a logical structure for evaluating costs. It is essential to evaluate as it is
critical to understand what part of the business is performing efficiently. This helps in identifying the
effective usage of resuources and making sure that these resources are allocated to the desired
activities. Segemented overhead costs are useful for the management to make decisions and analyse
the current costs of the company effectively. It also helps identify miscellenous expenses that the
company bears that do an add much value to the process. Hence, the company can utilise the
resources more effectively.

Apart from that, understanding proper segmentation of overhead costs is essential for financial
reporting. Financial reports are critical for companies and improper reporting can results in fine and
loss of public faith. Also, it is critical for management to understand the segments of overhead costs
as is to be presented to the public. Any deviation in these would lead to loss of market value or
might attract potential competitors to units of business that are performing well.

Indirect labour overheads helps the management understand the administrative costs required to
manufacture a product. It is critical to strike a balance in the expenses incurred for support services.
In case, they grow too large and lead to reduction in the profit margins for the company. In addition,
the true cost of producing a good incorporates all the indirect expenses which need to be accounted
for. Segmented overhead costs help us understand the real costs associated with the process and
hence are critical for any business.
Hence, the allocation of the overheads it is critical to understand the proportion to be attributed to
different activities in the production process. Since it might be arduous to apportion overhead costs
to each individual cost object, hence it is aggregated for the process. It is important to regulate
overheads. Since not directly related to revenue, overheads can drain a business if not controlled. A
standard example would be that of an entrepreneur renting a swanky office space for an employee
base that can work out of home until growth requires more room for staff.

https://www.pwc.com/gx/en/ifrs-reporting/pdf/segment-reporting.pdf

https://www.saylor.org/site/textbooks/Managerial%20Accounting.pdf

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