• Subject Code : BUSN2011
• University : Australian National University
• Subject Name : General Accounting and Finance

## Management Accounting - Answer 1

As John is facing difficulty in identifying the cost allocation base for factory administration costs. The factory administration cost can be calculated using the basis of allocating the cost. As per findings, the cost can be allocated by the collection of data, classification, and providing a code to the overheads. The next step is to apportion the overheads into the production units. So, a process needs to be set up for the allocation of cost. Here is the computation of Sales given below for interpretation. As per the product information provided in Table 1, the sales amount is calculated.

Computation of Sales

 Product No. Of ornaments Ornaments per box No. of Box Selling Price per box Total Sales Small Ornaments 9,60,000.00 8.00 1,20,000.00 20.00 24,00,000.00 Large Ornaments 5,80,000.00 4.00 1,45,000.00 18.00 26,10,000.00 Crystal Palace Ornament set 1,50,000.00 1.00 1,50,000.00 14.00 21,00,000.00 Total Sales 16,90,000.00 13.00 4,15,000.00 52.00 71,10,000.00

The apportionment of the cost is done on the basis table 2 related to the additional information provided based on the allocation of cost. Factory Annual overhead cost is given in table 3 for calculation of cost based on the cost information provided. Computation of the allocation and apportionment of cost is mentioned below:

Statement showing allocation and apportionment of cost

 Details Details of basis of apportionment Basis Total Small Ornaments Large Ornaments Crystal Palace Ornament set Production scheduling No. Of Batches 03:04:06 1,90,000.00 43,846.15 58,461.54 87,692.31 Machine set ups Machine operations per ornament 02:03:06 6,00,000.00 1,09,090.91 1,63,636.36 3,27,272.73 Equipment Depreciation Machine operations per ornament 02:03:06 4,40,000.00 80,000.00 1,20,000.00 2,40,000.00 Factory depreciation Factory area per box 0.07:0.07:.21 2,00,000.00 40,000.00 40,000.00 1,20,000.00 Quality Inspection Inspection per box 01:02:08 2,40,000.00 21,818.18 43,636.36 1,74,545.45 Packaging DM and DL per box 09:11:07 4,70,000.00 1,56,666.67 1,91,481.48 1,21,851.85 Factory Administration Factory area per box 0.07:0.07:.21 4,00,000.00 80,000.00 80,000.00 2,40,000.00 Total factory overhead cost 25,40,000.00 5,31,421.91 6,97,215.75 13,11,362.34

Basis of cost allocation

The number of batches: One of the bases mentioned in the case study is the number of batches involved in production scheduling. This is one of the basis through which the interpretation of the apportionment and allocation of the cost is done and in this way the apportionment is done based on the ratio of batches i.e 3:4: 6

Machine operations per ornament: The basis of this cost allocation used in the computation of apportionment of Machine set up overhead cost and in calculating the apportionment of the cost of equipment depreciation as they both are directly related to the no. of machine operations done for set and cost in machine set up and depreciation charges on the machine. The ratio used in the calculation or apportionment is 02:03:06.

Factory area per box: This is another basis of cost allocation that has been discussed in the case study. It means that how much factory area is required per box it is a very useful measure in the apportionment of factory depreciation cost and factory administration cost distributed between each product in the ratio of 0.07:0.07:.21.

Inspection per box: No. of inspection done per box which is related to the quality department so the quality inspection cost is apportioned based on it and the apportionment done in the ratio of 1:2:8.

Packaging: As packaging cost is directly related to DM and DL per pox so the cost of packaging is apportioned based on it in the ratio of 9:11:7.

Economic plausibility is that the base of allocation used for cost allocation and has cause and effect relationship as it is impacting the overhead cost of Production scheduling. As per the analysis drawn for another cost basis also the same conclusion has been drawn.

The goodness of fit is that accurate computation helps management in making a decision related to which ornament is performing well and the best cost apportionment technique is adopted. The basis defines the product line performing well. As pert the apportionment it is found that small ornament with small-batch has less cost involved in comparison to large ornament and crystal ornament. So, for another cost also if the comparison is made than the higher the ratio more is the cost for each product line.

The significance of the independent variable is that the basis of cost allocation is not impacted by any other factors it is independent and not dependent on any other factor. The batch no is impacted by any other factors but the cost of production scheduling is dependent on it higher the batch higher is the cost. There is no inverse relationship.

Each of the cost basis of allocation is an independent variable and not affected by any other factors that's why they are used as a basis of allocation and apportionment of cost and neither they have an inverse relationship with the cost.

The most appropriate basis of cost allocation is Machine operations per ornament and Factory area per box as both are suitable and used for the apportionment of depreciation and another cost also which seems to be a cost-effective technique and involves fewer hours.

## Management Accounting - Answer 3

If suppose three products are using three allocation methods the cost and profitability depend on the allocation. The three allocation methods are:

Primary distribution Method: As per this method of cost allocation there is no linkage between the service department and the production department. The cost is simply allocated as per the simple process as shown in the above analysis used.

Direct Distribution Method: It is based on the assumption that one department doesn't exchange the distribution of the other department. The cost is directly loaded to the production department. This is a simple way of allocation but the conclusion drawn for it is that it might not be correct. So, the quality inspection team cannot say that we are not inspecting the quality of the product. So, in the above example, the direct distribution method is used.

Step Distribution Method: The service department might render service to other service departments but don't receive any kind of service from that department. The cost of that service is distributed first which renders service to the maximum no. of the service department. So, this process continues until all the service departments are over. This helps in identifying the large department for which more focus needs to be given, but don’t help in interdepartmental transactions.

Repeated distribution Method: As per the repeated distribution method there is a continuous distribution of overhead costs over all the departments. The decided ratio of direct labor cost has been used as the basis of calculation in the given example. This is a continuous process and waits until the time figures get zero or nil.

As per the analysis drawn the best method of distribution is the repeated distribution method as the time taken is long but it involves details analysis of cost allocation of the department with the highest cost and the focus of the largest department will be more on earning profit and not in reducing the cost, so apportionment allows doing so.

 Basic Small Large Crystal Check As per primary distribution 5,31,421.91 6,97,215.75 13,11,362.34 25,40,000.00 Direct Labour Cost 6,00,200.00 8,30,600.00 10,43,200.00 24,74,000.00 Apportionment on direct labour cost basis Crystal cost 3,18,140.53 4,40,265.79 -7,58,406.32 - Allocation 1 8,49,562.44 11,37,481.54 5,52,956.02 25,40,000.00 1,34,148.83 1,85,644.81 -3,19,793.64 - Allocation 2 9,83,711.27 13,23,126.35 2,33,162.38 25,40,000.00 56,565.91 78,279.98 -1,34,845.89 - Allocation 3 10,40,277.18 14,01,406.33 98,316.49 25,40,000.00 23,851.88 23,851.88 -47,703.76 0 Allocation 4 10,64,129.06 14,25,258.21 50,612.72 25,40,000.00 0 12,278.80 16,992.29 -29,271.09 0 Allocation 5 10,76,407.87 14,42,250.50 21,341.63 2540000 0 5,177.55 7,165.06 -12,342.61 0 Allocation 6 10,81,585.41 14,49,415.56 8,999.03 2540000 ­ 0 2,183.19 3,021.26 -5,204.45 0 Allocation 7 10,83,768.60 14,52,436.82 3,794.58 2540000 0 920.58 1,273.96 -2,194.54 0 Allocation 8 10,84,689.18 14,53,710.78 1,600.04 2540000 388.17 537.18 -925.36 0 Allocation 9 10,85,077.35 14,54,247.96 674.68 2540000 163.68 226.51 -390.19 0 Allocation 10 10,85,241.03 14,54,474.48 284.49 2540000 69.02 95.51 -164.53 0 Allocation 11 10,85,310.05 14,54,569.99 119.96 2540000 29.10 40.27 -69.38 0 Allocation 12 10,85,339.15 14,54,610.26 50.58 2540000 12.27 16.98 -29.25 0 Allocation 13 10,85,351.43 14,54,627.25 21.33 2540000 5.17 7.16 -12.34 0 Allocation 14 10,85,356.60 14,54,634.41 8.99 2540000 2.18 3.02 -5.20 0 Allocation 15 10,85,358.78 14,54,637.43 3.79 2540000 0.92 1.27 -2.19 0 Allocation 16 10,85,359.70 14,54,638.70 1.60 2540000 0.39 0.39 -0.78 0 Allocation 17 10,85,360.09 14,54,639.09 0.82 2540000 Control Check 25,40,000.00

## Management Accounting - Answer 4

The possible decision that that crystal can consider to improve profit is to get the work done with timeliness and accuracy. That is what activity-based management is all about. Removal of waste appropriate strategies need to be followed and improved product design needs to be designed. The waste needs to be reduced. There is a need for allocation of cost to the lowest possible hierarchy, pick a new pattern. Initiate modification of equipment. Increase the price of the product that was designed below the ABC cost and drop non- profitable one from unprofitable product line from the production schedule. Setting priorities for improvement as shown in the above example which shows one of the techniques to deal with it. Cost drivers form the basis of allocation of cost. The two measures that Crystal needs to focus on is performance and another important measure is cost measure (BB, 2020).

So, there is a need to define activities that support output, then there is a need to define the link between activities and output. Gathering of cost and then allocation method needs to be used. As per the process view, there are cost drivers, activities, and performance measures. To improve profit so crystal, need to adopt the ABC management strategy to earn more profit and cost drivers need to be focused on and performance measures need to be adopted to get the correct picture and reduce the wastages in the process and manage cost-effectively and efficiently (Bake, 1998).

The below computation is shown of profit and factory cost and the allocation of the cost and its analysis is shown above.

Computation of Factory Cost

 Details Small Large Crystal Place set Total Labour 6,00,200.00 8,30,600.00 10,43,200.00 24,74,000.00 Material 25,300.00 21,800.00 44,900.00 92,000.00 Overhead 80,000.00 80,000.00 2,40,000.00 4,00,000.00 Total Cost 7,05,500.00 9,32,400.00 13,28,100.00

Computation of Profit

 Small Large Crystal Place set Sales 24,00,000.00 26,10,000.00 21,00,000.00 Cost 7,05,500.00 9,32,400.00 13,28,100.00 Profit 16,94,500.00 16,77,600.00 7,71,900.00

## References for Activity Based Management

Bake, J. J. (1998). Activity-based Costing and Activity-based Management for Health Care. Dallas Taxas: An Aspen Publication.

BB, T. P. (2020). Activity Based Management . Activity Based Management, https://search.proquest.com/openview/9ccf2ccf141514750711369db5f24870/1?pq-origsite=gscholar&cbl=48426.

Panfilova, E., Dzenzeliuk, N., Domnina, O., Morgunovа, N., & Zatsarinnaya, Е. (2020). The Impact of Cost Allocation on Key Decisions of Supply Chain Participants. International Journal of Supply Chain Management IJSCM, 9(1), 2051–3771. https://core.ac.uk/download/pdf/322571592.pdf

Joen Dahlberg. (2019). Cost allocation methods in cooperative transportation planning. Linköping University Electronic Press.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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