Qualification - Higher National Diploma in Business
Unit Name - Management Accounting
Unit Number - Unit 5
Unit Level - Level 5
Assignment Title - Practicing Management Accounting in Large- Sized Business
Learning Outcome 1: Demonstrate an understanding of management accounting systems.
Learning Outcome 2: Apply a range of management accounting techniques
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Executive Summary
Income statements of the two divisions of Engine Makers have been prepared using absorption costing and marginal costing methods. The results given by both the methods are same here because both the divisions sold all the output that they produced. Modern Motorcycle Division has much higher profits than the Modern Parachute division. In the Modern Motorcycle division, majority of the profit has come from Type A motorcycle. Demand for the goods of Engines Makers seems to be very strong as the entire output of both the divisions got sold. Compound annual growth rate in net income, in the period between 2009-18, of Modern Parachutes is much higher than the compound annual growth rate in revenues. This shows that production efficiency of the division has increased considerably in the period.
Scenario - The case of Engines Makers
Job/role scenario You work for Engines Makers company as Management Accountant who ensure the accuracy of financial statements and prepare financial documentation and explains their findings to individuals or a company's or its management. Your manager delegated you to prepare report and presentation to give briefing to your other team members in the department.
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Introduction
Engine Makers Group is a large sized company. It has two subsidiaries - Modern Parachute LLC and Modern Motorcycles LLC. Income statements for the first quarter of 2019 of the two divisions of Engines Makers Group have been made using both the Absorption Costing Method and Marginal Costing method. Analysis of various aspects of costing has been done.
Assignment Brief
• In a Presentation critically evaluate management accounting systems by explaining the requirement and reports by evaluating their benefits, application and integration for Engines Makers
• In a report, produce a sufficient financial reporting documents using management accounting techniques such as activity based costing and traditional costing methods accurately; considering the appropriate cost analysis techniques to prepare income statement by absorption and marginal approaches including data interpretation for the range of business activities.
Analysis
The results given by both the methods are same here because both the divisions sold all the output that they produced. If some of the output that was produced was left unsold as inventory then the net profit in the income statement, given by the two methods, would have been different (Drury, 2015).
The essential difference between absorption method and marginal costing method is that in absorption costing method the fixed costs of manufacturing are allocated on a per unit basis to the entire output that is produced in the period. In marginal costing method, only the variable costs are allocated on a per unit basis (Edmonds & Olds, 2013). Total variable costs are deducted from the total revenues to get contribution. From Contribution all the fixed costs are deducted to get the profit. So if inventory is left then marginal costing method gives lower profits than absorption costing method because in marginal costing method all the fixed costs are included in the income statement. In absorption costing method only the fixed costs that can be attributed to the units sold, and not to the inventory, are included in the income statement.
Absorption costing method is a more accurate method of costing, though it has its own big flaw. Profits can be artificially increased in absorption costing just by increasing production (Schatzberg, 2013). Increase in production results in higher inventory. And higher the inventory, lower will be the fixed costs included in the income statement.
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Absorption Costing
Income statement of Modern Parachute Company for the first quarter of 2019, using the Absorption Costing method
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|
|
Number of units sold
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20
|
|
Per unit price
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$75,000
|
|
Total sales revenue
|
$1,500,000
|
|
Cost of direct materials per unit
|
$20,000
|
|
Cost of direct manufacturing labor per unit
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$10,000
|
|
Direct cost per unit
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$30,000
|
|
Total direct cost
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$600,000
|
|
Variable manufacturing overhead cost per unit
|
$2,500
|
|
Total variable manufacturing overhead cost
|
$50,000
|
|
Fixed manufacturing overhead cost per quarter
|
$25,000
|
|
Fixed manufacturing overhead cost per unit
|
$1,250
|
|
Cost of production per unit (direct cost per unit + variable cost per unit + fixed manufacturing cost per unit)
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$33,750
|
|
Cost of goods sold (Cost of production per unit * Number of units sold)
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$675,000
|
|
Gross profit (Total sales revenue - cost of goods sold)
|
$825,000
|
|
Managerial employees' salaries
|
8000
|
|
Depreciation of office building
|
2000
|
|
Depreciation of office equipment
|
15000
|
|
Profit before tax
|
$800,000
|
Income statement of Modern Motorcycle for the first quarter of 2019, using the Absorption Costing method
|
|
Number of units of motorcycle A that are produced and sold
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100000
|
|
Number of units of motorcycle B that are produced and sold
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500
|
|
Sales price per unit of Type A
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1200
|
|
Sales price per unit of type B
|
7000
|
|
Revenue from Type A
|
120000000
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|
Revenue from Type B
|
3500000
|
|
Total revenue
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123500000
|
|
Set up cost per batch
|
150000
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|
Number of motorcycles of type B produced per batch
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500
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Set up cost per unit of B
|
300
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Number of motorcycles of Type A produced per batch
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33333
|
|
Set up cost per unit of type A motorcycle
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4.500045
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Welding cost of type A motorcycle
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13545000
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Welding cost per unit of Type A motorcycle
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135.45
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Welding cost of type B motorcycle
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1500000
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Welding cost per unit of Type B motorcycle
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3000
|
|
Assembly cost per unit of type A
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10
|
|
Assembly cost per unit of type B
|
70
|
|
Direct material cost per unit of type A
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240
|
|
Direct material cost per unit of type B
|
240
|
|
Direct labor cost per unit of type A
|
400
|
|
Direct labor cost per unit of type B
|
3400
|
|
Other overhead cost per unit (40% of direct labor costs) of Type A
|
160
|
|
Other overhead costs per unit of Type B
|
1360
|
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Total cost per unit of Type A
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949.95005
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Total cost of Type A sold
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94995005
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Total cost per unit of Type B
|
8370
|
|
Total cost of Type B motorcycle sold
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4185000
|
|
Total cost of goods sold
|
99180005
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Profit before tax
|
24319995
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Marginal costing method
Income statement of Modern Parachute Company for the first quarter of 2019, using the marginal Costing method
|
|
|
Number of units sold
|
20
|
|
Per unit price
|
$75,000
|
|
Total sales revenue
|
$1,500,000
|
|
Cost of direct materials per unit
|
$20,000
|
|
Cost of direct manufacturing labor per unit
|
$10,000
|
|
Direct cost per unit
|
$30,000
|
|
Total direct cost
|
$600,000
|
|
Variable manufacturing overhead cost per unit
|
$2,500
|
|
Total variable cost
|
$50,000
|
|
Total variable cost per unit
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$32,500
|
|
Total variable cost of all the units produced and sold
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$650,000
|
|
Contribution
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$850,000
|
|
Less fixed costs
|
|
Fixed manufacturing overhead costs
|
25000
|
|
Managerial employees' salaries
|
8000
|
|
Depreciation of office building
|
2000
|
|
Depreciation of office equipment
|
15000
|
|
|
|
Total fixed costs
|
50000
|
|
Profit before tax (Contribution - Total fixed costs)
|
$800,000
|
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Income statement of Modern Motorcycle for the first quarter of 2019, using the marginal Costing method
|
|
Number of units of motorcycle A that are produced and sold
|
100000
|
|
|
Number of units of motorcycle B that are produced and sold
|
500
|
|
|
Sales price per unit of Type A
|
1200
|
|
|
Sales price per unit of type B
|
7000
|
|
|
Revenue from Type A
|
120000000
|
|
|
Revenue from Type B
|
3500000
|
|
|
Total revenue
|
123500000
|
|
|
Assembly cost per unit of type A
|
10
|
|
|
Assembly cost per unit of type B
|
70
|
|
|
Direct material cost per unit of type A
|
240
|
|
|
Direct material cost per unit of type B
|
240
|
|
|
Direct labor cost per unit of type A
|
400
|
|
|
Direct labor cost per unit of type B
|
3400
|
|
|
Other overhead cost per unit (40% of direct labor costs) of Type A
|
160
|
|
|
Other overhead costs per unit of Type B
|
1360
|
|
|
variable cost per unit of type A
|
810
|
|
|
Total variable cost of type A
|
81000000
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(variable cost per unit * number of units produced)
|
|
Variable cost per unit of type B
|
5070
|
|
|
Total variable cost of type B
|
2535000
|
|
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Total variable cost of both types
|
83535000
|
|
|
Contribution (Total revenue - total fixed costs)
|
39965000
|
|
|
Less fixed costs
|
|
|
Set up cost of type A
|
450000
|
|
|
Set up cost of type B
|
150000
|
|
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Welding cost of type A motorcycle
|
13545000
|
|
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Welding cost of type B motorcycle
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1500000
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|
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Total fixed costs
|
15645000
|
|
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Profit before tax
|
24320000
|
|
Analysis of revenue growth and net income growth of Modern Parachute in the period between 2009 - `18
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Modern parachute company
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|
Year
|
Revenue
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Net income
|
|
2009
|
800000
|
300000
|
|
2010
|
950000
|
370000
|
|
2011
|
1050000
|
420000
|
|
2012
|
900000
|
470000
|
|
2013
|
850000
|
490000
|
|
2014
|
1020000
|
512000
|
|
2015
|
1200000
|
630000
|
|
2016
|
1150000
|
700000
|
|
2017
|
1300000
|
710000
|
|
2018
|
1400000
|
740000
|
|
|
|
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Compound annual growth rate
|
6.42%
|
10.55%
|
It can be clearly seen that compound annual growth rate in net income, in the period between 2009-18, of Modern Parachutes is much higher than the compound annual growth rate in revenues. This shows that production efficiency of the division has increased considerably in the period.
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Conclusion
Modern Motorcycle Division has much higher profits than the Modern Parachute division. In the Modern Motorcycle division, majority of the profit has come from Type A motorcycle. Demand for the goods of Engines Makers seems to be very strong as the entire output of both the divisions got sold. Absorption costing can give a more accurate idea of per unit cost.