Produce a report divided into seven main sections based on a case-study BB Ltd investigating the following aspects of management accounting techniques.

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UNIT 13

MANAGEMENT ACCOUNTING

Produced By

A.Akil

INTRODUCTION

My name is Akil, I am required to produce a report divided into seven main sections based on a case-study BB Ltd investigating the following aspects of management accounting techniques.

Part 1: Types of Cost

Part 2: Breakeven analysis and Marginal Cost

Part 3: Absorption costing

Part 4: Investment appraisal

Part 5: Budgets and budgetary control

Part 6: Standard cost and various analysis

Part 7: An effective summary of my results and a critical evaluation of each method

or technique used. (A grade)

Background information

Bianca Butcher is the managing director of BB Ltd a famous wooden toys manufacturer in Bromley. She supplies shops throughout the UK as well as retailing its products from a shop.

I have been employed as the management accountant and as part of my assignment. I am required to analyse various management accounting issues in making both short term and long term decisions.

The business address is as follows

BB Ltd

Broadfield Industrial Estate

Bromley

Kent

BR6 6TT

Tel : 020-8286-2222

Fax : 020-8286-7700

PART 1: CLASSIFICATION OF COSTS

A) I have had various discussions with Bianca Butcher and she would like me to carry out a brief investigation into the activities of any wooden toy manufacturer demonstrating my understanding of the following cost and how they behave

) Fixed Costs

2) Variable Costs

3) Direct Cost

4) Indirect Costs

5) Semi Variable Costs

6) Standard Costs

Fixed Costs

Any costs that do not vary with the level of output because they are linked to a time base rather than to a level of activity. Sometimes called period costs, they include rents and rates and depreciation.

The graph represents total payments made for the use of buildings, plant and equipment, etc, which must be met irrespective of whether outputs is high or low.

Variable costs

Any costs that tend to vary directly with the level of output. They represent payments made for the use of variable factor-inputs, notably raw materials i.e. wood, metal locks, labels etc and direct labour. BB Ltd will leave a market if in the short run it cannot earn sufficient sales revenue to cover its total variable cost. If it can generate enough total revenue to cover total variable costs and make some contribution towards total fixed cost then it will continue to produce in the short run even though it is still making a loss.

Direct Costs

Any costs which can be allocated precisely to a cost centre and which varies in direct proportions to activity or output. Common examples of direct costs are materials and piece rate labour.

Indirect Costs

A cost not directly attributable to a product line or a cost centre. It is probably, but not necessarily, a fixed cost. An example might be general maintenance charges in a factory. Under full or absorption costing, indirect costs are allocated in full to cost centres.

Semi Variable Costs

Are costs that vary with output, but not in direct proportions. Therefore, in order to calculate total costs at a specific level of output, a manager would have to work out the semi variables especially. This makes then hard to deal with, notably in break even analysis. Examples of semi variables include maintenance expenditure and telephone bills. In the latter case, it is clear that although a doubling of customer demand would not necessarily double a firms telephone calls or bills, it is reasonable to except that they would increase. Therefore the telephone is neither a fixed nor a variable cost.

Standard Costs

The desired average cost for producing an item. This can be compared with the actual achievement to discover whether the firm is working effectively.

Classify the costs in direct and indirect costs.

Direct costs

Direct materials: Wood, metal locks, labels, plastic hinge buttons

Direct Labour: 28 hours in manufacturing

Indirect costs

Indirect Materials: small factory, office, machinery

Indirect Labour: 12 hours in marketing /administration

Indirect expenses: insurance, rent, depreciation, delivery

The number of toys produced

To find out the number of toys produced each week is by taking the number of hours spent on manufacturing the toys per week, and then I will divide it by the time it takes to make one toy:

28 hrs manufacturing = 7 toys

4 hrs per toy

Number of toys produced in a year will be

7 toys x 50(weeks in a year)

= 350

Therefore the number of toys produced per year is 350 toys

Total Variable costs

To find out the variable cost per toy I will add the direct material and the direct labour per toy together.

Direct material per toy

Wood £6.00

Canvas £5.50

Metal locks £1.20

Label £0.80

Plastic hinge buttons £0.50

Total £14.00

Direct labour per toy =Drawing per week 120 = £3

40

£3 x 28hrs manufacturing = £84 direct labour per week

So £84 ?7 = £12 labour per toy

Total variable cost per toy is £12 +14 = £26

Total variable cost per week's production is 26 x 7 = £182

Total variable cost per annum is 182 x 50 = £9100

Total Fixed Costs

To find out the fixed costs is to calculate the fixed cost per toy, then to find all indirect costs. I will now calculate the indirect labour per week, and then when I have found the week labour cost, I will divide by 7 to get the indirect labour per toy. I can either multiply the indirect labour per toy by 350(toys produced per year) to obtain the yearly indirect labour cost or multiply the weekly labour cost by 50(number of weeks in working year). Then I will carry out the same method to find the indirect expenses per toy, per week and per year.

20 ?40 = 3 x 5 hr (marketing) = £15

3 x 7 hrs (administration) =£21

Total indirect labour per week (15 + 21) = £36

Indirect labour per toy 36 ?7 =£5.14

Indirect expenses

Rent: £4160 pa = 83.20 per week

50weeks

83.20 = £11.89 per toy

7

Insurance

£500 = £10 per week

50

£10 pw =£1.43 per toy

7

Machine depreciation

650 cost -50 scrap value = £300 per year

2 years

£300 = £6 per week

50

£6 = 0.86p per toy

7

Running expenses

£280 per year = £5.60 per week

50

£5.60 =80p per toy

7

The total fixed cost per toy

Indirect labour 5.14

Rent 11.89

Insurance 1.43

Depreciation 0.86

Running expenses 0.80

Total £20.12

The fixed cost per toy £20.12

Total fixed cost per week's production is £20.12 x 7 = £140.84

Total fixed cost per annum is £140.84 x 50 = £7042

PART 2: BREAKING ANALYSIS AND MARGINAL COSTING

A) BREAKEVEN ANALYSIS

The number of customers, which must use the delivery service for its breakeven is 19.

Quantity

VC (15)

FC (1400)

TC (VC+FC)

TR (90)

0

0

400

400

0

5

75

400

475

450

0

50

400

550

900

5

225

400

625

350

20

300

400

700

800

25

375

400

775

2250

30

450

400

850

2700

35

525

400

925

3150

40

600

400

2000

3600

Variable costs = £15

Selling Price = £90

Fixed Costs = £1400

I have been asked to calculate the breakeven analysis and to draw a breakeven chart. The Graph is on page
Join now!


Breakeven = Fixed Cost / (selling price - variable costs)

So: Breakeven = 1400 / (90-15)

Breakeven = 1400 / 75

Breakeven = 18.66 (Whole number 19)

Robbie believes 30 customers a month to be a realistic take up. I would say the margin of safety for this amount is as follows

Number of customer- Breakeven = margin of safety

30- 19 =11

Number of customers - Breakeven = margin of safety as a percentage

Breakeven x 100

30-19 x100 = 36%

30

Number of customers ...

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