Accounting case study
Admittedly, manufacturing institutions must have a production department whose primary work is to control manufacturing processes; however, the cost accountant does the budgeting and keeping the of cost data. The traditional view of the cost behaviors presumes that a mechanistic relationship exists between the costing units and the costs themselves. Modern costing approach recognizes that cost behaviour is subjected to management decisions due to constraints such as psychological biases and incentives provision. The primary goal of the paper is to analyse the cost volume analysis and the budgeting control processes. Cost volume profit analysis Marginal cost Marginal costs are the cost of producing an additional unit of the microchip by Downtown Micro Ltd. Marginal cost is computed as the change in the cost divided total change in the quantity of microchip produced.
For this case study, the minimal cost of production is the same as the unit variable cost which is £ 25. Marginal cost is equivalent to variable cost and is given the summation of the direct labour, direct material and variable overheads. Marginal costing Table 1: Downtown Microchip Ltd marginal cost statement Amount ($) Amount ($) Sales (200,000*37. 5) 7,500,000 Less cost of sales Opening inventory (20,000*37. Fixed components of production are costs which the company cannot easily trace in the production process and does not vary with the changes in the volume of production. For example, the amount paid for factory rent and motor vehicle insurance remains the same regardless of the company volume of output. As for cost accountant for the company, it is crucial to ensure that the company maintains a contribution margin which is above the fixed costs to achieve profit from the sale of its output (Owen, 2003, p.
The contribution margin is also determining the relationship between the firm selling price and the sales volume. In other words, the management can use the computed contribution margin of 3/8 to manipulate its desired level of the selling price and the sales volume. For the case study, the company fixed cost is 2,500,000 while the sale per unit is 40 with a unit variable cost of production of 25. The contribution margin is the difference between the sales and variable cost per unit (40-25). Therefore, the company will have to sell 600,000 units of a microchip to attain the desired profit of 6,500,000. However, due to the entry of the America producers in the UK market, Downtown Micro Chip Ltd may be forced to reduce its selling prices.
A reduction in the microchip per unit selling price will reduce the company contribution margin when no reduction is realized with the variable costs. The new market entrants can cause the selling prices to reduce to 37. A reduction in the price of the microchip lowers the company contribution per unit to 12. With the new contribution margin, the break-even point increases to 200,000 units (2,500,000/12. Table 2: BEQ quantity and costs Quantity F. C () V. A budgetary control system is the establishment of budgets and control mechanisms to regulate the operation of business activities (Chandra, 2010, p. It is the mandate of the executive management of Downtown Microchip Ltd to oversee the budget preparation process. Also, the management must adequately ensure that the actual and the budget result gives the accurate picture of the company.
Moreover, an excellent budgetary control system must prioritize the organization key business goals and objectives (Carey, Knowles and Towers-Clark 2017). Functional budget A functional budget is a plan of income and expenses for a particular business process. Usually, the variations in actual and budgeted production can be studied by the Downtown Microchip for future improvement. The production budget is prepared as closing stock plus budgeted sales-opening stock (Owen, 2003, p. Downtown Microchip Ltd production budget depends on the sales budget, production capacity of the plant, stipulated changes in its stock, management policy regarding production activities while the departmental production budget can be grouped into by the individual products, products groups, budget centers and production period. Material budget Material budget is part of the production budget.
Usually, the budget is computed after projecting the desired level of production. In an instance where the sales budget proves to be inaccurate, different existing budgets may not be estimated accurately thus creating a higher variance between the budgeted and actual expenditures (Horngren et al. 2002, p. Budgets The downtown budget serves the purpose of controlling, coordinating, planning and communicating business activities. Budgeting is crucial for departmental managers in coordinating the various processes of the company through effective planning and organization process. Likewise, the company can utilize its budget as a tool for communicating the firms’ plans for the employees and other business stakeholders. However, budgets power the managers to predict the trends and the dynamism within the external business environment. For instance, the company can use the budget to adjust its market demand as a result of the entry of the American firms in the UK market.
Disadvantages of a budgetary control system A budgetary control system may be awe-inspiring in monitory the business activities of Downtown Microchip Ltd, but the budget is not a cure-all for the business operational problems. The system suffers from certain inherent limitations and employees who are given the responsibilities of monitoring the company budgetary systems must be fully aware of the possibilities of the occurrences. These limitations include: Budget plans are based on past estimates: budget plans are mostly based on historical information to predict the future company occurrences. PHI Learning Pvt. Ltd. Carey, M. , Knowles, C. and Towers-Clark, J. Management and cost accounting. Harlow: Financial Times/Prentice Hall. Kaplan, R. S. and Atkinson, A. W. Researching management accounting practice: the role of case study methods.
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