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Advanced Management Accounting Solutions

The document discusses questions related to advanced management accounting. It covers topics like learning curves, cost-volume-profit analysis, target costing, and environmental costing. Several examples are provided and calculations are shown to solve problems involving these accounting concepts.

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Chia Pei Jun
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7 views8 pages

Advanced Management Accounting Solutions

The document discusses questions related to advanced management accounting. It covers topics like learning curves, cost-volume-profit analysis, target costing, and environmental costing. Several examples are provided and calculations are shown to solve problems involving these accounting concepts.

Uploaded by

Chia Pei Jun
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

ADVANCED MANAGEMENT ACCOUNTING

ACC60804
TUTORIAL 2 (SOLUTIONS)

Question 1

= 66,250 / (98,786)

246,400
√16,256 𝑥𝑥 3,810,500 = 246,400 / 248,884

𝑟𝑟 𝑥𝑥1 = 0.99002 @ 99.002%  r2 = 0.9801 @ 98.01%

R2 of x1 is 44.97%. It means that 55 per cent of the total variation of y from its mean is
not caused by variations in x1 (local advertising). This means that some proportion of
changes in sales does not result from changes in local advertising.

R2 of x2 is 98.01%. It means that 98.01 per cent of the total variation of y from its mean
is caused by variations in x2 (regional advertising). This means that the changes in
sales do result from changes in regional advertising.

Thus, marketing staff believe that the most important influence upon sales is local
advertising undertaken by the retail store is not true.

1
Cumulative average time per unit = on average, it tooks XX hours to produce each unit when a total of X units were manufactured

Question 2
31st batches 32nd batches
Y = 500 x 31^ -0.152 Y = 500 x 32^ -0.152

($6,000 x 40 batches)

Revenue - TC = Profit
Revenue - $644,937 = $150,000
Revenue = $150,000 + $644,937
Revenue = $794,937

($794,937 - $752,500)

($42,437/500 units)

Note:

Y = ax for 31 batch = 500hrs x 31 -0.152


Y = ax for 32 batch = 500hrs x 32 -0.152
1. Question 2a  You need to apply the three key concepts in the learning
curve analysis.
a) Average time is taken per unit of cumulative production.
b) Total hours for cumulative production
c) Incremental hours

2
Question 2b: You can use the cost-volume-profit analysis formula.
Revenue – Total costs = Profit
[($215 per unit x 3500 units) + (SP x 500 units)] – $644,937 = $150,000
$752,500 + 500SP - $644,937 = $150,000
SP = ($150,000 - $107,563)/ 500 = $84.88

Question 3

$4,800 x 2
$3,840 x 4
$3,840 x 80%

Other alternative  use formula e.g Y8 = $6,000 x 8^-0.3219 =$3,072.18


Total cost for 8 batches = #3,-72.18 x 8 batches = $24,577.44

(b)
No of units 800 1,600 3,200 6,400

Sales (SP ($70) x Units) 56,000.00 112,000.00 224,000.00 448,000.00

Direct Material & other non-labor related costs 36,000.00 72,000.00 144,000.00 288,000.00
($45 x Units)

Direct Labor costs 24,576.00 39,321.60 62,914.56 100,663.30

Fixed costs 60,000.00 60,000.00 60,000.00 60,000.00


Total costs (120,576.00) (171,321.60) (266,914.56) (448,663.30)

Profit/ Loss (64,576.00) (59,321.60) (42,914.56) (663.30)

As can be seen from the table above the break-even point seems to be slightly above
6,400 units.

3
(c ) The rate of learning, often referred to as the learning curve or learning rate, can have
a significant impact on the break-even sales volume of a business. In the context of
business and production, the learning curve theory suggests that as workers become
more experienced and skilled at a particular task or process, the time or resources
required to complete that task decrease, leading to increased efficiency and lower costs
per unit.
90% Learning Curve: In this scenario, the rate of learning is 90%. This means that with
each doubling of cumulative production or experience, the time or cost per unit decreases
by 10%. In other words, as the business produces more units, it becomes more efficient
at producing them.
80% Learning Curve: In this scenario, the rate of learning is 80%. This means that with
each doubling of cumulative production or experience, the time or cost per unit decreases
by 20%. This indicates a steeper learning curve and faster improvement in efficiency
compared to the 90% scenario.
Now, let's consider the effect on break-even sales:
90% Learning Curve: With a slower learning curve (compared to 80%), it takes more units
to achieve a significant reduction in costs per unit. This means that the break-even sales
volume will be higher in this scenario compared to the 80% learning curve scenario. The
business needs to sell more units to cover its costs because it becomes efficient at a
slower rate.
80% Learning Curve: With a faster learning curve, the business becomes more efficient
at a quicker rate as it produces more units. This leads to lower costs per unit and, as a
result, a lower break-even sales volume. The business reaches the point where it covers
its costs sooner, requiring fewer unit sales to break even.
In summary, a higher rate of learning (e.g., 80% compared to 90%) can lead to a lower
break-even sales volume because it indicates that the business becomes more efficient
and cost-effective at a faster rate as it gains experience and produces more units. This
can be a competitive advantage, as it allows the business to achieve profitability sooner
and potentially set lower prices to attract customers.
FC = 1,000

selling price per unit 50 50


VC 25 20
Contribution margin 25 30

BEP = (Fixed cost / selling price per unit - vc per unit)

BEP = (1,000 / (50-25) = 40


units BEP = (1,000 / (50-20) = 33 units
Question 4

(a) The average cost of the first 128 chairs is as follows:

$
Frame and massage 51.00
mechanism
Leather [2 / 1-20%]* x $10/mtr 25.00
Labour (W1) 20.95
Total 96.95

*Waste formula = net / (1 - %) = 2 meters /(1-20%) = 2.5 meters in total the required
leather per chair.
(c ) The cost of the 128th chair will be:

$
Frame and massage 51.00
mechanism
Leather [2 / 1-20%]* x $10/mtr 25.00
Labour (W2) 1.29 hrs x $15 19.35
Total 95.35
Note:

1. Remember to apply the three key concepts in learning curve analysis.


- Average time is taken per unit of cumulative production.
- Total hours for cumulative production
- Incremental hours

2. Waste is part of environmental costing. Companies are required to absorb the


waste cost instead of shifting the cost to the consumer by increasing the selling
price.

3. Target cost per unit is the estimated cost per unit of a product that enables the
company to achieve its target operating income per unit when selling at the target
selling price.

4. Cost gap is the difference between actual product cost and target cost.

5. Target cost per unit = target selling price per unit – target operating income per
unit

Target cost per unit = $120 – (20% x $120) = $96

6. For Q3a, you need to apply the average time taken per unit of cumulative
production.

7. For Q3c, you need to apply the incremental hour method since the question is
asking for the total cost of the 128th chair or the total cost of chair No 128 only.

Common questions

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The learning curve affects break-even sales volume by determining how quickly production efficiencies are achieved as workers become more skilled. A higher learning rate, such as 80%, indicates that costs decrease more rapidly with increased production, leading to a lower break-even sales volume. This is because the business becomes more efficient sooner, reducing the cost per unit and requiring fewer unit sales to cover costs. Conversely, a slower learning rate like 90% results in higher costs per unit for longer, meaning more sales are necessary to reach break-even. This affects profitability and pricing strategies, as businesses with a steeper learning curve (80%) can achieve profitability faster and potentially set competitive prices to attract customers .

Cost-volume-profit (CVP) analysis helps determine the selling price needed to achieve a target profit by analyzing the relationship between costs, sales volume, and profit. The formula is: Revenue - Total Costs = Profit. By rearranging this formula, the selling price (SP) is found by subtracting total costs from the desired profit and dividing by the number of units: 4.88 = (Profit - Total Costs) / 500 units. This scenario shows that to achieve a $150,000 profit with given costs, SP needs to be set at $84.88 per unit. This analytical tool allows managers to adjust pricing strategies according to cost constraints and profit goals .

The learning curve theory implies that as workers gain experience, they perform tasks more efficiently, reducing time and resources needed per unit over successive batches. This efficiency leads to lower production costs per unit and improves overall productivity. Implementation of this theory supports planning and costing strategies, enabling better pricing, budget forecasts, and profitability. In manufacturing, it fosters continuous improvement and competitive pricing strategies through increased labor productivity .

Understanding the cumulative average time taken per unit helps businesses gauge overall production efficiency and forecast future performance. This metric reflects improvements gained from experience, supporting time management and resource allocation. Consistent monitoring allows businesses to identify areas for efficiency improvements and adjust production processes to reduce costs. It's critical for strategic planning, as it influences capacity planning, cost predictions, and competitive pricing .

Target costing enhances competitiveness by aligning product prices with market expectations, and business profitability goals. It involves setting a target price and calculating a target cost that allows achieving necessary profit margins. By controlling design and production costs to not exceed this target cost, companies can offer competitive prices while maintaining profitability. It encourages innovation and cost-efficient processes, helping businesses meet market demands without sacrificing financial stability .

The break-even point is determined by the interaction between fixed and variable costs through the equation: BEP = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit). Fixed costs remain constant regardless of sales volume, while variable costs change with production levels. The equation calculates the sales volume required to cover all costs, reaching a point where no profit or loss occurs. Understanding this interaction helps businesses plan pricing strategies and assess the financial impact of production changes .

Waste management is crucial in environmental costing as it determines how cost increases due to waste are handled within an organization. Companies can absorb waste costs internally to avoid raising the selling price, thus staying competitive. Efficient waste management leads to better resource utilization and cost savings, which can enable lower pricing strategies and support sustainability. Environmental costing aligns with corporate social responsibility, encouraging waste reduction and efficient production methodologies .

R-squared values are critical for assessing how well variations in advertising predict sales changes. In the context provided, an R-squared value of 98.01% for regional advertising shows a strong correlation, indicating that almost all sales variation is explained by regional advertising efforts. Conversely, a lower R-squared value for local advertising implies that only a small portion of sales variation is due to local advertising. This understanding helps in strategic decision-making, guiding businesses on where to allocate resources effectively to maximize sales impact .

Evaluating advertising strategies with statistical methods like R-squared is essential to measure the effectiveness and efficiency of different campaigns. These metrics indicate how well variations in advertising explain sales changes, allowing for precise allocation of marketing resources. A higher R-squared value confirms a stronger relationship between advertising and sales, guiding decisions on prioritizing marketing efforts. This evaluation ensures optimal returns on advertising investments and supports data-driven strategy development .

Analyzing the cost gap—the difference between actual and target costs—allows businesses to identify inefficiencies and areas for cost reduction. It aids in streamlining operations, optimizing resource allocation, and enhancing profitability. By closing the cost gap, companies can reduce waste, improve pricing strategies, and increase market competitiveness. This analysis propels innovation and process improvements, facilitating strategic decision-making and long-term sustainability .

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