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Sample Management Accounting Report

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Autor:  yppi  06 May 2010
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Words: 2658   |   Pages: 11
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TABLE OF CONTENTS
CONTENTS PAGE
Abstract 2
1.0 Introduction 3
2.0 Analysis of the results 4
2.1 Allocation and Apportionment
2.2 Overhead Absorption Rates
2.3 Cost Determination
2.4 Pricing for Potential Orders
2.5 Profit Analysis
2.6 Sensitivity Analysis
2.6.1 Scenario 1: Increase/Decrease in Direct Material Costs
2.6.2 Scenario 2: Increase/Decrease in Direct Labour Costs
2.6.3 Scenario 3: Increase/Decrease in Profits
2.6.4 Summary
3.0 Conclusions 8
3.1 Issues
3.2 Recommendations



Abstract
Malaysian based glove manufacturer Super Glove Ltd faced problems with its costing systems and financial reporting. From the past 5 year’s financial results, 20% of its total glove production is exported to other Asian countries and mainly to the USA, and the UK. However, there has been an occurrence of unsystematic approaches toward its costing methods. This lead to inaccurate cost allocation which questions the integrity of its financial statements for decision making purposes. This report provides the review of the costing system computed using the excel spreadsheet using the Overhead Absorption Costing Method. Recommendations are to increase profits so that there will be a greater profit margin for the business.









1.0 Introduction
As an active player in the industrial sector, Super Glove Ltd should incur different types of indirect costs. Therefore it is crucial to allocate the costs correctly to determine correct pricing of products and profit measurement. The methodology here is to provide a spreadsheet computation and provide analyses for the overall costing system.












OAR = Budgeted Overhead
Basis
2.0 Analyses of Results
2.1 Allocation and Apportionment
Unlike direct costs which can be traced directly to the activity, indirect costs are not easily charged therefore, they are indirectly charged using allocation bases which are significant determinants. In the Overhead Analysis Sheet, the budgeted overheads are allocated and apportioned to both production and service departments and finally re-apportioned to the production department with Latex Dipping amounted with the highest overhead of RM 93 535 or 30% and Leaching with the lowest of RM 72 992 or 23%.

2.2 Overhead Absorption Rate
Overhead absorption rate are attributing overheads to a product or service. It is computed by taking the Budgeted amount of each relevant department and dividing it with the appropriate basis.




The bases used are machine hours for the entire production department except for the Beading department which was based on labour hours. From the spreadsheet the respective rates for Latex Dipping, Beading, Leaching and Drying are RM 2.92, RM 2.54, RM 3.32 and RM 2.15 respectively.

2.3 Cost Determination
Once the Overhead Absorption Rates are derived, the production costs are computed by summing both variable and fixed cost. In Appendix 2, Surgical Gloves consumed the most production costs with a total of RM 25 850.08 or 40% of the total production cost and Industrial/Household Glove consumed the lowest amount of RM 16 928 or only 26%.

2.4 Pricing for Potential Order
Recently, the company was approached by prospective buyers from the USA wanting to purchase three of the products with the following quantity of 15 000, 10 000 and 13 000 units. A quotation for the potential orders was derived and the pricing quoted was RM 1.91 per unit for Surgical, RM 1.88 for Industrial and RM 1.90 for Cleanroom Gloves.

2.5 Profit Analysis
Supposed the profit made would be 10% of the production cost. Therefore, the total profits forecasted would be RM 7 217.01. Surgical Gloves is stated to have made the most profit which is 40% of the total compared to Industrial/Household Gloves which stated to make the lowest of the total profits which is 26%.



2.6 Sensitivity Analysis
The sensitivity analysis shows how the changes in Direct Materials, Direct Labour and Profits would affect the overall price computation and the total profits. The changes are derived and shown in Appendix 3.
2.6.1 Scenario 1: Increase/Decrease of Direct Materials
A revised quotation produced by adding an extra 10% to the cost of direct
materials. This resulted in a slight change of an average 3.5% in prices and an
average of 3% increase in profits. On the other hand, a decrease of 10% of the
total direct materials would result in an average decrease of 3.5% in price
and an average 3.8% in profits. Therefore, the cost of direct materials should
be reduced.
2.6.2 Scenario 2: Increase/Decrease in Direct Labour
A second revised quotation where Direct Labour costs is added an extra 10%
is produced. This has little effect on the price with only an average of 2.98%
increase and an average of 2.73% increase in profits. Vice-versa, a 10%
decrease in Direct Labour costs results in a small fall in price with the
average of 3% and a fall in average profits of 3.5%.
2.6.3 Scenario 3: Increase/Decrease in Profits
The third revised quotation saw a 5% increase in its current profits. The
average price rose to 6% and average profits soared to a significant 58%.
Vice-versa, a decrease in 5% of current profits resulted in a fall in average
price of 5.3% and a great plummet in average profits of 53%. Hence, it
is not advisable to decrease current profits.
2.6.4 Brief Summary
From the computations above, there is little change in the price and profits
in scenario 1 and scenario 2. As not much amount is affected, it is concluded
that both scenarios are not sensitive to the changes in Direct Materials and
Direct Labour costs. Conversely, this is different in scenario 3 altogether. A
slight change in profits will affect the total profits in a significant amount.
Therefore, scenario 3 is very sensitive to changes and would affect the
company’s profit margin tremendously. So, decreasing the profits it not a
wise decision.









3.0 Conclusion
3.1 Issues
There were certain issues concerned in allocating the overheads. In the Overhead Analysis Sheet, there was no allocation for all four production departments in the Primary Apportionment. Another issue is that power is allocated under the basis of machine hours which actually is supposed to be under kilowatt. This is arbitrary and not a significant determinant of basis.

3.2 Recommendations
The absorption Costing method is recommended because of its simplicity and is inexpensive to operate. It is recommended that the company also maintains two different separate databases of costing systems. One for external financial accounting requirements and the other for decision making purposes.
Apart from that, it is advisable to increase the profit margin as this is forecasted to incur more profits in the future. As for non-financial recommendations, it would be best if the company try to come up with product differentiation and market the products with advertisements. Nevertheless, it is important for the business to maintain a systematic costing method to ensure that costs is reduced and the best price quoted.



(983 Words)
APPENDICES
Department Basis Overhead Absorption Rate (RM)
Latex Dipping Machine Hours
93,535 32,000 2.92

Beading Labour Hours
78,786 31,000 2.54

Leaching Machine Hours
72,992 22,000 3.32

Drying Machine Hours
73,188 34,000 2.15
1. Appendix 1

Surgical Industrial/Household Cleanroom
Total Costs (RM) 25 850.08 16 927.95 22 175.07
2. Appendix 2

Changes Original Amount Average Price Change Average Total Profit Change
(RM per unit) % %
Direct Increase 10% 1.91 3.5 3
Materials Decrease 10% -3.5 -3.8
Direct Increase 10% 1.88 2.98 2.73
Labour Decrease 10% -2.99 -3.5
Profits Increase 5% 1.90 6 58
Decrease 5% -5.3 -53
3. Appendix 3



REFERENCES
1. Drury, C., 2004. Management and Cost Accounting. 6th Edition. Thomson Learning. Italy: G Ganale & C
2. Drury, C., 1998. Costing: An Introduction. 4th Edition. London: Thomson Business Press
3. Izhar R., Hontoir J., 2001. Accounting, Costing, and Management. 2nd Edition. New York: Oxford Unversity Press

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