• January 29, 2019
• David Marks
• 0

Management Accounting Techniques

# Applying a range of management accounting techniques

To: Line manager, Ryanair

From: Management Accountant, Ryanair

Subject: Calculation of cost per unit under absorption costing and marginal costing and explaining the reasons for differences

Sir,

This part will represent calculation of cost per unit under absorption costing and marginal costing and explaining the reasons for differences

P3: Calculating cost per unit under absorption costing and marginal costing and explaining why they differ.

Unit cost: Per unit product or service production cost is called unit cost. This type of cost is directly related to product or service production in the business organization. Unit cost includes direct labour, direct material and manufacturing overhead. These type costs must do calculate when unit cost becomes calculates. These costs are directly related to the product or service production. Per unit cost is calculated “RYAN ECONOMICAL” in below:

Calculating unit cost under absorption costing method:

 Particulars Amount (£) Variable cost per unit 6 Fixed manufacturing overhead per unit 0.33 Total 6.33

Fixed manufacturing overhead per unit =

= £0.33

Calculating unit cost under marginal costing method:

 Particulars Amount (£) Variable cost per unit 6 Total 6

Explaining why do they differ

The variable cost of per unit is £6 where the unit cost is £6.33 in absorption costing method. There has different between calculating absorption costing method and marginal costing method.  The absorption costing methods includes fixed manufacture overhead per unit, and the managerial costing method includes variable cost per unit (Spencer, 2013).  It is the main difference between absorption costing and managerial costing.  The unit cost is £0.33 of two methods.

Explaining how unit cost is used to prepare income statement under absorption costing and marginal costing:

The absorption costing and managerial costing both methods are calculated per unit production cost. How unit cost uses to making income statement that is discussed in below:

Absorption costing:

Cost of goods manufactured: The business organization manager will multiply the unit by the number of goods produced to calculate the cost of goods manufacture.

Cost of goods manufactured =Number of units produced ×cost per unit

Cost of goods sold: The business organization manager will use the cost per unit to calculate the cost of goods sold (Woodson and Lewis, 2004).  Inventory of beginning inventory added with the number of good manufactured and ending inventory is deducted and multiplied by the unit cost to calculate the cost of goods sold.

Cost of goods sold=Unit sold×Unit cost

Cost of goods manufactured: managers will multiply the unit cost with the number of goods produced.

Cost of goods manufactured

Marginal costing

Variable cost of goods sold: The marginal cost is calculated by multiplying the marginal costing unit cost with the number of goods sold

Cost of goods sold=Unit sold×Marginal costing unit cost

Income statement under marginal costing

The income statement is prepared under marginal costing method for “RYAN ECONOMICAL” package:

 SN. Particular CU 1. Sales (900,000 units × £12) £ 10,800,000 Less (Cost of goods sold): 2. Beginning inventory £ 0 3. (+) Manufacturing cost for the period ( 910,000 units × £6) £ 5,460,000 4. Goods available for use (2+3) £ 5,460,000 5. (-) Ending inventory (10,000 units × £6) (£ 60,000) 6. Cost of goods sold (4-5) £ 5,400,000 7. Contribution margin (1-6) £ 5,400,000 8. (-) Fixed Manufacturing overhead (£ 300,000) 9. (-) Fixed non-manufacturing cost (£ 100,000) 10. Net Operating Income (9-10-11) £ 5,000,000

Income statement under absorption costing:

The income statement is prepared under absorption costing method for “RYAN ECONOMICAL” package:

 SN. Particular CU 1. Sales (900,000 units ×£12) £ 10,800,000 Less ( Cost of goods Sold): 2. (+) Opening inventories balance £ 0 3. (+) Manufacturing cost for the period( 910,000 units × £6.33) £ 5,760,000 4. Goods available for use (2+3) £ 5,760,000 5. (-) Ending inventories balance(10,000 units × £6.33) £ 63,300 6. Cost of goods sold (4-5) £ 5,696,700 7. Gross Margin (1-6) £ 5,103,300 8. (-) Non-manufacturing cost (£ 100,000) 9. Net Operating income (7-8) £ 5,003,300

Reconciliation of marginal costing and absorption costing income:

 Particular CU Net Income absorption costing £ 5,003,300 Fixed manufacturing overhead carried forwards (Closing inventory) (£ 3,300) Net Income variable costing £ 5,000,000

Task 3: Explaining the use of planning tools used for budgetary control

22-02-18

To: Line manager, Ryanair

From: Management Accountant, Ryanair

Subject: Explanation on the use of planning tools used for budgetary control

Sir,

This section will explain the advantages and disadvantages of different planning tools used for budgetary control.

P4: Explaining the advantages and disadvantages of different types of planning tools used for budgetary control

Manager of the Ryanair Airline company uses different types of planning tools for prepare budget, control production cost based on budget. These tools advantages and disadvantages are discussed in below:

Master budget: the Master budget is used for using sales budget, direct labour budget, direct material budget manufacturing, selling budget (Chadwick, 2010).This budget advantages and disadvantages are discussed in below:

• The budget plays the good role in making the better plan for the organization.
• This budget helps to forecast organization overall performance.
• Helps to make financial statements.

• The external unpredicted situation may do dismiss master budget.
• The business organization goes the wrong way for the wrong prediction.
• Master budget need to huge time and cost.

Operating budget: Operating budget represents organization cost and (Olivas-Lujan and Bondarouk, 2013). Operating budget can forecast organization cost, sales, operating expenses, cost of goods sold.

• This budget does ensure good performance of the organization.
• This budget decreases extra cost in the organization.
• This budget increases employee’s efficiency in the organization.

• For making this budget needed for several weeks.
• Employees do not show their innovative idea of this budget.
• High cost needed for making this budget.

Capital budget: The capital budget shows future capital expenditures in the organization.  The advantages and disadvantages are discussed below:

• This budget helps to select the best capital invest for the upcoming year.
• This budget helps to estimate future profitability in the organization.
• The business organization uses this budget for a long time.

• Different mangers use different capital investment. It is the bad side of capital budgeting.
• The business organization faces huge loss for the wrong capital budget.

Standard costing: It is very important budgeting for any organization. This budget advantages and disadvantages are

• Reduces waste of direct material.
• Reduces cost material, overhead and labour.
• Increase employee’s efficiency.

• This budget does not focus quality.
• This budget needs to regular update.

Collection from credit sales

 Particulars Oct Nov Dec Jan Feb Mar Total Credit sales 250000 250000 250000 260000 260000 280000 1550000 Oct 0 Nov 200000 200000 Dec 25000 200000 225000 Jan 20000 25000 200000 245000 Feb 20000 25000 208000 253000 Mar 20000 26000 208000 254000 Total 245000 245000 245000 234000 208000 0 1177000

Payment for credit sales:

 Particulars Oct Nov Dec Jan Feb Mar Total Credit Purchases 170000 180000 180000 200000 200000 200000 1130000 Oct 0 Nov 127500 127500 Dec 42500 135000 177500 Jan 45000 135000 150000 330000 Feb 45000 50000 150000 245000 Mar 50000 150000 200000 Total 170000 180000 180000 200000 200000 150000 1080000

Ryanair

Cash budget

For the 6 month ended in March

 Particulars Oct Nov Dec Jan Feb Mar Total Cash balance, beginning 15000 -15,000 27,500 50,000 -82,000 -216,000 15000 Add, receipts Cash sales 60000 60000 65000 75000 80000 90000 430000 Collection from credit sales 0 200000 225000 245000 253000 254000 1177000 Total cash available 75000 245,000 317,500 370,000 251,000 128,000 1622000 Less, disbursement Payment of credit purchase 0 127500 177500 330000 245000 200000 1080000 Other operating expense 90000 90000 90000 122000 122000 123000 637000 Payment for forklift trucks 0 0 0 0 100000 0 100000 Total disbursement 90000 217500 267500 452000 467000 323000 1817000 Excess (deficit) -15,000 27,500 50,000 -82,000 -216,000 -195,000 -195,000

The company deficit cash will be -£195,000. Ryanair can follow the following ways:

Line of credit: Ryanair takes bank line credit. Here the highest limit of deficit cash is -£216,000. So it can set the maximum limit of line of credit of -£216,000.

Changing the terms of credit sales: Ryanair can change the terms of credit sales because  it takes more cash at the end of the month.

Negotiating the payment deferred period: Ryanair can negotiate the payment terms.

More cash sales: Rynair offers more cash sales to avoid cash deficit problems.

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