Management Accounting and Control Practices

Question: Discuss about the Management Accounting and Control Practices. Answer: Introduction: Accounting methods refers to the guideline and rules according to which the financial reports of the business are prepared. Based on the roles of the different accounting methods, it is differentiated into several categories of accounting system. Cost accounting system is one of such special accounting methods. This system assists the users in ascertaining the cost of the products accurately. It also helps the users in accurately calculating the gain percentage (Fullerton et al. 2013). Accounting methods, used by the business firms, can have a major impact on the revenue, reported by the business. It also influences the expense, which is subtracted from the revenue to arrive at the bottom line. The given case study depicts about the processing of the manufacturing firm, Parker Ltd. Parker Ltd manufactures and sells the pencils and pens in sets. The organization has received several offers from different clients for supplying the pen and pencils in set. Report discusses about the several, offers provided by the organization and its potentiality. Various techniques of cost accounting is implemented for evaluating the profit percentage and cost of the plans for Parker Ltd. Current net monthly profit calculation: Important factors, which help in evaluating the offers of the company includes conducting the detailed study of the structure of the current costs of the company. It also takes into consideration the net monthly profit of the company. The calculations, done below, present the net monthly profit along with the present cost of production: Calculation of Monthly Profit:- Particulars Unit Cost per Unit Total Amount A B=C/A C=AxB Monthly Sales Revenue C 10000 $7.50 $75,000 Manufacturing Costs: Direct Material 10000 $1.00 $10,000 Direct Labor 10000 $1.20 $12,000 Variable Overhead 10000 $0.80 $8,000 Fixed Overhead 10000 $1.00 $10,000 Total Manufacturing Costs D 10000 $4.00 $40,000 Marketing Costs: Variable Marketing Costs 10000 $1.50 $15,000 Fixed Marketing Costs 10000 $1.50 $15,000 Total Marketing Costs E 10000 $3.00 $30,000 Total Cost of Goods Sold F=D+E 10000 $7.00 $70,000 Monthly Net Profit G=C-F 10000 $0.50 $5,000 Educational Institution offers: The calculation for the net profit, depicted below, is done by assuming that Parker Ltd acknowledges the offer from the educational institution, which agreed for supplying the extra 2000 sets at $ 5.5: Calculation of Monthly Profit with Additional Order of 2000 Units:- Particulars Unit Cost per Unit Total Amount A B=C/A C=AxB Normal Monthly Sales D 10000 7.5 75000 Order from Educational Institution E 2000 5.5 11000 Monthly Sales Revenue F=D+E 12000 $7.17 86000 Manufacturing Costs: Direct Material 12000 $1.00 $12,000 Direct Labor 12000 $1.20 $14,400 Variable Overhead 12000 $0.80 $9,600 Cost of Logo Inscribtion 2000 $0.60 $1,200 Fixed Overhead 12000 $0.83 $10,000 Total Manufacturing Costs G 12000 $3.93 $47,200 Marketing Costs: Variable Marketing Costs 12000 $1.50 $18,000 Fixed Marketing Costs 12000 $1.25 $15,000 Total Marketing Costs H 12000 $2.75 $33,000 Total Cost of Goods Sold I=G+H 12000 $6.68 $80,200 Monthly Net Profit J=F-I 12000 $0.48 $5,800 It is depicted by the calculation, done above, that the net profit of the company will decrease by $ 0.02 per set if the firm accepts the offer from the educational institution. Therefore, it would not be viable for the company to accept the offer. However, the Parker Ltd. should consider factors other than profitability. It may include cost of production per set, cash flow and many other. Nonetheless, the expenses of the company regarding the sold products of each set can be reduced if the provided offer is accommodated. In addition to this, the offer would also generate higher profit and generating the high amount of cash inflow. Long-term government profitability: The net profit, depicted below, would be generated, when the contract form the long-term government would be obtained by the organization. The contract is to provide 5000 extra sets at the cost of $ 4.00 per set produced. Calculation of Monthly Profit with Additional Order of 5000 Units:- Particulars Unit Cost per Unit Total Amount A B=C/A C=AxB Normal Monthly Sales E 10000 $7.50 75000 Order from Educational Institution F 5000 $4.00 20000 Monthly Sales Revenue G=E+F 15000 $6.33 95000 Manufacturing Costs: Direct Material 15000 $1.00 $15,000 Direct Labor 15000 $1.20 $18,000 Variable Overhead 15000 $0.80 $12,000 Fixed Overhead 15000 $0.67 $10,000 Total Manufacturing Costs H 15000 $3.67 $55,000 Marketing Costs: Variable Marketing Costs 15000 $1.50 $22,500 Fixed Marketing Costs 15000 $1.00 $15,000 Total Marketing Costs I 15000 $2.50 $37,500 Total Cost of Goods Sold J=H+I 15000 $6.17 $92,500 Monthly Net Profit K=G-J 15000 $0.17 $2,500 Based on above calculation, the profit earned by the company by producing and selling each set would be $ 0.17 only. The total amount of profit generates comes to $ 2500. The amount of money received in advance by Parker Ltd stands at $ 4000. Hence, the offer should not be accepted due to lower amount of profit. However, in the event of cash shortage, this offer would be helpful to the company. Lower Pricing for the New Foreign Market: If the parker Ltd intends to penetrate the market, it should propose the sets at the lower rates to its foreign clients. The organization may opt for break-even point and may sell the sets at the selling price, calculated below: Calculation of Monthly Profit with Additional Order of 10000 Units:- Particulars Unit Cost per Unit Total Amount A B=C/A C=AxB Manufacturing Costs: Direct Material 20000 $1.00 $20,000 Direct Labor 20000 $1.20 $24,000 Variable Overhead 20000 $0.80 $16,000 Fixed Overhead 20000 $0.50 $10,000 Total Manufacturing Costs D 20000 $3.50 $70,000 Marketing Costs: Variable Marketing Costs 20000 $1.50 $30,000 Fixed Marketing Costs 20000 $0.75 $15,000 Total Marketing Costs E 20000 $2.25 $45,000 Total Cost of Goods Sold F=E+D 20000 $5.75 $115,000 Less: Sale in Domestic Market G 10000 $7.50 $75,000 Sale in Foreign Market H=F-G 10000 $4 $40,000 For some quantity of product, fixed cost may remain constant in the short run. On the other hand, in the long-run, the cost changes for the same level of production. Since the fixed cost are not identical, it is not possible to calculate the least cost in the long run. Therefore, it is required by the firm to shift the range of prices according to the changes in the fixed expenses. Since the firm would be experiencing the zero profit and zero loss situation, the new price for making selling in the long-run would be counted as smallest (Otley and Emmanuel 2013). Outside supplier profitability: The calculation below depicts the expected loss and gain arising from the acceptance of the offers by the external supplier. Calculation of Monthly Profit for Order from Outside Supplier:- Particulars Unit Cost per Unit Total Amount Sale to Outside Supplier 10000 $7.50 $75,000 Monthly Sales Revenue 10000 $7.50 $75,000 Costs of Purchase: Purchase from Outside Supplier 10000 $4.20 $42,000 Fixed Overhead 10000 $0.70 $7,000 Total Manufacturing Costs 10000 $4.90 $49,000 Marketing Costs: Variable Marketing Costs 10000 $1.10 $11,000 Fixed Marketing Costs 10000 $1.50 $15,000 Total Marketing Costs 10000 $2.60 $26,000 Total Cost of Goods Sold 10000 $7.50 $75,000 Monthly Net Profit 10000 $0.00 $0 The offer cannot generate any profit for the high cost of goods sold, per unit. Therefore, the firm should not accept this offer. Outside supplier profitability with the Rental plan: The calculation, below, depicts the net loss or profit of the firm, which results from serving its assets for generating rent and purchasing the sets from outside supplier: Calculation of Monthly Profit for Order from Outside Supplier Rent:- Particulars Unit Cost per Unit Total Amount Sale to Outside Supplier 10000 $7.50 $75,000 Rent from Building Car Parking $5,500 Monthly Sales Revenue 10000 $8.05 $80,500 Costs of Purchase: Purchase from Outside Supplier 10000 $4.20 $42,000 Fixed Overhead 10000 $0.70 $7,000 Total Manufacturing Costs 10000 $4.90 $49,000 Marketing Costs: Variable Marketing Costs 10000 $1.10 $11,000 Fixed Marketing Costs 10000 $1.50 $15,000 Total Marketing Costs 10000 $2.60 $26,000 Total Cost of Goods Sold 10000 $7.50 $75,000 Monthly Net Profit 10000 $0.55 $5,500 It can be stated from the above table that Parker Ltd. can gain higher profit than the current profit margin, if it accepts the offer from outside supplier and uses its facilities to earn rental income. Hence, Parket Ltd. should implement this plan. Conclusion: From the above analysis, it is concluded that the first offer present the higher profit concerning the present market strategy than the other offers of the company. Therefore, the firm should consider the recent policy of marketing. Nonetheless, the firm can acknowledge the offer by the educational institute. To penetrate in the foreign market, the profit percentage for the short term should be sacrificed by the organization. It may also purchase the sets from the outside supplier along with renting its building and car parking lot instead of manufacturing the sets. Reference and Bibliography: Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2013. Management accounting and control practices in a lean manufacturing environment.Accounting, Organizations and Society,38(1), pp.50-71. Horngren, C.T., Sundem, G.L., Schatzberg, J.O. and Burgstahler, D., 2013.Introduction to management accounting. Pearson Higher Ed. Kaplan, R.S. and Atkinson, A.A., 2015.Advanced management accounting. PHI Learning. Otley, D. and Emmanuel, K.M.C., 2013.Readings in accounting for management control. Springer. Yee, C.M. and Khin, E.W.S., 2015. Positivist Research and its Influence in Management Accounting Research.Journal of Accounting Perspectives,3(1).