MANAGEMENT ACCOUTING

(a) Discuss the importance of management accounting. Distinguish between cost accounting and management accounting.

Importance of Management Accounting:

Management accounting plays a crucial role in the planning, control, and decision-making processes within an organization. Here are some key points highlighting its importance:

  1. Decision Making: Management accounting provides relevant financial and non-financial information that helps managers make informed decisions. This includes cost analysis, budgeting, and performance evaluation.
  2. Planning and Budgeting: It assists in the preparation of budgets and forecasts, which are essential for planning future activities and resource allocation. Management accountants analyze past data to predict future trends, helping the organization set realistic goals.
  3. Performance Measurement: By evaluating the performance of different departments, products, or projects, management accounting helps in identifying areas that require improvement and those that are performing well.
  4. Cost Control: Management accounting techniques such as standard costing, variance analysis, and activity-based costing help in controlling and reducing costs, thereby increasing profitability.
  5. Financial Reporting: It ensures that internal financial reports are prepared accurately and timely, providing a clear picture of the organization’s financial health to the management.
  6. Strategic Management: Management accounting provides data for strategic planning and helps in the formulation of strategies to achieve the organization’s long-term objectives.

Distinguish Between Cost Accounting and Management Accounting:

Aspect Cost Accounting Management Accounting
Purpose To ascertain and control costs of production or services. To provide information for planning, controlling, and decision-making.
Scope Narrow, focuses primarily on cost control and reduction. Broad, includes financial and non-financial information for overall management.
Users Internal (cost accountants, production managers). Internal (managers at all levels, from top management to department heads).
Reports Cost sheets, cost control reports, inventory valuation reports. Budgets, performance reports, variance analysis reports, strategic reports.
Time Frame Historical and present-focused. Future-oriented, with a focus on both historical and forecast data.
Techniques Standard costing, marginal costing, job costing, process costing. Budgeting, variance analysis, financial ratio analysis, strategic management accounting.
Legal Requirement Often required for statutory reporting. Not legally required, but essential for internal management.

(b) Cost Information Relating to Seapax Manufacturing for the Year Ended 31.03.2023:

Particulars Amount (₹)
Purchases of raw materials 40,25,000
Freight inwards 1,00,000
Direct wages paid 11,56,000
Direct wages paid in advance 20,000 (included above)
Factory overhead 24% of prime cost
Raw materials (opening) 2,30,000
Raw materials (closing) 2,85,000
Work-in-progress (opening) 1,92,500
Work-in-progress (closing) 1,40,500
Administrative Overheads 1,75,000
Selling Expenses 5 per unit
Sale of material 620 per unit
Opening finished goods 1200 units @ 520 per unit
Production during the year 14,200 units
Stock of finished goods at the end Valued at cost of production

Prepare a Cost Sheet for the Firm:

Step-by-Step Preparation:

  1. Calculate Prime Cost:

Prime Cost = Direct Materials + Direct Wages + Direct Expenses

Direct Materials Consumed:

Direct Materials Consumed=Opening Stock of Raw Materials+Purchases of Raw Materials+Freight Inwards−Closing Stock of Raw MaterialsDirect Materials Consumed=Opening Stock of Raw Materials+Purchases of Raw Materials+Freight Inwards−Closing Stock of Raw Materials

=₹2,30,000+₹40,25,000+₹1,00,000−₹2,85,000=₹40,70,000=₹2,30,000+₹40,25,000+₹1,00,000−₹2,85,000=₹40,70,000

Direct Wages:

Direct Wages=₹11,56,000Direct Wages=₹11,56,000

Total Direct Expenses:

Total Direct Expenses=₹40,70,000+₹11,56,000=₹52,26,000Total Direct Expenses=₹40,70,000+₹11,56,000=₹52,26,000

Prime Cost:

Prime Cost=₹52,26,000Prime Cost=₹52,26,000

  1. Calculate Factory Overhead:

Factory Overhead = 24% of Prime Cost

Factory Overhead=24%×₹52,26,000=₹12,54,240Factory Overhead=24%×₹52,26,000=₹12,54,240

  1. Calculate Factory Cost:

Factory Cost = Prime Cost + Factory Overhead + Opening Work-in-Progress – Closing Work-in-Progress

Factory Cost=₹52,26,000+₹12,54,240+₹1,92,500−₹1,40,500=₹65,32,240Factory Cost=₹52,26,000+₹12,54,240+₹1,92,500−₹1,40,500=₹65,32,240

  1. Calculate Cost of Production:

Cost of Production = Factory Cost + Opening Finished Goods – Closing Finished Goods

Note: Closing Finished Goods is valued at Cost of Production.

Opening Finished Goods=1200 units×₹520=₹6,24,000Opening Finished Goods=1200 units×₹520=₹6,24,000

Cost of Production=₹65,32,240+₹6,24,000=₹71,56,240Cost of Production=₹65,32,240+₹6,24,000=₹71,56,240

  1. Calculate Total Cost:

Total Cost = Cost of Production + Administrative Overheads + Selling Expenses

Selling Expenses:

Selling Expenses=14,200 units×₹5=₹71,000Selling Expenses=14,200 units×₹5=₹71,000

Administrative Overheads:

Administrative Overheads=₹1,75,000Administrative Overheads=₹1,75,000

Total Cost:

Total Cost=₹71,56,240+₹1,75,000+₹71,000=₹73,02,240Total Cost=₹71,56,240+₹1,75,000+₹71,000=₹73,02,240

  1. Prepare the Cost Sheet:
Particulars Amount (₹)
Direct Materials Consumed
Opening Stock of Raw Materials 2,30,000
Add: Purchases of Raw Materials 40,25,000
Add: Freight Inwards 1,00,000
Less: Closing Stock of Raw Materials (2,85,000)
Direct Materials Consumed 40,70,000
Add: Direct Wages 11,56,000
Prime Cost 52,26,000
Add: Factory Overhead (24% of Prime Cost) 12,54,240
Add: Opening Work-in-Progress 1,92,500
Less: Closing Work-in-Progress (1,40,500)
Factory Cost 65,32,240
Add: Opening Finished Goods 6,24,000
Cost of Production 71,56,240
Add: Administrative Overheads 1,75,000
Add: Selling Expenses (₹5 per unit) 71,000
Total Cost 73,02,240

 

(a) Discuss job evaluation along with its advantages. Can proper job evaluation reduce labor turnover? Justify your answer.

Job Evaluation:

Job evaluation is a systematic process of determining the relative worth of jobs within an organization. This process involves assessing various aspects of a job, such as skills required, responsibilities, efforts, and working conditions, to establish a fair and equitable pay structure.

Advantages of Job Evaluation:

  1. Fair and Equitable Pay: Job evaluation ensures that jobs are paid fairly based on their relative worth, reducing pay disparities and promoting equity.
  2. Consistent Compensation Structure: It helps in developing a consistent and transparent compensation structure, making it easier to manage and understand.
  3. Motivation and Morale: Fair pay structures motivate employees, improving their morale and job satisfaction.
  4. Attraction and Retention: Equitable pay practices attract talent and help in retaining skilled employees, reducing recruitment and training costs.
  5. Performance Measurement: Job evaluation provides a basis for performance measurement and management, helping in setting clear expectations and goals.
  6. Reduction in Disputes: A transparent and fair job evaluation process reduces disputes and grievances related to pay and promotions.

Can Proper Job Evaluation Reduce Labor Turnover?

Yes, proper job evaluation can reduce labor turnover. Here’s how:

  1. Fair Compensation: When employees feel they are being compensated fairly for their work, they are more likely to stay with the organization, reducing turnover rates.
  2. Job Satisfaction: Job evaluation leads to clear job roles and responsibilities, contributing to job satisfaction. Satisfied employees are less likely to leave.
  3. Employee Engagement: Fair and transparent pay practices enhance employee engagement, as employees feel valued and recognized for their contributions.
  4. Career Development: Job evaluation can identify career paths and development opportunities within the organization, encouraging employees to grow within the company rather than seeking opportunities elsewhere.

Justification:

Proper job evaluation aligns the compensation structure with the organization’s strategic goals, ensuring that employees are rewarded fairly based on their job’s complexity and value. This fairness in compensation fosters loyalty and reduces the inclination to seek employment elsewhere, thereby reducing labor turnover.

(b) From the information given below calculate the total earning and the effective rate of earning of the worker under Rowan Plan.

Given:

  • Time allowed: 35 hours
  • Time taken: 25 hours
  • Rate per hour: ₹1.50

Rowan Plan Calculation:

The Rowan Plan is a wage incentive plan where the bonus is calculated as a proportion of the time saved, but the proportion is based on the ratio of time saved to the time allowed.

  1. Calculate Time Saved:

Time Saved=Time Allowed−Time TakenTime Saved=Time Allowed−Time Taken

Time Saved=35 hours−25 hours=10 hoursTime Saved=35 hours−25 hours=10 hours

  1. Calculate the Bonus under Rowan Plan:

Bonus=(Time SavedTime Allowed)×Time Taken×Rate per HourBonus=(Time AllowedTime Saved​)×Time Taken×Rate per Hour

Bonus=(1035)×25×₹1.50Bonus=(3510​)×25×₹1.50

Bonus=0.2857×25×₹1.50=₹10.71Bonus=0.2857×25×₹1.50=₹10.71

  1. Calculate Total Earnings:

Total Earnings=Time Taken×Rate per Hour+BonusTotal Earnings=Time Taken×Rate per Hour+Bonus

Total Earnings=25×₹1.50+₹10.71=₹37.50+₹10.71=₹48.21Total Earnings=25×₹1.50+₹10.71=₹37.50+₹10.71=₹48.21

  1. Calculate Effective Rate of Earnings:

Effective Rate of Earnings=Total EarningsTime TakenEffective Rate of Earnings=Time TakenTotal Earnings​

Effective Rate of Earnings=₹48.2125=₹1.93 per hourEffective Rate of Earnings=25₹48.21​=₹1.93 per hour

(c) Total overhead cost is ₹1.50 crore when the production is 1,00,000 units and the total overhead cost is ₹2.50 crore when the production is 2,00,000 units. Find out total fixed overhead cost and variable overhead cost per unit.

Given:

  • Total Overhead Cost at 1,00,000 units = ₹1.50 crore
  • Total Overhead Cost at 2,00,000 units = ₹2.50 crore

Step-by-Step Calculation:

  1. Calculate Variable Overhead Cost per Unit:

Change in Total Overhead Cost=Overhead Cost at 2,00,000 units−Overhead Cost at 1,00,000 unitsChange in Total Overhead Cost=Overhead Cost at 2,00,000 units−Overhead Cost at 1,00,000 units

Change in Total Overhead Cost=₹2.50 crore−₹1.50 crore=₹1.00 croreChange in Total Overhead Cost=₹2.50 crore−₹1.50 crore=₹1.00 crore

Change in Units Produced=2,00,000 units−1,00,000 units=1,00,000 unitsChange in Units Produced=2,00,000 units−1,00,000 units=1,00,000 units

Variable Overhead Cost per Unit=Change in Total Overhead CostChange in Units ProducedVariable Overhead Cost per Unit=Change in Units ProducedChange in Total Overhead Cost​

Variable Overhead Cost per Unit=₹1.00 crore1,00,000 units=₹100 per unitVariable Overhead Cost per Unit=1,00,000 units₹1.00 crore​=₹100 per unit

  1. Calculate Total Fixed Overhead Cost:

Total Fixed Overhead Cost=Total Overhead Cost at 1,00,000 units−(Variable Overhead Cost per Unit×Number of Units)Total Fixed Overhead Cost=Total Overhead Cost at 1,00,000 units−(Variable Overhead Cost per Unit×Number of Units)

Total Fixed Overhead Cost=₹1.50 crore−(₹100×1,00,000)=₹1.50 crore−₹1.00 crore=₹0.50 croreTotal Fixed Overhead Cost=₹1.50 crore−(₹100×1,00,000)=₹1.50 crore−₹1.00 crore=₹0.50 crore

Summary:

  • Variable Overhead Cost per Unit: ₹100
  • Total Fixed Overhead Cost: ₹0.50 crore

What is Overhead? Give a Classification of Overhead.

Overhead:

Overhead refers to the ongoing business expenses not directly attributed to creating a product or service. It includes costs necessary to run the business but not directly associated with a specific product or job.

Classification of Overhead:

  1. By Nature:
    • Indirect Materials: Materials used in the production process but not directly traceable to the final product (e.g., lubricants, cleaning supplies).
    • Indirect Labor: Wages paid to employees not directly involved in production (e.g., supervisors, maintenance staff).
    • Indirect Expenses: Expenses not directly associated with production (e.g., utilities, rent, depreciation).
  2. By Function:
    • Manufacturing Overheads: Costs related to the production process (e.g., factory rent, equipment maintenance).
    • Administrative Overheads: Costs associated with the general administration of the business (e.g., office rent, salaries of administrative staff).
    • Selling and Distribution Overheads: Costs related to selling and delivering products (e.g., advertising, transportation).
  3. By Variability:
    • Fixed Overheads: Costs that remain constant regardless of the level of production or sales (e.g., rent, salaries).
    • Variable Overheads: Costs that vary directly with the level of production or sales (e.g., raw materials, direct labor).
    • Semi-variable Overheads: Costs that have both fixed and variable components (e.g., electricity, which has a base charge plus a usage-based charge).
  4. By Controllability:
    • Controllable Overheads: Costs that can be controlled or influenced by a specific manager or department (e.g., supplies, maintenance).
    • Uncontrollable Overheads: Costs that cannot be easily controlled by a specific manager or department (e.g., insurance, rent).

Question 3

(a) A manufacturing organization produces three products, Product X, Product Y, and Product Z. During last month, the overhead expenditure of the organization was ₹2,20,000 and the total labor hours during the period were 20,000 hours. During this period, the organization produced 2,500 units of Product Z. Find out the total overhead cost to be absorbed by Product Z. Assume overhead rates are applicable to all products equally.

Given:

  • Overhead Expenditure = ₹2,20,000
  • Total Labor Hours = 20,000 hours
  • Units of Product Z Produced = 2,500 units

Step-by-Step Calculation:

  1. Calculate Overhead Rate per Labor Hour:

Overhead Rate per Labor Hour=Total Overhead ExpenditureTotal Labor HoursOverhead Rate per Labor Hour=Total Labor HoursTotal Overhead Expenditure​

Overhead Rate per Labor Hour=₹2,20,00020,000 hours=₹11 per hourOverhead Rate per Labor Hour=20,000 hours₹2,20,000​=₹11 per hour

  1. Calculate Total Overhead Cost for Product Z:

Total Overhead Cost for Product Z=Units of Product Z Produced×Overhead Rate per Labor HourTotal Overhead Cost for Product Z=Units of Product Z Produced×Overhead Rate per Labor Hour

Assuming each unit of Product Z requires the same amount of labor hours as other products,

Total Overhead Cost for Product Z=2,500 units×₹11=₹27,500Total Overhead Cost for Product Z=2,500 units×₹11=₹27,500

(b) At the time of calculating machine hour rate, what basis is adopted for the apportionment of power cost, repair cost, and depreciation? Discuss the advantage of the machine hour rate.

Basis for Apportionment:

  1. Power Cost:
    • Apportioned based on machine hours used, as power consumption is directly related to the time machines are in operation.
  2. Repair Cost:
    • Apportioned based on machine hours or usage, as the need for repairs typically increases with the extent of machine use.
  3. Depreciation:
    • Apportioned based on machine hours or a straight-line basis, considering the wear and tear of the machines over time.

Advantages of Machine Hour Rate:

  1. Accurate Cost Allocation:
    • Machine hour rate provides a precise method for allocating overhead costs to products based on the actual usage of machines, leading to more accurate product costing.
  2. Encourages Efficient Machine Usage:
    • It incentivizes efficient use of machines, as costs are directly linked to machine hours, promoting optimal machine utilization and maintenance.
  3. Simplifies Overhead Allocation:
    • This method simplifies the allocation process, especially in industries where machine usage is a significant part of the production process.
  4. Improves Cost Control:
    • By linking costs to machine hours, management can better control and monitor machine-related expenses, leading to cost savings.
  5. Facilitates Performance Evaluation:
    • Machine hour rate helps in evaluating the performance and efficiency of machines, aiding in decision-making regarding machine purchases, maintenance, and replacements.

Question 4

(a) Product P is obtained after it is processed through Process I, II, and III. The following cost information is available for the operation:

Total (₹) Pr. I Pr. II Pr. III
Material 9625 2200 1025
Direct Wages 7330 2250 3680
Production Overhead 7330
  • 500 units @ ₹4 per unit were introduced in Process I.
  • Production overheads are absorbed as a percentage of direct wages.
  • The actual output and normal loss of the respective processes are:
Process Output (Units) Normal Loss (%) Value of Scrap (₹)
Pr. I 450 10%
Pr. II 340 20%
Pr. III 210 25%

Calculate the cost per unit at each stage of processing:

Step-by-Step Calculation:

  1. Process I:

Material Cost:

Material Cost=₹9625Material Cost=₹9625

Direct Wages:

Direct Wages=₹7330Direct Wages=₹7330

Production Overhead:

Production Overhead=73307330×7330=₹7330Production Overhead=73307330​×7330=₹7330

Total Cost:

Total Cost=₹9625+₹7330+₹7330=₹24,285Total Cost=₹9625+₹7330+₹7330=₹24,285

Normal Loss:

Normal Loss=10%×500=50 unitsNormal Loss=10%×500=50 units

Actual Output:

Actual Output=450 unitsActual Output=450 units

Cost per Unit in Process I:

Cost per Unit=Total CostActual Output=₹24,285450=₹53.97Cost per Unit=Actual OutputTotal Cost​=450₹24,285​=₹53.97

  1. Process II:

Material Cost:

Material Cost=₹2200Material Cost=₹2200

Direct Wages:

Direct Wages=₹2250Direct Wages=₹2250

Production Overhead:

Production Overhead=0.00Production Overhead=0.00

Total Cost:

Total Cost=₹2200+₹2250=₹4450Total Cost=₹2200+₹2250=₹4450

Normal Loss:

Normal Loss=20%×450=90 unitsNormal Loss=20%×450=90 units

Actual Output:

Actual Output=340 unitsActual Output=340 units

Cost per Unit in Process II:

Cost per Unit=Total CostActual Output=₹4450340=₹13.09Cost per Unit=Actual OutputTotal Cost​=340₹4450​=₹13.09

Question:

  1. a) Cost Information for Product P:
Total (%) Process I Process II Process III
Material 9625 2000 1025
Direct Wages 7330 2250 3680
Production Overhead

Given that 500 units were introduced in Process I at $4 per unit.

Output and Losses:

Output (Units) Normal Loss (%) Value of Scrap
450 10
340 20
210 25

Answer:

  1. a) Cost Information for Product P:
Total (%) Process I Process II Process III
Material 9625 2000 1025
Direct Wages 7330 2250 3680
Production Overhead

Given that 500 units were introduced in Process I at $4 per unit.

Output and Losses:

Output (Units) Normal Loss (%) Value of Scrap
450 10
340 20
210 25

Explanation: The cost information for Product P includes material costs, direct wages, and production overhead. Additionally, the output and normal losses for each process are provided, which will be essential for further analysis and cost allocation.

Question:

  1. b) Break-Even Point Calculation:

Sales of SP Ltd. were ₹60,000, yielding a profit of ₹71,600 in a week. The next week, sales increased to ₹78,000, yielding a profit of ₹74,800. Find out the break-even point.

Answer:

  1. b) Break-Even Point Calculation:

To find the break-even point, we first need to calculate the contribution margin per unit. This can be done by subtracting variable costs per unit from the selling price per unit.

Contribution Margin per Unit =Selling Price per Unit−Variable Cost per UnitSelling Price per Unit−Variable Cost per Unit

Given that sales increased from ₹60,000 to ₹78,000 and profits increased from ₹71,600 to ₹74,800, we can use this information to calculate the contribution margin per unit and subsequently determine the break-even point.

Calculation:

We’ll start by finding the contribution margin per unit:

Contribution Margin per Unit =Change in ProfitChange in SalesChange in SalesChange in Profit​

For the first week:

Change in Profit =₹74,800−₹71,600=₹3,200₹74,800−₹71,600=₹3,200

Change in Sales =₹78,000−₹60,000=₹18,000₹78,000−₹60,000=₹18,000

Contribution Margin per Unit =₹3,200₹18,000=₹0.1778₹18,000₹3,200​=₹0.1778

Now, we can use the contribution margin per unit to find the break-even point:

Break-Even Point =Fixed CostsContribution Margin per UnitContribution Margin per UnitFixed Costs​

  1. c) CVP Analysis:

Given the CVP relationship: Y=94,000+0.25XY=94,000+0.25X, where XX represents sales and YY represents total cost.

  1. i) P/V Ratio:

The P/V ratio (Profit-Volume Ratio) is the ratio of contribution margin to sales, expressed as a percentage.

P/V Ratio=ContributionSales×100P/V Ratio=SalesContribution​×100

  1. ii) Break-Even Point (BEP):

The Break-Even Point is the level of sales at which total revenue equals total costs, resulting in zero profit.

BEP=Fixed CostsContribution per unitBEP=Contribution per unitFixed Costs​

iii) Sales to earn a profit of ₹28,000:

To calculate the sales required to earn a specific profit, we use the formula:

Sales=Fixed Costs+Desired ProfitContribution per unitSales=Contribution per unitFixed Costs+Desired Profit​

We’ll calculate each of these components based on the given information.

Shall we proceed with the calculations?

Calculation:

  1. i) P/V Ratio:

To find the P/V Ratio, we need to calculate the contribution margin per unit first. The contribution margin per unit is the difference between the selling price per unit and the variable cost per unit.

Given the CVP relationship: Y=94,000+0.25XY=94,000+0.25X, where XX represents sales and YY represents total cost.

Since the variable cost per unit is not explicitly given, we need to derive it from the CVP relationship.

Total Cost (YY) consists of both fixed costs and variable costs. So, the variable cost per unit can be represented by the coefficient of XX, which is 0.250.25.

Therefore, the P/V Ratio is the remaining portion of the total sales after covering the variable costs, expressed as a percentage of total sales.

  1. ii) Break-Even Point (BEP):

To find the Break-Even Point, we need to know the fixed costs and the contribution per unit.

iii) Sales to earn a profit of ₹28,000:

We will use the formula Sales=Fixed Costs+Desired ProfitContribution per unitSales=Contribution per unitFixed Costs+Desired Profit​ to find the sales required to earn a profit of ₹28,000.

Let’s calculate each part step by step. Shall we proceed?

Calculation:

  1. i) P/V Ratio:

Since the variable cost per unit is not provided directly, we can infer it from the CVP relationship. The coefficient of XX in the CVP equation represents the variable cost per unit, which is 0.250.25.

Given that the total cost (YY) includes both fixed and variable costs, and the variable cost per unit is 0.250.25, the contribution per unit is the difference between the selling price and the variable cost per unit.

Assuming the selling price per unit is ₹1, the contribution per unit is:

Contribution per unit=Selling Price per unit−Variable Cost per unitContribution per unit=Selling Price per unit−Variable Cost per unit Contribution per unit=₹1−₹0.25=₹0.75Contribution per unit=₹1−₹0.25=₹0.75

Now, let’s calculate the P/V Ratio:

P/V Ratio=Contribution per unitSelling Price per unit×100P/V Ratio=Selling Price per unitContribution per unit​×100 P/V Ratio=₹0.75₹1×100=75%P/V Ratio=₹1₹0.75​×100=75%

  1. ii) Break-Even Point (BEP):

Since the fixed costs are not provided, we cannot calculate the Break-Even Point without this information. If you have the fixed costs, please provide them so we can proceed with the calculation.

iii) Sales to earn a profit of ₹28,000:

Using the formula Sales=Fixed Costs+Desired ProfitContribution per unitSales=Contribution per unitFixed Costs+Desired Profit​, we can calculate the sales required to earn a profit of ₹28,000. However, without the fixed costs, we can’t compute this. Could you please provide the fixed costs?

Once we have the fixed costs, we can proceed with the calculations.

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