FAKULTI PERNIAGAAN DAN PENGURUSAN

BBAP2103
MANAGEMENT ACCOUNTING

NAMA

CHE ZAWAWI BIN CHE MAHMOOD

NO. MATRIKULASI

RF130143001

NO. TELEFON

089712222

E-MEL

[email protected]

SEMESTER SEPTEMBER / TAHUN 2016

BBAP2103
Management Accounting
QUESTION 1: THE ROLE OF MANAGEMENT ACCOUNTS IN ENSURING THE SUCCES
OF A BUSINESS
Historically the focus of management accounts has been to support corporate managers by
supplying relevant information which used in the business planning process. In the past, this
information has been principally financial (Model, 2009, Shea, 1997). Management accountants are
increasingly being called upon to assist in quality management decision-making that may involve
measuring non-financial aspects of the business such as customer satisfaction (Stanleigh, 1993). In
addition, they must extend their analytical skills, information management, communication and
planning expertise to encompass the broader categories of information that are integral components of
the Total Quality Management philosophy. They must work towards satisfying a wider constituency
of stakeholders, meeting the needs of customers and shareholders alike (Grant, 1995). The risk in not
meeting these new account. For example, ineffective use of information could hamper bottom-line
results of the company and management accountant could become marginalized within his or her
organization. The managerial accountant must become proactive rather than reactive (Shea, 1994).
Management accounting refers to a function of tracking internal cost for any business process
that helps an organization, firm or an individual in making decisions related to production, operation
and investment in market. Companies need management accounting to know the efficiency of their
budget, the cost of their operations and then allocate funds accordingly in production, sales and
investment. The role of a management accountant is thus, very crucial for a firms well being. His role
and responsibilities are so huge that even a single miscalculation or underestimation of any business
plan by management accountant can put a companys future in danger.
The role of management accountant include collecting, recording and reporting financial data
from several units of an organization, observe and analyze their budget and suggest their funding and
allocation. This includes estimation of cost of raw material, labor, manufacturing, sales and
advertising, social media networking, lobbying and companys internal operation cost. A management
accountant need to coordinate with all concerned departments to make an overall analysis of
companys functioning capital and availability of funds and then he or she has to report all the
information to senior management and board of directors. Thus, a CFO is a source of information
required by directors and CEOs to take decisions.

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Management Accounting
Management accountings main role is budgeting. For small company budgets are guide to all
expenditures. Small businessmen decide a budget every year to fix their expenses on each process that
is operation and production cost and then further investment. Thus here a management accountant has
to review historical data to prepare an accurate prediction of a years future expenses. Budget had
ensure coordination between the entrepreneur and his employees in implementing all the plans for the
year ahead.
Time is very important for making all plans for a companys management. A management
accountants functions are time bound since he or she has to make predictions, budgets and report
within a stipulated period so that they can be implemented at the time of need a timely forecasting is
needed with taking consideration of market uncertainties. The budget need to be according to the
available working capital and exposure to market risks thus a certain amount of accuracy is very
necessary. Before reporting the owners, a management accountant has to ensure accuracy of all
information gathered to help in correct decision making.
Business technology software plays an important role nowadays in preparation of financial
records, their analysis and forecasting. They help in dissemination of digital information and seedy
processing of data for formulation of budget and its interpretation. This software provides tools that
take required track record and automatically create financial predictions. Thus time and effort to
calculate this lengthy information get reduced saving management accountant from lots of burden.
A management accountant need to be aware of everything, be it political situation that affect
market, inflation, other exposures in market, competition, cost of labor, raw material, internal
operations, coordination among different departments within a company as well as its interaction with
rest of the business world and social media. Thus, he should be master of everything. He needs to
outline challenges in advance to make his organization ready for cash crunch or any other risk. He
needs to inform company owners in advance so that they can take financial decisions with
consideration of available funds and requirements,

The purpose of management accounting in the organization to support competitive decision

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Management Accounting
control and evaluate business processes and company strategy. The interesting thing about
management accounting is that it is rare to find an individual within a company with the title of
management accountant. Often many individual function as accountants within the organization,
but these individuals typically operate as financial accountants, cost accountants, tax accountants or
internal auditors. However, the ability to develop and use good management accounting (which
covers a lot more ground than the product costing done by cost accountants) is actually an important
ability for many individuals, including finance professionals, operational and marketing managers,
top-level executives and information technologist.
Generally, in a very large company, each division has a top accountant called the controller
and much of the management accounting that is done in these divisions comes under the leadership of
the controller. On the other hand, the controller usually reports to the vice president of finance for the
division who in turn, reports to the divisions president or overall chief financial officer (CFO). All of
these individuals are responsible for the flow of good accounting information that supports the
planning, control and evaluation work that take place within the organization.
As should be clear by now, the process of management accounting is the process of creating
and using cost, quality and time-based information to make effective decisions within the
organization. Many people in the organization play a role in this process. The internal audit
department has the responsibility of ensuring that controls are followed and operation are efficient.
Financial accounting while providing information to outsiders (such as creditors, investors and
government agencies) must also provide relevant financial reports to decision makers within the
organization. Systems professionals have the responsibility to process information so that it is
available to management in formats useful for decision making. Tax department expert make sure that
the organization complies with the tax laws and pays no more than its legally obligated tax liability,
but these people also participate in good planning, control and evaluation of processes and decisions
that will affect future tax expense exposure. Finally, cot accounting obviously plays a keyrole in
tracking and reporting relevant product and service costs. Overall, the controller works to bring
together all this information as an integral part of the planning, controlling, evaluating and decisionmaking activities that take place throughout the organization.

Business professionals involved in management accounting have come a long way since the
early days of management accounting in the 1800s. Today, management accounting professionals play
a key role in many organizations. The nature of their work continues to expand as new industries
develop and computer technology grows in importance in the gathering and use of information by

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Management Accounting
decision makers. For example, you have spent the bulk of this chapter being introduced to
management accounting in the context of DuPont, a manufacturing business. However, businesses
focused on service rather than manufacturing (example law firms, banks, hospitals, transportations
and hotels) are far and away the dominant industries in the U.S. economy. Further, merchandising
companies (retailers and wholesalers) combine to be a strong an economic force as the manufacturing
industry. The explosion of the Internet has established a new aspect in our economy such a
ecommerce. At this point, e-commerce is generally a growing delivery platform for many service and
merchandising companies, rather than a separate industry

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Management Accounting
QUESTION 2: THE BEHAVIOUR OF COSTS AND EVALUATE HOW IT CAN INFLUENCE
THE PRICING STRATEGIES OF THE ORGANIZATION
Competitors costs are usually the crucial estimate in appraisal of competitors capabilities.
For products already in the marketplace, the objectives are to estimate competitor staying power and
the floor of retaliation pricing. For the first objective, the pertinent cost concept is the competitors
long run incremental costs. For the second, their short-run incremental cost is relevant. Forecasts of
competitors costs for competing products that could affect a products future can help assess the
capability of competitors. These forecasts also provide an estimate of the effectiveness of a product
pricing strategy to discourage entry. For this situation, the cost behavior to forecast is the relationship
between unit direct costs and cumulative experience as the relevant products move through their life
cycles. These cost forecasts should consider technological progress and should reflect the potential
head-start cost advantages that one of the sellers might have.
Typically, a firm is only one part of a set of activities within a value chain. Suppliers not only
deliver inputs the firm uses to create value for its customers, but also have an important impact on the
firms ability to develop and maintain a cost advantage in the product markets it serves. The firm must
understand how its activities influence the costs of its suppliers because often the costs of the product
that the firm incurs is determined by its linkages with its suppliers. Value analysis, similar to that
conducted to understand how the firm helps its customers create value, must be conducted for the
firms suppliers as well.
The sellers costs play several roles in pricing a product or service. First, a new product must
be pre-priced provisionally early in the research and development (R&D) stage and then again
periodically as it progresses toward market. Forecasts of production and marketing costs will
influence the decision to continue product development and ultimately to commercialize. The concept
of cost relevant for this analysis is a prediction of direct costs at a series of prospective volumes and
corresponding technologies. Second, the sellers cost is important in establishing a price floor that is
also the threshold for maximizing return on the product investment over the long run. For both issues,
the relevant concept is future costs, forecast over arrange of volume, production technologies and
promotional outlays in the marketing plan. The production, marketing and distribution costs that
matter are the future costs over the long run that will be incurred by producing and selling this
product.

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Management Accounting
Customers seldom are concerned with what it costs the seller to be able to offer the product or
service for sale. Thus to determine a price that will sell, the sellers costs have relatively little
importance. Indeed, cost is probably the least important factor to consider when setting product or
service prices. This statement implies a relative ranking, and in no way suggests that costs can be or
should be ignored when establishing prices. Moreover, the practice of adding a percentage (usually of
some aspect of production or acquisition costs) to cover selling, marketing, distribution and general
administrative costs is an inadequate recognition of this point. Indeed, marketing and distribution
costs are of the same importance as production and material costs. The most commonly used method
to set prices is the cost-plus or full-cost method of pricing. Probably the two strongest reasons for the
prevalence of this pricing approach is that traditionally it has been associated with the notion of the
just price and that objective cost data are easier to obtain from pricing research than are
subjective price-volume estimates.
The full-cost approach, although seemingly objective, is neither objective nor logical. When
considering the cost aspect of a pricing decision, the crucial question is what costs are relevant to the
decision. When cost-plus methods of pricing are used and the cost portion of the formula is arbitrarily
determined, the resultant price may be incorrect because the pricing formula does not allow for
demand or competition. It is important for the seller to know the determinants and behavior of product
and service costs in order to know when to accelerate cost recovery, how to evaluate a change in
selling price, how to profitably segment a market, and when to add or eliminate products from the
product line. Cost information indicates whether the product can be made and sold profitably at any
price, but it does not indicate the amount of markup or markdown on cost buyers will accept. Proper
costs determination serves to guide management in the selection of a profitable product-service mix
and the determination of how cost can be incurred without sacrificing profit.
Costs for pricing must deal with the future. Current or past information probably will provide
an adequate basis for profit projections only if the future is a perfect mirror of the past. Product costs
must be based on expected costs of raw material, labor wage rates, planned marketing expenditures
and other expenses to be incurred. In addition, information about research and market development
and expected administration costs is needed. Information on product and service costs should be
regularly developed to determine whether changes have occurred. It is planned costs that are
important, not past costs, since profit planning necessarily deals with the future.

BBAP2103
Management Accounting
Determining profit at any volume, price level, product mix or time requires proper cost
classification. Some costs vary directly with the rate of activity, whereas others do not. When these
different costs are mixed together in a total unit cost, it is not possible to relate sales volume to costs
or determine what costs will change due to pricing decisions. As a result, the pricing decision is likely
to be reduced to a formula that can lead to serious errors. However, if the cost data are properly
classified into their fixed and variable components and properly attributed to the activity causing the
cost, the effect of volume or activity level becomes readily apparent and sources of profit are
revealed. It is important to emphasize the concept of activity. Commonly, costs that vary with
production rate, such as labor or materials, have been classified as variable costs and all other costs
including marketing and distribution costs have been classified as fixed. However such a
classification scheme is inappropriate for proper cost classification. For example, the travel costs of
supporting a salesperson vary directly with number of miles traveled. Also, when a salesperson is paid
on commission, selling costs vary with sales. Therefore, it is important to recognize that the cost
concepts presented here apply to marketing and distribution activities as well as production.
Direct costs also called traceable or attributable costs are those costs incurred by and solely
for a particular product, department, program, sales territory or customer account. These costs may be
fixed or variable. Material and labor costs can be traced to a unit of product. The administrative
salaries, rent and other office expenses can be traced to district sales office and therefore are direct
costs of the sales territory. Indirect traceable costs can be objectively traced to a product, department,
program, sales territory or customer account if the costs can be identified with that unit. These costs
although not incurred solely for a product, may be objectively identified with the product. They may
be fixed or variable. Materials used in the production of several products can be objectively traced to
or identified by the rate of usage for the production of each different product. Classic examples
include maintenance and repair, heating, power and lighting for plants and offices.
When cost allocations are used for pricing purposes, the sales volumes are usually estimates
or forecasts, implying that several average unit cost figures must be developed, depending on the
relative range of forecasted sales. When there are parallel or joint production or sales method, the cost
allocation process can become very complex and arbitrary, resulting in subjective cost estimates rather
than the assumed objective estimates. Thus an indirect cost should be assigned only when there is a
reasonably objective means of tracing it to the appropriate business segment for which it is incurred.
Common or general costs support a number of activities or profit segments. These costs cannot be
objectively traced to a product or segment based on a direct physical relationship to that product or
segment. The administrative costs of a sales district are common to all units of product sold in that
district. A common or general cost does not change when one of the activities it supports is

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Management Accounting
discontinued. Hence, discontinuing a product in the line will not affect the administrative costs of the
district or other general expenses such as market research or research development.
An opportunity cost is the marginal income forgone by choosing one alternative over another.
Essentially, opportunity costs reflect the costs of not choosing the best alternative or opportunity.
These cost are relevant when operating at or near full capacity or when resources are in scarce supply.
If a decision is made not to produce a product with the largest contribution per resource unit
consumed, then the difference between the income earned and the larger income that could have been
earned is income forgone (opportunity cost). N a similar manner, when the organization is operating
well below capacity, then sales volume becomes the limiting or scarce factor, and instead of
maximizing contributions per scarce resource unit, the relevant decisions criterion would be
maximization of contribution per sales dollar. In these two situations, opportunity costs are relevant to
price setting and must be included in the development of relevant costs for the decision.
Costs can lead to cash (or out-of-pocket) outlays or book-keeping (depreciation or
amortization) entries. The noncash costs do impact the cash flows but do not reflect actual monetary
outlays in a particular accounting period. Consider, for example, depreciation expenses. There are
very good reasons for charging depreciation, but the amount is calculated by an arbitrary formula and
does not necessarily have to be set aside when the entry is made in the accounts. Depreciation as an
allowable expense serves to reduce the organizations tax obligations, thereby enhancing the cash
flow of the organization. However, it is not an actual cash or out-of-pocket expense and therefore is
not a legitimate cost for setting prices. When analyzing the implications of particular price-expected
volume combinations on profitability or financial status, these noncash costs become relevant. But
they are not relevant for the determination of actual selling prices.
In addition to classifying costs according to ability to attribute a cost to a product or profit
segment, it is also important to classify costs according to variation with the rate of activity. As noted
previously, unless costs can be segmented into fixed and variable costs, it is not possible to trace the
effects of changes in price, volume or product selling mix on costs. Costs that vary directly with an
activity level are called direct variable costs. Cost that vary directly with an activity level are called
direct variable costs. As production increases in a given time period, a proportionately higher amount
of labor and materials is used. Assuming no changes in scale economies as the volume increases,
these direct variable costs will be constant per additional unit produced. However, there usually is a
point where unit direct variable costs change due either to economies of quantity raw-material
purchases or to increased labor unit costs resulting from overtime or a second shift.

BBAP2103
Management Accounting
In pricing, direct variable costs are also known as out-of-pocket costs, since these costs are
incremental to the decision to make and sell and therefore require an outlay of immediate cash. One
test of a unit variable cost is whether it is readily discontinued or whether it would not exist if a
product were not made. Direct variable costs include those costs that the product incurs unit by unit
and includes such costs as productive labor, energy required at production centers, raw material
required, sales commissions, royalties and shipping costs. The major criterion of a direct variable cost
is that it be traceably and tangibly generated by and identified with, the making and selling of a
specific product. Some costs vary with activity rates but are not zero at a zero activity rate. Plant
supplies are needed in some minimum amount to get activities started and then additional quantities
are required as the level of activity increases. Hence these semi-variable costs consist of a base
amount that is constant in relation to activity and a variable amount that varies directly with changes
in the activity level.
Generally, fixed costs occur because of a legal, contractual or more obligation. Some of these
cost, although fixed for the planning period re assigned to specific projects by management to fulfill
company objectives. These specific programmed costs refer to costs used to generate additional
revenues, they include opening a new sales district office or warehouse or a special advertising
program for specific product line. These direct fixed costs are separable because they can be charged
to the product line or activity that is the recipient of the incurred cost. Other costs are also fixed for
the planning period, but they are incurred for the entire company and are common to the various
products or activities. Examples of these general programmed cost are general and administrative
salaries, research and development and general marketing expenses.
Other costs are neither separable nor inescapable during the planning period. These constant
cost are common and are incurred as long as the firm is in business. Common costs support a number
of activities or profit segments. These costs cannot be objectively traced to a particular type of service
or product based on a direct physical relationship to that service or product. The administrative cost of
a service facility is common to all units of service provided in that facility. A common or general cost
does not change when one of the activities it supports is discontinued. Hence discontinuing a product
or type of service provided will not affect the administrative cost of the facility or the general
expenses such as market research or research and development. Included in these costs depreciation,
real estate taxes, rent and interest payments on mortgages. In pricing, all the period fixed costs are
referred to simply as fixed costs as long as the costs will be incurred in the planning period.

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Management Accounting
No cost is inherently fixed or variable. Furthermore, whether a cost is fixed or variable
depends on whether that cost varies as the organizations activity level changes. Traditionally, it has
been customary to consider variable costs as those costs that vary with production volume, usually
measured in terms of product units. For example, material cost is usually considered a variable cost
because it varies directly with changes in production activity. However, when analyzing costs to set
pices or justify price differences, it is important to recognize that there are other sets of activities in
addition to production that incur costs. For example, a salespersons travel expenses vary directly with
the distance traveled. A salaried salespersons expenses in serving an account varu directly with the
amount of time spent serving a customer account. The shipping departments cost of preparing an
invoice may vary directly with the number of items on an invoice
On the other, fixed costs are affected by long-range planning decisions. Some of these fixed
costs are long-term lease commitments and depreciation costs, which remain constant over periods of
time. These general programmed costs originate in capacity decisions, whereas specific programmed
costs result from decisions on how to use that capacity. These specific programmed costs are planned
expenditures to generate a sales volume or to handle a specified level of administrative work. Thus,
managers can increase the specific programmed costs whenever they decide to do so. Different
decisions may produce different levels of fixed costs. For example, shut-down fixed costs are usually
lower than operating fixed costs of a plant. Required power levels are lower and security and
maintenance personnel are fewer when a plant is shut down than when it is running.
Fixed costs may also differ with extent to a which fixed costs is traceable to a specific time
period. Administrative salaries, lease payments and taxes are direct costs of the time period in which
they are paid. However, other fixed costs reflect a lump-sum payment that is apportioned over a series
of future time periods. Depreciation, amortization and depletion expenses are common costs
apportioned over specific time periods and they vary according to the computational procedure
employed. Because depreciation costs are subjective and reflect prior decisions, they are irrelevant for
pricing and other planning decisions. Unfortunately, they are often lumped in with other fixed costs,
unitized according to some estimate of projected volume, and become a part of the cost that price is
expected to recover. Depreciation, amortization and depletion costs should be separated from other
period expenses for the purpose of pricing. Although costs are not inherently fixed or variable, it is
essential that an organization identify the behavior pattern that they follow. It is vitally important to
know which costs vary with changes in activity levels and which constant remain constant.

QUESTION 3:

BBAP2103
Management Accounting
a. The product cost per unit
i.

Absorption methods

Unit product cost = direct materials + direct labor + variable manufacturing overhead + fixed
manufacturing overhead
= 100, 000 + 80, 000 + 20, 000 + 80, 000
= RM280, 000

Product cost per unit = RM280, 000 210, 000

ii.

Marginal costing methods

Unit product cost = direct materials + direct labor + variable manufacturing overhead
= 100, 000 + 80, 000 + 20, 000
= RM200, 000

Product cost per unit = RM200, 000 210, 000

b. Income statement using absorption costing method

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Management Accounting
INCOME STATEMENT (absorption costing)
Sales (RM210,000 x RM4.50)

945, 000

Less: Cost of Goods Manufactured

100, 000

Direct labor

400, 000

Factory overheads: Variable

20, 000

Fixed
Less: Closing stock (10, 000 x 600, 000 200, 000)

80, 000
600, 000
30, 000

Gross profit

570, 000
375, 000

Less: Selling and distribution expenses

60, 000

Fixed marketing cost

40, 000

Fixed administrative cost

25, 000
125, 000
250, 000

Net profit

c. Income statement using marginal costing method

INCOME STATEMENT (marginal costing)

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Management Accounting
Sales

945, 000

Less: Variable cost:

100, 000

Direct labor

400, 000

Variable factory overheads

20, 000
520, 000

Less: Closing stock (10, 000 x 520, 000 200, 000)

26, 000
494, 000

Add: Variable selling and distribution expenses

20, 000
514, 000
431, 000

Less: Fixed factory overheads

80, 000
40, 000 + 25, 000

Nett profit

145, 000
286, 000

d. The difference in net income reporting exist between both income statements
= Nett profit using marginal costing nett profit using absorption costing
= 286, 000 250, 000
= RM36, 000

e. Situations that will result in different net income reporting for both method
In marginal costing, work in progress and finished stocks are valued at marginal cost,
but in absorption costing they are valued at total production cost. Hence profit will differ as
different amounts of fixed overheads are considered in two accounts
The profit difference due to difference in stock valuation such as when there is no
opening and closing stocks, there will be no difference in profit. When opening and closing
stocks are same, there will be no difference in profit provided the fixed cost element in
opening and closing stocks are of the same amount.

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Management Accounting
When closing stock is more than opening stock, the profit under absorption costing
will be higher as comparatively a greater portion of fixed cost is included in closing stock and
carried over to next period. When closing stock is less than opening stock, the profit under
absorption costing will be less as comparatively a higher amount of fixed cost contained in
opening stock is debited during the current period.

RUJUKAN
1. Professional Accountants in Business Committee (2009). Evaluating and Improving Costing
in Organizations (International Good Practice Guidance). International Federation of
Accountants. p. 7.
2. Clinton, B.D.; Van der Merwe, Anton (2006). "Management Accounting - Approaches,
Techniques, and Management Processes". Cost Management. New York: Thomas Reuters
RIA Group (May/Jun).

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3. "Taking Control of IT Costs". Nokes, Sebastian. London (Financial Times / Prentice Hall):
March 20, 2000.
4. Friedl, Gunther; Hans-Ulrich Kupper; Burkhard Pedell (2005). "Relevance Added:
Combining ABC with German Cost Accounting". Strategic Finance (June): 5661.