Management Accounting Techniques

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,

Management Accounting TechniquesThis 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:

 

ParticularsAmount (£)
Variable cost per unit6
Fixed manufacturing overhead per unit0.33
Total 6.33

 

Fixed manufacturing overhead per unit =

= £0.33

Calculating unit cost under marginal costing method:

 

ParticularsAmount (£)
Variable cost per unit6
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.ParticularCU
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.ParticularCU
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:

ParticularCU
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:

Advantages

  • 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.

Disadvantages

  • 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.

Advantages

  • 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.

Disadvantages

  • 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:

Advantages

  • 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.

Disadvantages

  • 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

Advantages

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

Disadvantages

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

Collection from credit sales

ParticularsOctNovDecJanFebMarTotal
Credit sales2500002500002500002600002600002800001550000
Oct0
Nov200000200000
Dec25000200000225000
Jan2000025000200000245000
Feb2000025000208000253000
Mar2000026000208000254000
Total24500024500024500023400020800001177000

 

Payment for credit sales:

 

ParticularsOctNovDecJanFebMarTotal
Credit Purchases1700001800001800002000002000002000001130000
Oct0
Nov127500127500
Dec42500135000177500
Jan45000135000150000330000
Feb4500050000150000245000
Mar50000150000200000
Total1700001800001800002000002000001500001080000

Ryanair

Cash budget

For the 6 month ended in March

ParticularsOctNovDecJanFebMarTotal
Cash balance, beginning15000-15,00027,50050,000-82,000-216,00015000
Add, receipts
Cash sales600006000065000750008000090000430000
Collection from credit sales02000002250002450002530002540001177000
Total cash available75000245,000317,500370,000251,000128,0001622000
Less, disbursement
Payment of credit purchase01275001775003300002450002000001080000
Other operating expense900009000090000122000122000123000637000
Payment for forklift trucks00001000000100000
Total disbursement900002175002675004520004670003230001817000
Excess (deficit)-15,00027,50050,000-82,000-216,000-195,000-195,000

 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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