Jahangirnagar University

Department/Institute: Institute of Business Administration (IBA-JU)

BBA 2nd Year 2nd Semester Final Examination-2020

Assignment for Final Examination

Course No.# ACT 203

Course Title# Management Accounting

Name of the Student: Yasir Arafat

Class Roll No. # 1959

Examination Roll No. # 192490

Registration No. # 20193550219

Academic Session # 2018 - 2019

Total number of written pages in the assignment #11

Date of Submission: 3rd October, 2021

Instructions:
1. Don’t copy from other’s assignment. Copying from others will be punished
severely.
Course Summary Contents
Managerial Accounting and the Business Environment..............................................................................3
Cost Terms, Concepts, and Classifications...................................................................................................3
Systems Order Costing: Job Order costing and Process Costing..................................................................4
Cost Behavior: Analysis and Use..................................................................................................................4
Cost-Volume-Profit Relationships................................................................................................................5
Variable Costing: A Tool for Management...................................................................................................6
Activity Based Costing: A Tool to Aid Decision Making................................................................................7
Profit Planning.............................................................................................................................................8
Standard Costs and Balance Scorecard......................................................................................................10
References.................................................................................................................................................11
Couse Summary: What I learned so far ...
Managerial Accounting and the Business Environment
Accounting is made up of two parts: financial accounting and managerial
accounting, which are highly diverse in their own ways. This chapter exposes us to
a number of fundamental concepts related to the use of Management Accounting,
Management Work, Organizational Structure, and Process Management.

Management work consists of three core activities: planning, directing and

motivating, and controlling. Concerns have been raised about the establishment of
a centralized organizational strategy and its translation into departmental
strategies. Directing and motivating staff requires assigning duties and managing
everyday operations. Controlling is a feedback system that monitors progress.

We learn about decentralization, line staff, and support staff in organizational

structure. Employees in the line staff are actively involved in the manufacturing
process, whereas support staff advises and supports the line staff's actions. Human
resources is a support function.

We are also exposed to the ideas of Lean Production, Theory of Constraints, and Six
Sigma to help drive process management.

Cost Terms, Concepts, and Classifications

 General Classification: There’s manufacturing costs and non-
manufacturing costs. Manufacturing costs comprises of Direct Material, Direct
Labor, and Manufacturing Overhead. Non-manufacturing costs consists of
Selling costs and Administrative costs.
 Regarding the preparation of External Financial Statements: There’s
Product costs and Periodic costs. Product costs are all costs that are incurred
to make a product, which are DM, DL, MO. Period costs are not product costs
and these costs are incurred in the period they are expensed. Direct Labor
and Direct Materials together make prime costs, whereas Direct Labor and
Manufacturing Overhead together makes conversion cots.
 In terms of cost behavior: There’s Fixed costs and Variable costs. Fixed
costs in total remains constant with the change of production activity,
whereas variable costs in total changes proportionally directly with the
change in activity level.
 In terms of decision making: Sunk costs are costs that has already been
incurred and cannot be recovered. Differential costs are the difference of
costs between the two alternatives available, and opportunity costs are
incurred when we choose to enjoy the benefit of one alternative and let go of
the benefit of the other alternative.
Systems Order Costing: Job Order costing and Process Costing
There are two types of product costing system: Job-order costing and Process
Costing.

Process Costing: A company that produces identical units of homogenous product

uses process costing.

Job Order costing: A company that produces variety of products under different
jobs to order uses Job order costing.

Similarities between the two-costing system:

i. For products, both methods include material, labor, and overhead expenses.
ii. Raw Materials, Manufacturing Overhead, Work in Process, and Finished
Goods are all accounts that are shared by both systems.
iii. Both systems have a similar cost flow in manufacturing.

Differences between the two-costing system:

i. Cost is incurred department wise for process costing, whereas costs are
assigned to jobs for job order costing.
ii. Unit costs under process costing is also computed under department and for
job-order costing in the job cost sheet.

Now, in the Job cost order, the material requisition form is favored over the bill of
materials for recording the flow of direct and indirect materials. The distinction
between the two is that the bill of materials is used for more common products,
whilst the material requisition form is utilized for most customized orders. Employee
time cards and contemporary bar codes are used to record direct and indirect labor.
Direct materials and direct labor are recorded into the Work in Process, job cost
sheet from material requisition forms and time tickets, but indirect labor and
indirect materials are first recorded into a Manufacturing Overhead Account, which
is a control account. The manufacturing overhead expenses are then added to the
work in process job cost sheet, along with other overhead charges. It then moves
to the Finished goods account and then to the expenses of goods sold account.

Direct materials, direct labor, and manufacturing overhead are traced to production
departments for process costing, then to finished goods, and finally to cost of goods
sold. It is worth noting that these cost subjects pass through multiple departments
before reaching the completed goods account.

Cost Behavior: Analysis and Use

Cost structure in terms of cost behavior entails Variable costs and Fixed Costs.
Variable costs: Variable costs are directly proportional to the changes in activity
level. Total variable costs changes with the change of activity level, but unit
variable costs remain the same. There are two variable costs:

i. True Variable Costs: True variable costs vary in direct proportion to output
level. Direct Materials and certain Manufacturing Overhead, such as
Lubricant, are examples.
ii. Step Variable Costs: Step Variable costs are incurred for resource obtained
in large portions and the cost varies within a relevant range. Direct labor,
such as a maintenance worker, is one example. Variable costs are incurred
as a result of large changes in activity.

Fixed Costs: Total fixed costs remain constant whereas unit fixed costs changes,
being indirectly proportional to activity level. As production activity increases, per
unit fixed costs decreases. There are two types of Fixed Costs:

i. Committed Fixed Costs: Committed fixed costs are long-term fixed costs
that cannot be adjusted in the near term. Investment in Real Estate, Plants,
and Equipment, for example
ii. Discretionary Fixed Costs: Managed Fixed Costs is another name for
Managed Fixed Costs. Discretionary fixed costs are fixed costs that can be
changed in the near term. Management is not committed to it. Consider
advertising.

Both Fixed costs and Variable costs highlight the concept of relevant range,
which is the variety of activity within which assumptions about both fixed costs
and variable costs are accurate. Economists believe the cost function is curved,
whereas accountants feel it is linear. Both the curvilinear and linear functions
intersect each other within the relevant range. The assumptions of cost
behavior: both constant and variable, will be invalid for any activities that fall
outside of the relevant range.

Mixed Costs: A mixed cost is one that includes both fixed and variable costs. We
utilize the formula Y=a + bX, where a represents total fixed costs, b represents
variable costs per unit, and X represents degree of activity, adding up to Y
representing total mixed costs. For mixed cost analysis, the scatter graph method,
the High-Low method, and regression analysis could be utilized.

Cost-Volume-Profit Relationships
CPV analysis assists managers in focusing on the interplay between cost, volume,
and profit in order to make strategic decisions about which product to produce and
sell, at what price, which marketing techniques to use, and so on.

Now, we are going to cover the basic concepts from this chapter:
 1. Contribution Margin: The contribution method distinguishes between fixed
and variable costs. The contribution margin is the amount of money left over
after deducting variable costs from sales revenue. The contribution margin is
used to pay fixed expenses, with the remainder contributing to net income.
CM Ratio= Total CM/ Total Sales
2. Break Event Point: Break-event point is achieved when sales= total
expense (Variable & Fixed), leading to Net Income=0. There are two ways to
do break even analysis: Equation Method and Contribution Margin Method.
i. Equation Method: Sales= Variable expenses+ Fixed Expenses (In
dollar amount and Units sold)
ii. Contribution Margin Method: In Units sold= Fixed Expenses/ CM
per unit and in total sales dollars= Fixed Expenses/ CM ratio.
3. To do target profit analysis, use: Sales= Variable expenses+ Fixed
Expenses+ Profit (Target). For break-even analysis, profit was 0.
4. Margin of Safety= Total Sales – Break-even sales (In sales and Units)
5. Margin of Safety in Percentage= Margin of safety amount/ Unit selling
price.
6. Cost structure: In an organization, the relative share of fixed and variable
costs is referred to as cost structure. Which company has a better cost
structure: one with high fixed costs or one with high variable costs? The
answer is dependent on a variety of factors, including sales trends, year-to-
year fluctuations, and so on, but from a long-term perspective, higher fixed
costs and lower variable costs are preferable. Lower variable expenses
translate into a larger contribution margin and contribution ratio. If the CM
ratio is higher, earnings will rise in tandem with sales. Another advantage of
high fixed cost structure is that income will be higher in good years
compared to companies with high variable cost structure
7. Degree of Operating Leverage: It is a metric that correlates the
percentage change in NOI to the percentage change in sales. NOI typically
fluctuates when sales levels change, with DOL acting as a multiplier. DOL
equals Contribution Margin / NOI. If DOL=5, a 10% increase in sales would
result in a 10% X 5=50% increase in NOI. DOL = Infinity at the break-even
point, however as sales and profits increase and move away from the break-
even point, DOL drops.

Variable Costing: A Tool for Management

There are two ways to value inventory and cost of goods sold: Absorption costing
and Variable costing.

Absorption Costing: This is also referred to as the Full Cost Method. This type of
costing is in accordance with GAAP and is utilized for external reporting. It includes
all manufacturing expenses, whether fixed or variable, as product costs. In
Absorption costing, direct materials, direct labor, fixed and variable manufacturing
overhead, and fixed and variable selling and administrative costs are all product
costs, whereas fixed and variable selling and administrative costs are periodic
expenses.

Variable Costing: Also referred to as Direct Costing or Marginal Costing. Variable

costing only treats variable production costs as product costs, which means that
costs that vary with the rise or reduction of output are classified as variable costing
product costs. The product costs are comprised of direct materials, direct labor, and
variable manufacturing overhead, whereas the remainder are considered period
expenses. When calculating variable costs, a contribution format income statement
is employed.

Let’s have a look at the key insights:

1) When Production> Sales, Absorption costing NOI> Variable costing NOI. Why?
Since, under the absorption costing entails Fixed Manufacturing overhead as
product costs, when production is greater than sales, that means there remains
significant ending inventory which is carried to the next period. Hence, fixed
manufacturing overhead costs is deferred to the next period. Thus, under
absorption costing high value is reported in terms of NOI. Whereas, in Variable
costing, the entire fixed manufacturing overhead cost is utilized in that period
alone.

2) When Production< Sales, Absorption costing NOI< Variable costing NOI. Because
no inventory is carried over to the next period.

3) When Production= Sales, Absorption costing NOI= Variable Costing NOI. It is

possible in a JTI inventory system.

When the production level varies between periods but the sales level remains
constant, the NOI will be the same under variable costing for both periods, however
it may be different under absorption costing. However, after a long period of time,
the NOI for both systems will be the same because neither sale nor production can
exceed sales. It is only in the short term that NOI varies.

Activity Based Costing: A Tool to Aid Decision Making

Activity Based Costing, as opposed to traditional absorption costing, assists
managers with decision making by giving cost information. This type of costing
method supplements, rather than replaces, the company's standard costing system.
It has an impact on both a company's fixed and variable costs. In three ways,
activity-based costing varies from traditional costing:
1) In contrast to traditional costing, ABC costing assigns both manufacturing and
non-manufacturing expenses to a product, whereas traditional costing solely
prioritizes manufacturing costs. For example, direct materials, direct labor, and
shipping costs are non-manufacturing costs that may be directly attributed to the
product.

2) In the ABC costing approach, not all manufacturing costs are allocated to the
product. Manufacturing overhead costs, such as the Plant Manager's salary, are not
reflected in the final product cost. The Traditional Costing approach, on the other
hand, assigns these types of expenses. Such expenditures as organization
maintenance and idle capacity do not appear in ABC costing.

3) ABC costing contains numerous cost pools and distinct measurements.

Traditional costing has plantwide overhead rates and departmental overhead rates,
such as Direct Labor Hour. However, as industrial processes advanced, direct labor
expenses in organizations decreased, resulting in an increase in overhead
expenditures. Different overhead costs result in varying degrees of complexity, and
ABC costing eliminates such complexities through the use of individual cost drivers
or allocation bases.

Although ABC costing offers many advantages over traditional costing systems, it is
only utilized for internal reports and not for external reports. The accounting
department may encounter various setbacks if an ABC costing system is
implemented in the firm, because such systems consume significant resources and
may be unpopular with managers in terms of allocating all expenses to goods,
among other things.

Profit Planning
Profit Planning is essentially profit targets that businesses want to achieve and this
is done by preparing a handful of interdependent budgets.

What is a budget? A budget is a thorough qualitative plan prepared for the

acquisition and use of financial and other resources over a certain time period.
Budgets are prepared to control the activities of an organization, which is termed as
budgetary control. Planning and Controlling are key essentials to prepare an
effective budget. Without planning, effective control brings in no value to the
organization, because planning entails developing set of objectives for the
organizations, and based on achieving those objectives, budgeting is done. If the
objectives are not clear and transparent, then controlling seems pointless.

Responsibility accounting is a very big part of the budgeting process and becomes
the heart of the organization in terms of control measures. Now, we are going to
discuss the various forms of budget in the perspective of budget period,
management involvement, and budget elements.

Operating Budget: Operating budgets are typical budgets prepared in accordance

with the company’s fiscal year. It is divided into quarterly or monthly subsets.
Quarterly budgets are most popular.

Continuous Budget: It is an extension or modification of operating budget.

Continuous budgets roll forward a month or a quarter once a month or quarter is
completed. For example: If an organization completes the January budget period,
and has 11 more months of budget period in the fiscal year, it preplans the budget
for the next January as well, making it a 12-month budget in whole again. This is a
loop that continues.

Self-Imposed Budget/ Participative Budget: Self-imposed budgets, also known

as participative budgets, are created with the help of top-level, mid-level, and
lower-level managers. This type of budgeting approach has numerous advantages,
including the fact that employees are empowered and viewed as equal members of
the firm. Self-imposed budgets also produce accurate estimates of frontline
operations, which lower-level managers are more familiar with than top managers.
Furthermore, this budgeting procedure leaves no room for staff to manufacture
excuses for failing to meet stated goals. However, one drawback is that lower-level
managers may allow budgetary slack, which means they may set simple-to-attain
targets that will be easy to meet. As a result, top-level managers should establish
profit and sales targets and then delegate responsibility for developing
departmental budgets to other managers.

Master Budget: The master budget is a summary of the company's sales,

production, and finance targets, culminating in a cash budget, a budgeted income
statement, and a planned balance sheet. The master budget is used to separate
independent budgets such as sales, production, direct materials, direct labor, and
so on. Because all other budgets are dependent on the sales budget, it is reportedly
prepared first. The production budget is prepared next, and it has a direct impact
on the direct materials budget, manufacturing overhead budget, and, ultimately,
the ending inventory budget. To cut to the chase, all of these budgets are then
merged to make the cash budget, which outlines the comprehensive plan for
acquiring financial resources and how they will be used during the budget period.
The final stage is to generate an income statement and balance sheet based on the
budget.
Standard Costs and Balance Scorecard
This chapter introduces us to the practice of using standard costs for measuring
performance and balanced score cards to implement strategic directions into
performance measures at an organizational and individual level.

Standards are established against which actual outputs are tested. In a way,
Standards are benchmarks for performance review. There are two sorts of
standards in managerial accounting:

 Quantity Standard: Defines the amount of input requirement in a product or

service.
 Price Standard: Defines the amount of time requirement for each unit of
input.

Standard cost cards in an organization display the standard quantities and prices of
inputs necessary to generate one unit of product. When it comes to creating
standards, “Management by Exception” comes in handy. It is a system in which any
deviation from standards is brought to management's attention if and only if the
deviation appears to be significant. These differences are referred to as variance.
Only those deviations from norms that are bigger in monetary amount or
percentage are investigated by management. Within the company, variance
analysis and standards are established to keep Direct Materials, Direct Labor, and
Variable Manufacturing Overhead in check. Production managers are held
accountable for direct material and direct labor quantity variance, but Purchase
Managers are held accountable for standard subject price variance. To develop DM,
DL, and VOH standards, manufacturing businesses frequently combine the efforts of
individuals in accounting, procurement, production, and engineering. While these
criteria are being established, practical standards are chosen above ideal standards
since they are more reachable. Ideal standards are unrealistic since workers are
expected to perform at 100 percent peak efficiency with no breaks or leisure
periods. Whereas, in practical standards, machine downtime and breaks are
considered reasonable, and are said to bring out the highest efficiency of an
average worker.

Balanced Scorecards are tools that help management translate its plan into
financial and non-financial performance measurements that people can understand,
embrace, and influence. The balanced scorecards incorporate four types of
performance measures: financial, customer, internal business processes, and
learning and growth. Non-financial measurements include customer satisfaction,
internal business processes, and learning and growth. The key to enhancing an
organization's internal business process is to understand about the limits,
variances, and individuals within the business processes. After that, management
will be able to take safeguards to remove bottlenecks from the system, resulting in
faster and more efficient product offerings and increased customer satisfaction.
Only then can financial performance improve.

References
Ray H. Garrison, D.B.A., CPA, Eric W. Noreen, Ph.D., CMA, Peter C. Brewer, Ph.D., CPA. (n.d.).
Managerial Accounting. McGraw Hill.