Management accounting essay
General Information
· Individual written assignment contributing 30% to your final grade
· 2,000 words (+/- 10%)
· Part 1: “Absorption and marginal costing report” (1,500 words, excluding excel tables)
· Part 2: “Management accounting reflection...” (500 words)
· Late submission will have 1 mark deducted for each day late (any submissions more than 1 week late will be awarded a mark of zero)
Assignment Questions:
HiTec Power Solutions
HiTec Power Solutions (HiTec) is a fast-growing European manufacturing business. The company had developed a special, longer-lasting cell phone battery whose product code is MS (for Macht Strom). The MS is now beginning to gain wider recognition and acceptance by cell phone manufacturers since a growing number of users prefer this brand to cheaper, but shorter-life batteries. As a result, HiTec is entering into a period of business growth and so has put together plans for expansion.
As expected, the company’s budget for the current financial year anticipates some increase in sales. During the first quarter, 32,000 units of MS were sold and this was considered a great success in comparison with past results. HiTec’s plan for the second quarter was based on a 25% increase in sales over the first quarter (40,000 units).
The company is now in the process of compiling its performance reports for the second quarter, which ended on 30 June 2018. The sales target was achieved and Mrs Lisa Harrison, the Chief Executive Officer (CEO), is very pleased. She is looking forward to receiving the Income Statement for the second quarter just ended. Naturally, she expects that it would “reflect the company’s new-found success,” as she wrote in an e-mail to the Financial Controller (FC), Mr Mike Hughes.
HiTec is preparing to discuss additional finance to fund the planned expansion with their bank. To justify a new loan request, Mrs Harrison is excited about the prospect of the company presenting a set of strong second-quarter results. She is convinced that that would help the company make a strong case that would persuade the bank to approve the additional loan request.
The company’s Board of Directors is due to meet soon and in preparation for that, Mr Hughes has sent the CEO an advance copy of the company’s Income Statement for the first and second quarters (see below). The statement shows that the net operating income in the second quarter is substantially lower than that of the first. It was prepared under the company’s absorption costing policy, which is highly favoured by the CEO.
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HiTec – “Absorption Costing” Income Statement for Q1 and Q2 |
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Quarter 1 (£) |
Quarter 2 (£) |
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Sales |
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4,000,000 |
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5,000,000 |
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Cost of Sales: |
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|
|
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Opening Inventory |
525,000 |
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1,225,000 |
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ADD: Production Cost |
3,500,000 |
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2,450,000 |
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Production (available for sales) |
4,025,000 |
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3,675,000 |
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LESS: Closing Inventory |
1,225,000 |
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175,000 |
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Cost of Sales |
2,800,000 |
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3,500,000 |
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Under/Over absorbed Fixed overheads |
0 |
2,800,000 |
600,000 |
4,100,000 |
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Gross Profit |
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1,200,000 |
|
900,000 |
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Selling and Administration expenses |
|
775,000 |
|
825,000 |
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Net Operating Income |
|
425,000 |
|
75,000 |
The significant reduction in net operating income reported was very shocking to Mrs Harrison who felt certain that there had to be an error somewhere. She immediately wrote to the Mr Hughes demanding that “the numbers be corrected and the problem resolved without delay!” In her reply, Mr Hughes stated:
“I can assure you, Lisa, that the net operating income is correct as reported. Although sales went up during the second quarter, the problem is in production. You see, we budgeted to produce 40,000 units each quarter. However, there was major flooding in one of our supplier's plants, main warehouse, and the surrounding region during part of the quarter. As a result, some essential components were not shipped to us in time. This forced us to cut production back to only 28,000 units in the second quarter. It is this reduction in production that gave rise to the drop in net operating income.”
Mr Hughes explanation did not satisfy the CEO:
“I don’t see why you are more interested in discussing production when my clear instructions to you are to have the incorrect drop in income corrected. What do weather conditions in the operating region of another company have to do with the sales that we achieved, which, in any case, was 40,000 units, as expected? What if production dropped? Does that cancel the increased income that we made from increased sales? If sales go up, then income must go up. If this simple, common-sense equation cannot be reflected in your reports, then it might be about time for some changes to be made!”
Budgeted production and sales of MS for the year, along with actual production and sales for the first two quarters, are given below:
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HiTec – “Absorption Costing” Income Statement for Q1 and Q2 |
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Q1 (actual) |
Q2 (actual) |
Q3 (budgeted) |
Q4 (budgeted) |
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Budgeted Sales (units) |
32,000 |
40,000 |
40,000 |
48,000 |
|
Actual Sales (units) |
32,000 |
40,000 |
- |
- |
|
Budgeted Production (units) |
40,000 |
40,000 |
40,000 |
40,000 |
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Actual Production (units) |
40,000 |
28,000 |
- |
- |
The company had 6,000 units of MS in inventory at the start of quarter one. The selling and administrative expenses include both fixed and variable elements.
Your task:
You were recently hired by HiTec as Assistant Management Accountant reporting directly to Mr Hughes. He has assigned to you the task of putting together a response to the CEO to explain the situation. Specifically, he has asked that you first prepare data tables that will show and help to clarify the following:
1.
a) “product cost per unit” for Q1 and Q2 under the “absorption (full) costing” method (showing the fixed and variable parts of the cost)
b) “product cost per unit” for Q1 and Q2 under “marginal (variable) costing”
c) the fixed and variable parts of selling and administration overheads
d) a “contribution statement” for Q1 and Q2 under marginal (variable) costing
2.
a reconciliation of the “absorption costing” and the “marginal (variable) costing” net operating income figures for each quarter.
Furthermore, Mr Hughes has asked you to produce a draft report (using appropriate numbers from the tables produced above), to explain to the CEO the results of Q2 in comparison with Q1. He is keen that your report should include:
3.
a) a clear explanation of the characteristic of absorption costing that caused the drop in net operating income for the second quarter
b) some suggestions of what Mr Hughes could have said to Mrs Harrison to explain the problem
c) a discussion of the differences between “marginal (variable) costing” and “absorption (full) costing”
d) identification of the advantages and any disadvantages of using the “marginal (variable) costing“ method for internal reporting purposes
Required:
Part 1 (1,500 words, excluding Excel tables)
You are required to prepare a management report to explain the above situation. Your data tables must be clear and complete with workings that show how your numbers were calculated. The written part of your report should be around 1,500 words and use numbers from the question and your data tables to support and illustrate your discussion of the above situation.
Part 2 (500 words)
Write a “personal reflection” based on a separate topic presented in the course and how you may have used – or may plan to use – this topic as part of your role as a management accountant for a business. This should include a brief explanation of the chosen topic, what purpose it is used for and how it is useful for management decisions and for the benefit of the business and decision making. You may invent some numbers to illustrate your example and reflection.
Marking guide:
The following should help guide you on the amount of effort expected for each task:
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% of marks |
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Part 1 - 1,500 words |
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1 |
Calculations and data tables (from excel and embedded in report) |
25% |
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a. |
“product cost per unit” for Q1 and Q2 under the “absorption (full) costing” method (showing the fixed and variable parts of the cost) |
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|
b. |
“product cost per unit” for Q1 and Q2 under “marginal (variable) costing” |
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c. |
the fixed and variable parts of selling and administration overheads |
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d. |
a “contribution statement” for Q1 and Q2 under marginal (variable) costing |
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|
2. |
a reconciliation of the “absorption costing” and the “marginal (variable) costing” net operating income figures for each quarter |
15% |
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3 |
Written Report |
25% |
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a. |
a clear explanation of the characteristic of absorption costing that caused the drop in net operating income for the second quarter |
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b. |
some suggestions of what Mr Hughes could have said to Mrs Harrison to explain the problem |
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c. |
a discussion of the differences between “marginal (variable) costing” and “absorption (full) costing” |
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d. |
identification of the advantages and any disadvantages of using the “marginal (variable) costing“ method for internal reporting purposes |
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Part 2: (500 words) |
25% |
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4. |
Your reflection on the role and purpose of a management accountant |
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General: |
10% |
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5. |
Presentation – excel tables embedded inside written report; quality and neat formatting; spelling and grammar; remember it has to be “useful for the purpose”, not just “look nice”… |
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Total |
100% |
Notes on presentation:
· Only include ID number on submission (to maintain anonymity when marking)
· Write a short “Executive Summary” at the start
· a very brief introduction/summary to what is in the report…
· The CEO is your “audience” for Part 1… Keep that in mind when writing…
· Course staff marking this assignment is your “audience” for Part 2…
· Give the report a “Title” (no requirement for a contents page)
· Use headings and sub-headings (where appropriate)
· Use Word and embed Excel data table calculations (as is done in this file above)
· Present data tables on the same page (i.e. do not have 1 table printed across 2 pages)
· Use font size 12 and choose an easy-to-read font (for example: Arial, Calibri, Verdana, Tahoma)
· Use limited number of colours or images (only when you think it is absolutely necessary)
· Word limit is 2,000 words (+/- 10%)
Notes on copying and plagiarism:
· This is an individual assignment and any suspected plagiarism or copying will be taken seriously and referred to the relevant Business School Committee for consideration (which may result in reduction in marks, or a mark of zero)