MA Assignment

Assignment Topsheet Your Name Pang Wan Chin Student ID 1138116 Module Title Management Accounting Module Code KAP011-2 Module coordinator’s name Seun Avoseh Submission due date 17 November 2012 Assignment Title Part 1 - Stances Between Old & New Management Accounting System & Part 2 - Case Study . Signature Pang Wan Chin Date 17 November 2012 Extension deadline CAAS agrees that the assignment may be submitted ____ days after the deadline and should be marked without penalty. CAAS confirmation All assignments must be handed into the Assignments Office by 4:30 pm on the due date. Please leave sufficient time to meet this deadline and do not leave the handing-in of assignments to the last minute or you will have to queue. Top sheets without module codes will not be accepted. Students who arrive after 4:30 pm will not be allowed access to the Assignments Office.  Assessment Grade Tutor’s signature Note this grade is provisional until agreed by the Examination Board Strengths Areas for improvement Other comments A REPORT ON THE STANCES BETWEEN TRADITIONAL COSTING SYSTEMS AND NEW MANAGEMENT ACCOUNTING SYSTEMS Prepared for: Seun Avoseh Prepared by: Pang Wan Chin Submitted: 17 November 2012  Executive Summary Management accounting has hardly changed in over 100 years. By 1925, most of the traditional costing systems used today were established. Until about 1980, some new techniques had introduced but there was very little further development (Dyson, 2010). The traditional costing systems has serious limitations due to its assumption that all overheads are incurred to production volume. Some of the costs such as handling cost, setup costs and so on are affected by complexity rather than volume (Khan & Jain 2010). There is some new management accounting techniques as introduced such as activity-based costing, target costing, life cycle costing, better budgeting and performance measurement Traditional management accounting system could not cope with the rapidly changing of business environment. Companies should adapt to the new ideas of costing system, performance measurement and budgeting to cope the changing of global market There have some future directions of the management accounting, for example environmental management accounting and strategic management accounting. There have two accounting I recommend, which are throughput accounting and value chain analysis.  Table of Contents Page Number Executive Summary i 1. Introduction 1 2. Findings 2.1 Traditional Costing Systems 1 2.2 New Management Accounting Systems 2.2.1 Activity-Based Costing 2 2.2.2 Target Costing 3 2.2.3 Life Cycle Costing 3 2.2.4 Better Budgeting 4 2.2.5 Performance Measurement 5 2.3 Cultural Issues 5 3. Conclusions 6 4. Recommendations 7 5. List of References 7  1. Introduction Management accounting is the process of planning, controlling and decision-making. It concerned with providing financial and non-financial information to internal managers who are control and direct an organization’s operations (Seal, 2009). Management accounting has hardly changed in over 100 years. By 1925, most of the traditional costing systems used today were established. Until about 1980, some new techniques had introduced but there was very little further development (Dyson, 2010). The business environment in recent years has rapidly changing, and increasing the competition in many industries to worldwide. Besides, the new technology especially in telecommunications and computers has changing the business environment too. All the financial data will be performed electronically. Tomorrow’s management accountants will be much more involved in taking decisions about future events and less to recording of past events. They need to keep up to date and to adapt in the new techniques to cope with the changing of business environment. 2. Findings 2.1 Traditional Costing Systems Traditional costing systems distinguishes between fixed and variable costs, it is assume that fixed costs do not vary with the number of units of output whereas variable costs vary with the output. The conventional costing has serious limitations due to its assumption that all overheads are incurred to production volume. Some of the costs such as handling cost, setup costs and so on are affected by complexity rather than volume (Khan & Jain 2010). 2.1 Traditional Costing Systems (Cont’d) Furthermore, variable costs also known as marginal costs, allocate these costs may cause extra costs and will understate the actual cost of production. The companies also will overlook the important savings if focusing on marginal costs. As a result, volume-related allocation of overhead would lead to product cost distortion. Traditional costing systems will also over-simplify of how costs actually behave (Shim & Siegel 1999). 2.2 New Management Accounting Systems There is some new management accounting techniques as introduced below: 2.2.1 Activity-Based Costing Activity-based costing is a system that assigning costs to products based on the product’s demand for activities. This costing involve in two stages, as the first stage, costs are traced into activities and the second stage consists of tracing costs from activities to products (Khan & Jain 2010). Traditional costing system also involve in two stages, but in the first stage, costs are allocated to departments, and second, the costs are assigned to individual product lines via volume-related allocation of overhead Drury (2008) highlights the three steps to allocate the product cost as following: Identify the major activities that cause overhead costs, which are called cost drivers. Assign costs to activity cost centres with the suitable cost drivers. Sum the costs of the cost drivers and apply to the products. 2.2.1 Activity-Based Costing (Cont’d) The advantages of ABC system are it has better cost control, improvement in performance measurement and improve the profitability due to more accurate of products costs. However, ABC system also has some limitations. The activities are hardly to determine in different industry and it may take more time to develop as most of the company still using the traditional costing systems. 2.2.2 Target Costing Target costing is a method that deducting the target selling price with the target profit margin to get the target cost of a product. Thus, this balance is the maximum total costs that allow developing the product. However, traditional costing works the other way round by adding all the production costs on a targeted profit to get the selling price. The following are the important information relates to target costing: What do customers want? What will customers pay? What do competitors offer? There have some benefits for target costing, this give better emphasis on customer requirements in developing the new product, and a continuous improvement in a company to maintain their market value of the products. This helps to manage life cycle costs during the design stage. 2.2.3 Life Cycle Costing Life cycle costing is a technique that compares a product’s revenue with all the costs whether these costs are incurred before, during or after the product is produced. This costing also known as 'from the cradle to the grave' costing. 2.2.3 Life Cycle Costing (Cont'd) The main phases of a product can be divided to four as following: Research, development and engineering stage Manufacturing stage Post-sale services stage Disposal stage This costing focuses on all costs, which provide profitability that is more realistic and help an organization more easier to achieve their targeted profit. In today’s business environment, companies cannot only depend on a stable sale of one product, this costing emphasis all the costs at the every stage of product development. 2.2.4 Better Budgeting Shim and Siegel (1999) define that a budget is a quantified statement for planning and control of the company to a coming period and prepared annually. It represents a target, and motivates the management keeps improving their performance against the plan Incremental budgeting is the traditional approach, which is prepared by taking the results of previous periods and only update for known changes. Changes in business environment will make the budget out to date. Dyson (2010) lists there ways of better budgeting as below: Rolling budgets, also known as continuous budget that still prepared in incremental basis, but ignore the first month’s budget by added in the next year’s budget. Zero-based budgeting is prepared in cost-benefits analysis basis; estimate the costs from the zero level. Activity-based budgeting is similar to concept of activity-based costing system, the budget for overheads are prepared as activity costs. 2.2.5 Performance Measurement Performance measurement is a system that consists of financial and non-financial data in measuring the company's performance. On the other hand, the traditional performance measurement does not include the non-financial data, it only rely on the accounting information. Drury (2008) lists two of the performance measurement, the balanced scorecard and benchmarking: The balanced scorecard is a system that translating the company's strategy and mission into objectives and linked performance measures. It has four perspectives which are: (i) Financial - how to we look to shareholder? (ii) Customer - how do customers see us? (iii) Internal business - What must we excel at? (iv) Learning and growth - Can we continue to improve value? Each of the four perspectives may have one or more objectives, each objective should be translated into measures, followed by setting a target and may come up with initiatives. Benchmarking is a process that comparing the best practices of a company with other companies. 2.3 Cultural Issues There have some cultural issues for the using of management accounting systems. In Japan, Japanese introduce the most modern accounting systems into their industry. The following are the Japanese business practices: Total quality management (TQM) is a manufacturing approach to improve the quality in products and processes. 2.3 Cultural Issues (Cont'd) Just-in-time (JIT) system involves in production and purchasing processes, it aims to produce the products just in time to meet the customer requirement, and purchase the material that delivered just in time to meet the deadline of customer order. Thus, this system has less inventory control and a hundred percent of delivery on time service (Dyson 2010). Kaizen costing is a technique that focuses on the production process and cost reductions. However, in India, Indian usually uses the traditional costing systems in the companies. They are more conservative, will only adopt the new accounting techniques once these ideas are successfully applied in worldwide. 3. Conclusions Traditional management accounting system could not cope with the rapidly changing of business environment. Companies should adapt to the new ideas of costing system, performance measurement and budgeting to cope the changing of global market There have some future directions of the management accounting. Environmental management accounting is a very new technique that provides financial and non-financial data especially environmental costs. This method aims to reduce these environmental costs to provide benefit to the company and environment, due to the threat of global warming. Furthermore, the activity-based costing also can be applied to the reduction of environmental costs. Besides, strategic management accounting is an advances of management accounting, which comparing the financial and non-financial data with the competitor's data. This is not an accounting technique but is a development of traditional management accounting. 4. Recommendations There have two accounting I recommend, which are throughput accounting and value chain analysis. Throughput accounting is a method that calculating the throughput contribution, which is the difference between sales and direct material cost. Therefore, this technique also called super variable costing. This method looks into the theory of constraints, (TOC) that maintains the profit and not to limited by the bottlenecks in the production process. Value chain analysis is a technique that link all the value added activities from the development stage through to the end-use product or service delivered to customer. By viewing each link in the chain, the company can meet the customer satisfaction and the opinions of customer can be used for feedback on supplier. 5. List of Reference Drury, C. 2008, Management and Cost Accounting, 7th edition, Cengage Learning EMEA Limited, London. Dyson, J.R. 2010, Accounting for Non-Accounting Students, 8th edition, Pearson Education Limited, Harlow. Joshi, P.L. 2001, “The international diffusion of new management accounting practices: the case of India”, Journal of International Accounting, Auditing & Taxation, pp. 85-109 Khan, M.Y. & Jain P.K. 2010, Management Accounting. 5th edition, Tata McGraw Hill Education Private Limited, New Delhi. 5. List of Reference (Cont’d) Seal, W., Garrison, R.H. and Noreen, E.W. 2009, Management Accounting, 3rd edition, McGraw-Hill Education, Berkshire. Shim, J.K. & Siegel, J.G. 1999, Managerial Accounting, 2nd edition, McGraw-Hill Companies, United States.  A REPORT ON THE COMPANY’S DRAFT BUDGET FOR 2013/14 Prepared for: Board of Sarika Ltd Prepared by: Pang Wan Chin Submitted: 17 November 2012 Executive Summary The Board of Sarika Ltd’s draft budget for 2013/14 does not achieve a total profit of at least £400,000 to meet the required 20% return on capital, so they decide to revise the budget. There have proposals are made, which Bob’s is the worst on the reported profits and Ben’s is the unrealistic. Paul’s bring the highest profits for the coming year, but may lead to industrial action by dropping the Product Z. In addition, the Arthur’s would be the recommendation, but only consider the savings on Product Z only. The Board uses marginal costing in production, which provides the best information in decision-making. However, they should consider other non-financial aspects such as organizational behaviour issues. The activity-based costing system can be used in the production because more focus in the activities of the products. The Board may introduce new product to replace Product Z and can also improving the performance of other products.  Table of Contents Page Number Executive Summary i 1. Introduction 1.1 Purpose 1 1.2 Background 1 1.3 Scope 1 2. Findings 2.1 Marginal Costing 2 2.2 Absorption Costing 2 2.3 Advantages of Marginal Costing Compared 2 with Absorption Costing 2.4 Statement of Total Contribution and Profit 2.4.1 Original Budget 4 2.4.2 Bob, the Marketing Manager’s Proposal 5 2.4.3 Ben, the Managing Director’s Proposal 6 2.4.4 Arthur, the Production Manager’s Proposal 7 2.4.5 Paul, the Financial Controller’s Proposal 8 2.5 Reservations about My Analyses and Recommendation 9 2.6 Non-Financial Aspects of the Case 9 3. Conclusions 10 4. Recommendations 10 5. List of References 10 6. Appendices 6.1 Appendix 1 11 6.2 Appendix 2 12  1. Introduction 1.1 Purpose The purpose of this report is to draft a budget for 2013/14 to achieve a total profit of at least £400,000 to meet the Board of Sarika Ltd required 20% return on capital. 1.2 Background Sarika Ltd produces three industrial valves, which are incorporated the equipment used in the Oil and Gas industry. The Board is unhappy with the planned outcome in two respects: Product Z, their oldest product, will make a loss of £360,000 in next year, and may affect the company to achieve their targeted profit. After knowing the unsatisfactory results, they decide to revise the budget. The revised budget is commissioned to Paul, the Financial Controller who compiled the original budget on 10th October 2012 1.3 Scope This report covers the benefits of marginal costing for decision-making, the statement of total contribution and profit for the original budget and the four proposals from Financial Controller, Production Manager, Marketing Manager and Managing Director, and other non-financial aspects of the case. 2. Findings a) A discussion of the benefits of marginal costing statements for decision- making when compared with full cost statements. 2.1 Marginal Costing Seal (2009, p.200) states that marginal costing is sometimes referred to as variable costing, a system which distinguishes between fixed costs and variable costs in the product cost and inventory valuation. Under this method, when the sales increase, the profits also increase. 2.2 Absorption Costing Absorption costing also known as full costing, because it includes all production costs whether fixed or variable into production and inventory valuation. This costing system will report a higher profits if the productions increase (Drury 2008). 2.3 Advantages of Marginal Costing Compared with Absorption Costing Under marginal costing, all the fixed costs are treated as period costs, therefore it provide more relevant information for decision-making as fixed costs are sunk costs which are irrelevant. Marginal costing provides a constant net profit because it will not affected by the changes of inventory level, whereas absorption costing will show a higher profit if the inventory level is increased (Drury 2008). ` 2.3 Advantages of Marginal Costing Compared with Absorption Costing (Cont'd) Marginal costing is easy to operate and manage costs; there are no apportionments of fixed costs to products or departments. On the other hand, the absorption costing incurred all fixed costs in production, but many fixed costs are inseparable by their nature (Lucey, 2003). Besides, in marginal costing, only variable overheads are charged to production, while the fixed overheads are transferred into the Profit and Loss account, thus, there is no under or over absorption of overheads, but it happens to absorption costing as fixed overheads are absorbed into production. Seal (2009, p.215) also argues that reported profit under marginal costing is closer to the actual net cash flow than the absorption costing. Therefore, there is easier to estimate the profitability of products. b) A statement of total contribution and profit for the original budget and each of the four proposals. 2.4 Statement of Total Contribution and Profit 2.4.1 Original Budget As shown below is the present level of contribution and profit, Product Z has a loss of £360000, and does not meet the targeted profit of £400000. Product X (000) Product Y (000) Product Z (000) Total Sales units 100 80 120 300 × selling price (£) 15 25 10 (£000) (£000) (£000) (£000) Sales 1500 2000 1200 4700 Less: Variable costs (W1 & C2) (1000) (1200) (1320) (3520) Contribution margin 500 800 (120) 1180 Less: Fixed costs (W1) Labour (100) (160) (90) (350) Overheads (125) (200) (150) (475) Total (225) (360) (240) (825) Profit/(Loss) 275 440 (360) 355 (Created for the purpose of this assignment) 2.4.2 Bob, the Marketing Manager's Proposal Bob proposes to lower the price of Product Z by £1 per unit and raise the demand by 25%. Refer to the table below; the profit is even worse than the original budget, because the contribution remain the same negative of £1 per unit but selling an additional of 30000 units. Product X (000) Product Y (000) Product Z (000) Total Sales units 100 80 120 300 × selling price (£) 15 25 9 (£000) (£000) (£000) (£000) Sales 1500 2000 1080 4580 Add: Sales increased by 25% - - 270 270 1500 2000 1350 4850 Less: Variable costs (Note 1) (1000) (1200) (1200) (3400) Less: Variable costs increased by 25% - - (300) (300) Contribution margin 500 800 (150) 1150 Less: Fixed costs (W1) Labour (100) (160) (90) (350) Overheads (125) (200) (150) (475) Total (225) (360) (240) (825) Profit/(Loss) 275 440 (390) 325 (Created for the purpose of this assignment) * Note 1 - (£11 - £1) x 120000 units = £1200000 2.4.3 Ben, the Managing Director's Proposal According to the table below, Ben suggests to increase the sales and activities by 10%. Although this proposal has achieved the targeted profit of £400000, but it is not realistic to only estimate the increase of sales and activities without any other changes to the original budget. Product X (000) Product Y (000) Product Z (000) Total Sales units 100 80 120 300 × selling price (£) 15 25 10 (£000) (£000) (£000) (£000) Sales 1500 2000 1200 4700 Add: Sales increased by 10% 150 200 120 470 1650 2200 1320 5170 Less: Variable costs (W1 & C2) (1000) (1200) (1320) (3520) Less: Variable costs increased by 10% (100) (120) (132) (352) Contribution margin 550 880 (132) 1298 Less: Fixed costs (W1) Labour (100) (160) (90) (350) Overheads (125) (200) (150) (475) Total (225) (360) (240) (825) Profit/(Loss) 325 520 (372) 473 (Created for the purpose of this assignment) 2.4.4 Arthur, the Production Manager's Proposal Arthur proposes to cut the labour supervision that would reduce the cost by £75000 but increase the variable overheads by 10%, and substitute a cheaper component that would save £0.75 per unit for Product Z. This proposal looks better than the others' reported profit, it would be the recommendation, but the quality of the product should be taken into consideration if doing so. Product X (000) Product Y (000) Product Z (000) Total Sales units 100 80 120 300 × selling price (£) 15 25 10 (£000) (£000) (£000) (£000) Sales 1500 2000 1200 4700 Less: Variable costs (W1 & C2) (1000) (1200) (1320) (3520) 500 800 (120) (1180) Increase variable overheads by 10% - - (18) (18) Reduce component cost £0.75/unit - - 90 90 Contribution margin 500 800 (48) 1252 Less: Fixed costs (W1) Labour (100) (160) (90) (350) Overheads (125) (200) (150) (475) Total (225) (360) (240) (825) Reduce labour supervision - - 75 75 Profit/(Loss) 275 440 (213) 502 (Created for the purpose of this assignment) 2.4.5 Paul, the Financial Controller's Proposal Refer to the table as below, Paul suggests to stop making the Product Z, which can eliminate the fixed labour costs of £90000, sell the fully written off machinery would fetch £50000, and estimate redundancy costs of £50000. Although this proposal easily exceeding the targeted profit, but drop the product may have excess of workers and this product is the company's old product, which still has its steady sales. Product X (000) Product Y (000) Product Z (000) Total Sales units 100 80 120 300 × selling price (£) 15 25 10 (£000) (£000) (£000) (£000) Sales 1500 2000 1200 4700 Less: Variable costs (W1 & C2) (1000) (1200) (1320) (3520) Contribution margin 500 800 (120) 1180 Less: Fixed costs (W1) Labour (100) (160) (90) (350) Overheads (125) (200) (150) (475) Total (225) (360) (240) (825) Stop making Z - - 120 120 Eliminate fixed labour costs - - 90 90 Sell machinery - - 5 5 Redundancy costs - - (50) (50) Profit/(Loss) 275 440 (195) 520 (Created for the purpose of this assignment) c) State any reservations you have about your analyses and recommendation. Are there any other non-financial aspects of the case, such as organizational behaviour issues, that seem worthy of consideration or comment? 2.5 Reservations about My Analyses and Recommendation The key difference between marginal costing and absorption costing is the treatment of fixed production costs, but how to distinguish between fixed and variable costs is one of the problem. Besides, the company seems to use the same overheads rate no matter which machine produce which product, so will affect the accuracy of the estimated sales and all the production cost in the original budget All the proposals are the short-term solution, but they should think on the long-term solution for the benefits of company. Last problem is how the company set their targeted profit of at least £400000 to meet the required 20% return on capital, have they do the research on the changing of marketing environment. 2.6 Non-Financial Aspects of the Case Organizational behaviour issues have taken into my consideration about my analyses. The members of management team have a serious argument when discussing the budget for the company. Paul, the Financial Controller who compiled the budget, never shares the results to other team members and is the first to discuss the budget. All the members of management team should have participation in the decision-making. The company has not considered what new product can be introduced to replace Product Z, and how to improve the sales of Product X and Y. 3. Conclusions Marginal and absorption costing are alternative methods of costing for production. The Board of Sarika Ltd uses the marginal costing on its budget for 2013/14, which only absorbs the variable costs in the product costs and inventory valuation. However, the various proposals only look for the short-term solution, not the long-term solution. The company should look into other costing systems that maybe bring an enhancement in profit. Besides, other non-financial aspects such as organizational behaviour issues should take into consideration in the decision-making and planning. 4. Recommendations This report recommends that other new costing system can be used in the production. Activity-based costing is a system based on activities linking to the product cost. The Board of Sarika Ltd can introduce new product to replace Product Z, or improving the performance of Product X and Y. 5. List of References Drury, C. 2008, Management and Cost Accounting, 7th edition, Cengage Learning EMEA Limited, London. Lucey, T. 2003, Management Accounting, 5th edition, Cengage Learning EMEA Limited, London. Seal, W., Garrison, R.H. and Noreen, E.W. 2009, “Profit reporting under variable costing and absorption costing”, Management Accounting, 3rd edition, McGraw-Hill Education, Berkshire, pp 200-215. 6. Appendices 6.1 Appendix 1 Working 1 (W1) Product X (£000) Product Y (£000) Product Z (£000) Total (£000) Materials 300 400 480 1180 Labour: Fixed 100 160 90 350 Variable 600 640 660 1900 Total labour 700 800 750 2250 Overheads: No. of units (000) 100 80 120 300 ÷ Machine hours 4 [(60/15)mins] 2 [(60/30)mins] 4 [(60/15)mins] Units/machine hours 25 40 30 95 Fixed at £5/hr 125 200 150 475 Variable 100 160 180 440 Total overheads 225 360 330 915 (Created for the purpose of this assignment) Working 2 (W2) Product X (£) Product Y (£) Product Z (£) Sales price/unit 15 25 10 Less: Variable costs/unit (C1) Materials (3) (5) (4) Labour (6) (8) (5.50) Overheads (1) (2) (1.50) Total (10) (15) (11) Contribution/unit 5 10 (1) (Created for the purpose of this assignment) 6.2 Appendix 2 Calculation 1 (C1) - Variable costs/unit Product X Material = £300000 ÷ 100000 units = £3/unit Labour = £600000 ÷ 100000 units = £6/unit Overheads = £100000 ÷ 100000 units = £1/unit Product Y Material = £400000 ÷ 80000 units = £5/unit Labour = £640000 ÷ 80000 units = £8/unit Overheads = £160000 ÷ 80000 units = £2/unit Product Z Material = £480000 ÷ 120000 units = £4/unit Labour = £660000 ÷ 120000 units = £5.50/unit Overheads = £180000 ÷ 120000 units = £1.50/unit Calculation 2 (C2) - Total Variable Costs Product X = £10 × 100000 units = £1000000 Product Y = £15 × 80000 units = £1200000 Product Z = £11 × 120000 units = £1320000 PERSONAL DEVELOPMENT IN ACCOUNTING AND FINANCE 2 tudent ID: 1138116 Name: Pang Wan Chin - Page 2 - MA/UMCS/Topsheetv2 MANAGEMENT ACCOUNTING PART 1 STANCES BETWEEN OLD & NEW MANAGEMENT ACCOUNTING SYSTEMS Student ID: 1138116 Name: Pang Wan Chin Student ID: 1138116 - Page i - Name: Pang Wan Chin Student ID: 1138116 Name: Pang Wan Chin MANAGEMENT ACCOUNTING PART 2 CASE STUDY – SARIKA LTD Student ID: 1138116 Name: Pang Wan Chin MANAGEMENT ACCOUNTING PART 1 STANCES BETWEEN OLD & NEW MANAGEMENT ACCOUNTING SYSTEMS Student ID: 1138116 - Page 1 - Name: Pang Wan Chin MANAGEMENT ACCOUNTING PART 2 CASE STUDY – SARIKA LTD Student ID: 1138116 Name: Pang Wan Chin Student ID: 1138116 - Page i - Name: Pang Wan Chin Student ID: 1138116 Name: Pang Wan Chin MANAGEMENT ACCOUNTING PART 2 CASE STUDY – SARIKA LTD Student ID: 1138116 Name: Pang Wan Chin Student ID: 1138116 - Page 1 - Name: Pang Wan Chin PERSONAL DEVELOPMENT IN ACCOUNTING AND FINANCE ASSESSMENT 1 - REFLECTIVE DIARY Student ID: 1138116 Name: Pang Wan Chin - Page 1 -