Management Accounting 2
Part one:
(a) Prepare the following budgets for each of the six months to 30th September 200Y:
Direct materials usage budget in units
Given that one unit of zip will require 2 units of A6 and 3 units of B9, given the budgeted production levels for product Zip we can determine the required level of product A6 and B9 as follows:
2 units
3 units
zip
A6
B9
April
140
280
420
may
280
560
840
June
700
1400
2100
July
380
760
1140
august
300
600
900
September
240
480
720
total
2040
4080
6120
Therefore the budgeted material usage for product A6 is as follows:
A6 material usage budget:
production budget
2040
usage of A6 per unit
2
total usage
4080
B9 material usage budget:
production budget
2040
usage of B9 per unit
3
total usage
6120
Direct materials purchase budget in units and £’s
Material purchase budget:
This budget entails indicating the quantity of material A6 and B9 to be purchased so as to satisfy the quantity required in production of product zip:
Material A6:
targeted ending inventory of A6
direct material usage budget
expected beginning inventory
direct material purchase
April
110
280
100
290
may
220
560
110
670
June
560
1400
220
1740
July
300
760
560
500
august
240
600
300
540
September
200
480
240
440
We add the ending inventory to direct material usage then subtract the expected beginning inventory to get the direct material purchase.
Material B9:
targeted ending inventory of B9
direct material usage budget
expected beginning inventory
direct material purchase
April
250
420
200
470
may
630
840
250
1220
June
340
2100
630
1810
July
300
1140
340
1100
august
200
900
300
800
September
180
720
200
700
In this case we also add the ending inventory to direct material usage then subtract the expected beginning inventory to get the direct material purchase.
The cost of the purchase is shown below:
Material A6
targeted ending inventory of A6
direct material usage budget
expected beginning inventory
direct material purchase
cost per unit in pounds
total cost of purchase in pounds
April
110
280
100
290
5
1450
may
220
560
110
670
5
3350
June
560
1400
220
1740
5
8700
July
300
760
560
500
5
2500
august
240
600
300
540
5
2700
September
200
480
240
440
5
2200
total
4180
20900
Material B9:
targeted ending inventory of B9
direct material usage budget
expected beginning inventory
direct material purchase
cost per unit in pounds
total cost of purchase in units
april
250
420
200
470
10
4700
may
630
840
250
1220
10
12200
june
340
2100
630
1810
10
18100
july
300
1140
340
1100
10
11000
august
200
900
300
800
10
8000
september
180
720
200
700
10
7000
total
6100
61000
(b) In approximately 50 words discuss the link between budgeting and motivation.
Budgeting as a motivation tool:
A budget will act as a motivating tool in an organisation whereby the workers and the managers will work to achieve the goals of the organisation outlined in the budget, this way every worker will be motivated to achieve these goals and therefore motivation is encouraged through budgeting.
(c) In approximately 50 words discuss the political-economy implications of budgeting:
Political economy implication of budgeting:
A budget is a tool of control in an organisation where actual events and activites are compared with the budget and any deviation investigated and collective action undertaken, the budgets also act as a means by which the performance of managers can be evaluated and finnaly budgets are important in that they aid in coordination of activities of various departments and also communication of organisation goals and objectives to its workers.
Part two:
1) Calculate an overhead cost rate for the: (a) Machining department; (b) Assembly department.
Overhead costs are those costs that cannot be directly traced to the a particular unit produced, example insurance costs and depreciation, insurance costs and depreciation can be allocated on the basis of book value of machines while lighting and fuel can be allocated depending on area occupied. In our case our overhead costs include:
Indirect labour, maintenance, handling, supervision, canteen, rent and rate, fuel and light, insurance and depreciation
Depreciation and insurance are allocated in accordance with the cost of the plant in each department, fuel and light is allocated depending and machine hours and rent and rate is charged on area occupied. Supervision charges are charged with regard to labour hours and canteen depend on number of employees. The following is the overhead cost for each department:
overhead costs
machining department
assembly department
indirect labour
20,000
8800
maintenance
11527
26903
handling
6636
9954
supervision
1225.263158
4774.736842
canteen
2880
4320
rent and rate
14285.71429
10714.28571
fuel and light
6449.044586
1050.955414
insurance
1410
470
depreciation
17437.5
5812.5
total overheads
81,851
72799.47797
labour hours
3880
15120
overhead cost rate
21.09549537
4.814780289
The total overhead for the machining department is 81,851 and for the assembly department is 72799, the overhead cost rate for the machining department is 21.09 and for the assembly department are 4.81.
2) Calculate the total production costs for producing one unit of the special product, Sunset.
assembly rate
4.815
labour hours
8
total overhead charge
38.52
machining rate
21.1
machine hours
6
total overhead hours charged
126.6
direct labour and material cost
1256
total cost
1294.52
3) Calculate the company’s desired selling price per unit for the special product, Sunset.
Selling price will include the desired profit level which is 25%, therefore if the cost of production is 1294.52 then the selling price will be
1294.52 X 125% = 1618.15
This selling price will earn the company a profit of 1618.15 – 1294.52 = 404.53
Therefore the desired selling price is 1,618 pounds
4) In approximately 100 words discuss what are the advantages and disadvantages of departmental versus company-wide overhead rates
One of the advantage of this type of overhead rates assigned to each department is that we are able to determine whether we have under applied or over applied overhead costs, the departmental costs also ensure that we do not overcharge products that do not require certain department because a product may only be required to pass through one department and therefore the selling price of products using the departmental overhead rates are cheaper and competitive. The departmental overhead costs also ensure that the problem of costs of production is resolved and each department is used effectively.
A disadvantage of this type of costing is that a certain department may experience a reduction in profit levels whereby the company overhead rates may be higher ensuring high profits for a certain department but in the case where various departments are given their own stock then the overhead may be low leading to less profit.
References: