CPA
Intermediate Leval
Management accounting May 2018
Suggested Solutions

2. Focus on Internal Information:

Management accounting primarily focuses on internal information and is not regulated by external standards. This can lead to a lack of consistency and comparability between organizations, as each may adopt different methods for reporting.

3. Historical Emphasis:

Much of the information provided by management accounting is based on historical data. While historical information is useful for trend analysis, it may not accurately reflect future market conditions or changes in the business environment.

4. Not Subject to External Audit:

Unlike financial accounting, management accounting reports are not subject to external audit or independent verification. This can reduce the reliability of the information presented, as there is no external assurance of accuracy.

5. May Encourage Short-Term Focus:

Management accounting is often geared towards short-term planning and decision-making. This can result in managers making decisions that benefit the organization in the short term but may not be in its long-term best interest.

6. Costly and Time-Consuming:

Implementing and maintaining a management accounting system can be costly and time-consuming. Small businesses, in particular, may find it challenging to allocate resources to develop and maintain a sophisticated management accounting system.

7. Dependency on Financial Metrics:

Management accounting often relies heavily on financial metrics such as budgets, variances, and ratios. This financial focus may not capture important non-financial factors that can influence the performance and success of an organization.

8. Influence of Organizational Culture:

The effectiveness of management accounting can be influenced by the organizational culture. In some cases, organizational cultures may resist or not fully embrace the information and insights provided by management accounting.

9. Inability to Predict External Factors:

Management accounting is limited in its ability to predict external factors such as changes in market conditions, economic trends, or political events. This can make it challenging for organizations to adapt quickly to unexpected changes.

10. Emphasis on Quantifiable Data:

Management accounting tends to emphasize quantifiable data, and certain qualitative factors that are critical to decision-making may not be adequately considered.

(ii) Determine the relevant costs for the EBQ in (b) (i) above

(ii). Using a cost analysis statement, advise Louise Njambi on whether to live the wall herself or sublet it

Components:

• Direct Materials: The cost of raw materials that can be directly traced to a specific product, such as wood in furniture manufacturing.
• Direct Labor: The cost of labor directly involved in the production process, including wages and benefits for workers assembling products.
• Manufacturing Overhead: Indirect costs that are not directly attributable to a specific product but are incurred in the production process, such as factory rent, utilities, and depreciation of manufacturing equipment.

2. Administration Costs:

Definition: Administration costs, also known as general and administrative (G&A) costs, encompass expenses related to the overall management and administration of the entire organization. These costs do not directly contribute to the production of goods or services but are essential for the organization's overall functioning.

Components:

• Salaries of Administrative Staff: The wages and benefits of employees responsible for general management, finance, human resources, and other administrative functions.
• Office Supplies: Costs associated with office materials and supplies necessary for day-to-day administrative activities.
• Utilities and Facility Costs: Expenses related to maintaining and operating office spaces, including rent, utilities, and maintenance.

3. Selling and Distribution Costs:

Definition: Selling and distribution costs are incurred to promote, sell, and deliver products or services to customers. These costs are associated with the marketing and distribution of goods and include expenses aimed at reaching customers and facilitating product delivery.

Components:

• Sales Commissions: Payments made to sales staff based on the volume or value of products sold.
• Advertising and Marketing Costs: Expenditures related to advertising campaigns, promotional activities, and marketing materials aimed at increasing product visibility and sales.
• Distribution Expenses: Costs associated with the transportation, warehousing, and delivery of products to customers, including shipping costs and distribution center expenses.

(ii) Using simple regression

(iii) Total cost for 2000 patients

(ii) Compute under-applied or over-applied overhead cost for the year

(iii) Cost of sales to be charged in income statement.

1. Identifying Cost Drivers:

Value chain analysis helps identify the key activities that drive costs in the production process. By understanding cost drivers, businesses can focus on optimizing and managing these specific activities to reduce overall costs.

2. Cost Differentiation:

The analysis allows businesses to differentiate between cost-effective and costly activities. This differentiation helps in making informed decisions on where to invest resources for maximum efficiency and value creation.

3. Competitive Advantage:

Understanding the value chain enables businesses to identify areas where they can gain a competitive advantage. By optimizing key activities and minimizing costs, a company can position itself more competitively in the market.

4. Process Optimization:

The analysis facilitates the identification of inefficiencies and bottlenecks in the production process. This insight enables businesses to streamline operations, enhance productivity, and reduce unnecessary costs.

5. Strategic Planning:

The analysis provides a comprehensive view of the entire business process, allowing for better strategic planning. Businesses can align their resources and efforts with activities that contribute most to value creation and overall success.

6. Supply Chain Management:

Value chain analysis extends beyond the company's boundaries, incorporating suppliers and distributors. By optimizing relationships and processes along the entire supply chain, businesses can enhance coordination, reduce costs, and improve overall efficiency.

7. Product and Service Quality Improvement:

By examining each stage of the value chain, businesses can identify opportunities to enhance product or service quality. Improved quality often leads to increased customer satisfaction and loyalty, contributing to long-term profitability.

8. Resource Allocation:

The analysis assists in allocating resources effectively by prioritizing activities that have the most significant impact on value creation. This ensures that resources are allocated to areas that contribute most to the company's objectives.

9. Risk Management:

Value chain analysis helps in identifying and mitigating risks associated with various activities. Understanding the impact of each activity on the overall value chain allows businesses to proactively manage risks and uncertainties.

10. Continuous Improvement:

Value chain analysis is a dynamic process that encourages continuous improvement. Regularly reassessing the value chain helps businesses stay responsive to changes in the market, technology, and other external factors.

Deluxe

Luxury suites

Integrated Accounting Systems:

Summar

1. Simplicity and Ease of Use:

Marginal costing is straightforward and easier to understand compared to absorption costing. It involves fewer complex calculations, making it more accessible for management and decision-makers.

2. Clarity in Decision-Making:

Marginal costing provides a clear distinction between variable and fixed costs. This clarity is particularly beneficial for decision-making, as it helps management focus on the impact of production and sales volume on profitability.

3. Contribution Margin Analysis:

Marginal costing emphasizes the concept of contribution margin, which is the difference between sales and variable costs. This facilitates a quick assessment of the profitability of products or services and aids in making decisions to maximize contribution and overall profit.

4. Flexible Budgeting:

Marginal costing is conducive to flexible budgeting. Since fixed costs are treated as period costs, the budget can be easily adjusted for changes in production levels without the need to allocate fixed costs per unit.

5. Cost-Volume-Profit (CVP) Analysis:

Marginal costing is particularly useful for Cost-Volume-Profit analysis. It allows management to assess the impact of changes in volume on costs and profits, providing insights into break-even points and profitability levels.

6. Effective Pricing Decisions:

Marginal costing helps in making effective pricing decisions. By focusing on variable costs, management can set prices that cover variable costs and contribute towards covering fixed costs, ensuring profitability.

7. Better Inventory Valuation:

Closing inventories are valued at variable production costs in marginal costing. This approach provides a more realistic reflection of the economic value of inventories, especially when production volumes fluctuate.

8. Facilitates Short-Term Decision-Making:

Marginal costing is well-suited for short-term decision-making, as it emphasizes incremental costs and revenues associated with specific decisions. This is valuable for scenarios such as special orders, discontinuation of products, or pricing decisions.

9. Reduces Overhead Absorption Issues:

Unlike absorption costing, marginal costing avoids the complexities associated with overhead absorption rates. Fixed overhead costs are treated as period costs, eliminating the need for arbitrary allocation methods.

10. Performance Evaluation:

Marginal costing aids in performance evaluation by focusing on contribution margins and segmental profitability. This can help identify and prioritize profitable segments within an organization.

( ii) Labour rate variance (LRV)

(iii) Variable overhead efficiency variance (VOEV)

(iv). Fixed overhead volume variance