Management Accounting

Management Accounting Analysis



Management Accounting Analysis

Question (a)

Part 1

Total variable cost can be broken down into three components i.e. direct material, direct labor and variable overhead. Direct material and variable overhead per unit are given. Direct labor per unit can be calculated as

Product X = (28x10) + (8x12) + (16x8) = 504

Product Y = (16x10) + (6x12) + (8x8) = 296

Product Z = (30x10) + (10x12) + (30x8) = 660

 

product X per unit

Product Y per unit

Product Z per unit

Direct Materials

200

480

360

Direct labor

504

296

660

Variable Overhead

48

28

64

Total variable cost per unit

752

804

1084

There are two methods to calculating per unit cost i.e. absorption costing and marginal costing. The unit cost calculated above depicts the marginal approach to calculating per unit costs as fixed overhead cost is not involved in the calculation rather the entire amount is used in the calculation of profit. In absorption costing fixed cost is also absorbed in per unit cost.

Profit can be calculated as

Profit = Revenue - total variable costs- total fixed cost

Revenue = (840x15000) + (880x12000) + (1200x12000) =

Total variable cost = (752x15000) + (804x12000) + (1084x12000) =

Total fixed cost = 2400000

 

Product X

Product Y

Product Z

Total

Revenue

12600000

10560000

14400000

37560000

variable cost

11280000

9648000

13008000

33936000

Total fixed Cost

 

 

 

2400000

Profit

 

 

 

1224000

Part 2

The most profitable mixture among the three products can be calculated by calculating the contribution margin ratio of each product. The product with highest contribution ratio should have the highest share in sales volume. Contribution ratio is equal to

Contribution margin ratio = (revenue-variable cost)/sales

 

product X per unit

Product Y per unit

Product Z per unit

selling price per unit

840

880

1200

Direct Materials

200

480

360

Direct labor

504

296

660

Variable Overhead

48

28

64

total variable cost per unit

752

804

1084

contribution margin per unit

88

76

116

As we can see that product Z has the highest contribution margin per unit. Thus product Z contributes most to the profit and should have the highest share in sales.

 

Product X

Product Y

Product Z

current production

15,000

12,000

12,000

hours performed by Dept. B

8

6

10

 

120000

72000

120000

Total labor hours available for utilization in B

312000

expected increase in production

20%

25%

33.33%

expected increase in production in units

18000

15000

16000

contribution margin per unit

88

76

116

After increase in production

expected hours required in B

144000

90000

160000

The current production is given in the chart above. The chart also shows the total hours that department B can perform which are 312000 labor hours. As department B is restricted in terms of its recruitment it cannot increase its labor hours. The expected increase in production is also shown in the chart in terms of percentage and units as well. As contribution margin of product Z is highest so its production should be increased as proposed by the management. After product Z the next highest contributor to profit is product X, hence after product Z the labor hours should be allocated to product X and its production should be increased as proposed and the remaining labor hours should be allocated to product Y as it has the least contribution margin per unit among the three products.

Increase in production of product X can be calculated as

Product X = expected labor hours of product X/product hours of X as contributed by B

= 144000/8

= 18000

In the same way expected production of product Y ...