Accounting for

Business
Decision
Making
(BMAC5203)
 Accounting for Business Decision Making (BMAC5203)

Question 1

a. Identification

Managers or financial controller must identify the information that can be

used to analyze the organization performance. Information needed might
not only be from internal but can also external environment analysis or
trends. Identification process is also required to the processes that could
be re-engineered.

b. Measurement

When the managers have identified the information to be used for further
analysis, they will have to measure the organization performance and
process efficiency with an intended purpose. Organization financial
measurement requires financial and non-financial inputs by cost analysis
but cost is not the only measurement elements. A proper accounting
method might be needed to ensure that performance measurement is
done correctly.

c. Analysis

Proper analysis is required by using the information or report gathered on

any period of time i.e. weekly, monthly, quarterly or annually. The result of
the analysis and report generated using statistical tools to arrive at
monetary value that can be used in future decision-making.

d. Preparation and communication

Managerial accounting data provides internal organization members with

the necessary information to improve continuously on many operations
and processes through well-informed decision making using product and
processes of specific financial data. Reports generated is appropriate for
control and planning and will cover any time span that is relevant by those
using and applying the data to improve operation and strategy.

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e. Planning

In Managerial Accounting, when we talk about planning, it is usually

related to budgeting. Budgets are usually prepared and controlled by a
controller, which is usually the manager of Financial Department of one
organization. Budgets are usually prepared on annual basis and specific.
However, budget can also be prepared for minor organization activities
which later shall be included in the annual budget.

As proposed in http://accountingformanagement.com, the planning

process must occur at all levels. There are three stages of planning:

i. Occurs at high level if setting strategy. Strategy involves

creating core values, mission and objectives which
organizations need to invest their time and money to develop
one.

ii. Moves to broad-based thought about how to establish an

optimum position to maximize potential for realization of
goals

iii. Planning must be undertaken from the perspective of

thoughtful consideration of financial realities and constraints
and anticipated monetary outcomes. Budget is one of the
essential part in planning that outlines the financial plan for
the organization.

f. Evaluation

Cost that is incurred in any process of managerial accounting has to be

evaluated, both future and in the long run and must be weighed against
anticipated benefits. Evaluation can also be done on the impact of the
operations to the employee behaviour and activity. Behavioral changes

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 Accounting for Business Decision Making (BMAC5203)

and expectations will also be changed when the management attempts to

introduce, redesign and enhance the operation performance.

g. Controlling

As a financial controller in an organization, he/she must ensure that the

budget allocated must be followed. Managers must request for feedback
to ensure the budget are used on track. Various teams or units are to
produce reports to be compared and analyzed on the usage of the budget.

Question 2

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 Accounting for Business Decision Making (BMAC5203)

2(a)(i)

Cost Activi
drive ty Activit
Activi Cost Po r cost Prod y cost
ty driver ol qtty for line per
cost Cost quant Ra Prod for prod volu unit
Activity pool driver ity te uct prod uct me (RM)
Machine 1920 2400
operation H 0 76800 0 3.20
s 192,0 Machine 3360 13440 2400
48,000 4
& 00 hours D 0 0 0 5.60
maintena 2160 1200
nce P 0 86400 0 7.20
19200 2400
H 960 0 0 8.00
Machine 440,0 Setup 28800 2400
2,200 200
setups 00 hours D 1440 0 0 12.00
19200 1200
P 960 0 0 16.00
2400
H 1200 16800 0 0.70
Electric 49,00 Kilowatt 2400
3,500 14
power 0 hours D 2400 33600 0 1.40
1200
P 1800 25200 0 2.10
1920 15360 2400
H 00 0 0 6.40
Materials 320,0 400,00 2400 19200 2400
Pounds 0.8
handling 00 0 D 00 0 0 8.00
1680 13440 1200
P 00 0 0 11.20
2400
H 480 67200 0 2.80
No.of
Quality 252,0 13440 2400
inspectio 1800 140
control 00 D 960 0 0 5.60
ns
16800 1200
P 1200 0 0 14.00

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 Accounting for Business Decision Making (BMAC5203)

2(a)(ii)

Delux
Home e Pro
Direct material 24.00 30.00 36.00
Direct labor 18.00 30.00 40.00
Supervision
(0.10x Direct
labor cost) 1.80 3.00 4.00
Total direct
cost per unit 43.80 63.00 80.00

Manufacturing overhead (based on ABC

calculation)

Machine
operations
&
maintenance 3.20 5.60 7.20
Machine setup 8.00 12.00 16.00
Electric Power 0.70 1.40 2.10
Materials
handling 6.40 8.00 11.20
Quality control 2.80 5.60 14.00

Total overhead cost per 21.10 32.60 50.50

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 Accounting for Business Decision Making (BMAC5203)

unit

Total product
cost 64.90 95.60 130.50

2(b)

Home Deluxe Pro

Selling Price
(RM) 80.00 120.00 160.00
Product cost
(RM) 64.90 95.60 130.50
Contribution 15.10 24.40 29.50

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 Accounting for Business Decision Making (BMAC5203)

Limiting factor = machine

hours 0.80 1.40 1.80

15.10/0.8 24.40/1. 29.50/1.

0 40 80
Contribution
per limiting
factor
(contribution /
limiting factor) 18.88 17.43 16.39
Production Rangking 1 2 3

Number of machine hours = 48,000 hours

The company should optimize the machine to produce the product that gives
contributes more per limiting factor, which is according to the product ranking
mentioned above.

Therefore, the company will first produce Home module with the amount of
24,000 units:

24,000 x 0.80hours = 19,200 hours needed

To optimize the balance available machine hours=

48,000 -19,200 =28,800 hours

To produce Deluxe model requires:

24000x 1.40hours = 33,600hours

With the balance of 28,800 hours available, the number of Deluxe model can be
produced:
28,800 ÷1.40hours =20571.42857

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 Accounting for Business Decision Making (BMAC5203)

= 20,571 units

Since the production of Deluxe model has used up the available machine hours,
therefore the company will not produce any units of Pro Model.

As a conclusion, the company will produce:

1. Home Model 24,000 units

2. Deluxe Model20,571 units

3. Pro Model 0 units

Question 2(c)

Home Deluxe Pro

Direct material 24.00 30.00 36.00

Direct labor ( x 50%
overtime premium) 27.00 45.00 60.00
Supervision
(0.10x Direct
labor cost) 2.70 4.50 6.00
Total direct
cost per unit 53.70 79.50 102.00

Manufacturing overhead (based on ABC

calculation)

Machine
operations
& maintenance 3.20 5.60 7.20

Machine setup 8.00 12.00 16.00

Electric Power 0.70 1.40 2.10

Materials
handling 6.40 8.00 11.20

Quality control 2.80 5.60 14.00

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 Accounting for Business Decision Making (BMAC5203)

Total overhead
cost per unit 21.10 32.60 50.50

Total overhead
cost per unit
(x
20%manufactu
ring support
cost) 25.32 39.12 60.60

79.02 118.62 162.60

Home Deluxe Pro

Selling Price
(RM) 80.00 120.00 160.00
Product cost
(RM) 79.02 118.62 162.60

Contribution 0.98 1.38 -2.60

Limiting factor = machine

hours 0.80 1.40 1.80

1.38/1.
0.98/0.80 40 -1.44

Contribution
per limiting
factor
(contribution /
limiting factor) 1.23 0.99 -1.44

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Since the company has fully produced Home Model, therefore, the additional
machine hours will be used to produce Deluxe model and Pro model.

Production ranking:

1. Deluxe

2. Pro

Number of machine hours = 28,800 hours + 8000 hours

= 36,800hours

Since the company has produced 20,571 units earlier, therefore, the company
will maximize the additional machine hours by producing the balance of 3429
units.

24,000 -20,571 unit =3,429 units

Assuming that the additional machine hours are fully utilized to produce both
models, the balance after the production of Deluxe model will be used for
producing Pro Model. Therefore:

36,800 hours – 33,600 hours [24000 of Deluxe model fully produced x 1.4
machine hours]

= 3200hours ÷ 1.8 machine hours [machine hours for Pro model]

= 1,777 units of Pro model

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From the table above, it illustrated that Deluxe model has positive contribution
while Pro model has negative contribution. Therefore, Petrol Drill should not
produce Pro Model under overtime premium.

The number of machine hours to the company to work overtime:

3429 units x 1.4 machine hours = 4801 hours

Question 3

a. Budgetary slack being defined by Hilton, R.W in his book “Managerial

Accounting” as difference between the revenue or cost projection that a person
provides and a realistic estimate of the revenue or cost. In a study done by
Ramdeen c. et al (2007) , Williamson (1964) stated that managers try to control
the budget process by introducing slack into their budget. Another author, Onsi
(1973) stated that this slack represents either the amount of additional resources
managers purposely construct in the budget, or the amount by which they
wittingly understate productive capability.

In the study, it also mentioned that managers built slack in their budgets as
means of protecting their personal interest and it was rational economic
behaviour for them to do so (Lowe & Shaw, 1968). The main purpose that
managers build slack in the budgets is to increase their payoff chances. It was
proposed by Schiff and Lewin (1970) that if subordinates perceive that their
compensation depends on budget achievement, they might aim to have slack in

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their budget. The authors also find that the management can and does create
slack to achieve attainable budgets. In addition, it secures resources for
furthering their personal goals and desires. By doing so, it may give the
managers to access to private information and it may leads to an increase in
budget slack.

b.
(i) Cash collections for 4th quarter

Cash Receipts (RM)

Sales (RM)
October November December
August 10,000 1,300
September 15,000 9,000 1,950
October 12,500 3,500 7,500 1,625
November 20,000 5,600 12,000
December 35,000 9,800
Total 13800 15,050 23,425

(ii) Cash disimbursement for 4th quarter

Cash disimbursement (RM)

October November December January
Receipts
Sales 13,800 15,050 23,425 0

Total 13,800 15,050 23,425 0

Payments

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Cash (20%
paid in month
of purchase,
2% discount)
October 4,000 784 3,216
November 6,000 1176 4,824
December 5,000 980 4,020
784 4392 5804 4020

Balance b/f 13,016 23,674

Surplus/Deficit 13,016 10,658 17,621
Balance c/f 13,016 23,674 41,295

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Question 4 (PART A)

a.

1 2 3
Cost
Budget Actual variance
[1-2]
Volume 90,000 75,000
Manufacturing cost

Direct materials 180,000 156,000 24,000 [F]

Direct labor 900,000 835,000 65,000 [F]
Variable overhead 450,000 360,000 90,000 [F]
Fixed overhead 54,000 60,000 -6,000 [UF]
Total 1,584,000 1,411,000 173,000 [F]

From the report above, Fruity Bhd had compared the budget and actual
manufacturing cost for the month ending 31 May 2009. The estimated volume
for the month is 90,000 units while the actual amount produced is 75,000 units.
From the comparison that they have made based on the units estimated to be
produced and the actual amount produced, three manufacturing cost are
favourable which are direct materials, direct labour and variable overhead.
However, the calculation should not be made by comparing the estimated
volume with actual volume. It doesn’t reflect the difference spending of each
activity. Therefore, we have to apply flexible budgets to get the correct cost
variance.

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b.

1 2 3 4 5 6
Standard New cost
Cost
cost variance
Flexible varian
per unit Budget Actual (75,000
[1 x 3] ce
(budget units)
[2 - 4]
cost/unit) [3 - 4]
Volume 90,000 75,000 75,000
Manufacturing
cost

Direct 24,00 -6,000

materials 2.00 180,000 150,000 156,000 0 [UF]
65,00 -85,000
Direct labour 10.00 900,000 750,000 835,000 0 [UF]
Variable 90,00
overhead 5.00 450,000 375,000 360,000 0 15,000[F]
Fixed -15,000
overhead 0.60 54,000 45,000 60,000 -6,000 [UF]
1,320,0 1,411,0 173,0 -76,000
Total 17.60 1,584,000 00 00 00 [UF]

From the report prepared above, it illustrated that the company has overspend
from what they have estimated. They have overspend on direct materials with
RM6,000 and direct labour with RM85,000. Hence, the total manufacturing cost
in unfavourable with RM76,000.

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c. A static budget is also known as master budget that is prepared by

businesses at the beginning of the budget period. It incorporates expected
values about inputs and outputs on a particular planned activity.

A flexible budget on the other hand is a budget prepared by business after

the budget period has ended and it is been used to control overhead cost.
Flexible budget uses actual output levels instead of budgeted output levels.

Even though static budget is suitable for planning, but it is insufficient for
evaluating how well costs are controlled because the actual level of activity
is unlikely to equal the planned level of activity.

Question 4 (PART B)

a. It is important to conduct cost variance analysis to identify which

manufacturing cost being used inefficiently. This analysis helps managers
in many ways. Certain times managers action may lead to the actual cost
lower than what has been estimated, similar cost savings can be realized
by repeating the actions in producing other jobs. If the situation is
otherwise, the manager may take necessary actions to either eliminate or
control them. By doing variance analysis, managers can better understand

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what are the causes of the variances and correct them to reduce
unnecessary expenses.

b. Standard
costing

Standard Standard Standard

Quantity Price cost/unit
(SQ) (SP) (RM)
2 RM2
Direct Material gallons per 4
can gallon
Standard Standard
Hour Rate
(SH) (SR)
0.5 RM15
Direct labor 8
hour per can hour

Actual

Actual Standard
Actual Price
Quantity cost/unit
(AP)
(AQ) (RM)
11000 RM2.20
gallons 24,200
purchased gallon
Direct material and used
Actual hour Actual Rate
(AH) (AR)
3200 RM14
44,800
Direct labor hours hour
Total 69,012
Actual Output 6,000 cans

1) Material price variance = [(SP-AP) AQ]

= (SP x AQ) - (AP-AQ)
= (2 x 11,000) - (2.20 x 11,000)
= 22,000 – 24,200
= 2,200 [U]

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2) Material usage variance = [(SQ of AO)-AQ] SP

= [(2 x 6,000)] -11,000] 2
= [12,000 – 11,000]2
= 2,000 [F]

3) Labor rate variance = [(SR-AR) AH]

= (SR x AH) - (AR x AH)
= (15x3,200) - (44,800)
= 48,000 - 44,800
= 3,200 [F]

Labor efficiency variance = [(SH of AO) - AH]

4) SR
= [(SH x AO) - AH] SR
= (0.5 x 6,000) – 3,200] 15
= 3,000 [UF]

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