Question No. 3 - MMPC-004 Accounting for Managers

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MMPC - 004 - Accounting for Managers

Solutions to Question No. 3

Variance analysis can be summarized as an analysis of the difference between planned and actual numbers. The sum of all variances gives a picture of the overall over-performance or under-performance for a particular reporting period. For each item, companies assess their favorability by comparing actual costs to standard costs in the industry.

For example, if the actual cost is lower than the standard cost for raw materials, assuming the same volume of materials, it would lead to a favorable price variance (i.e., cost savings). However, if the standard quantity was 10,000 pieces of material and 15,000 pieces were required in production, this would be an unfavorable quantity variance because more materials were used than anticipated.

When standards are compared to actual performance numbers, the difference is what we call a “variance.” Variances are computed for both the price and quantity of materials, labor, and variable overhead, and are reported to management. However, not all variances are important.

Management should only pay attention to those that are unusual or particularly significant. Often, by analyzing these variances, companies are able to use the information to identify a problem so that it can be fixed or simply to improve overall company performance.

There are several types of variance analysis that companies can use. For example, companies can use sales or cost variances to examine specific areas of interest. Similarly, companies may further divide variances into those caused by prices and those caused by usage or efficiency. Some companies may also use variance analysis to investigate product mixes, yields, or for planning variances.

The variance analysis process starts with establishing standards or preparing forecasts. Once companies do so, they must monitor their actual performance closely and identify any inefficiencies. Sometimes, the process may not be as straightforward, though. Therefore, companies will have to wait until the end of their accounting periods to obtain actual performance results.

Need and Importance of Variance Control

Variance analysis plays a significant role in management and cost accounting. These are both areas in accounting that relate to controlling, monitoring and decision-making. Companies primarily use variance analysis to monitor actual costs and control them when needed. However, there is much more to that process apart from the basics.

Variance analysis can be of significant importance to companies for the following reasons.

1. Acts As A Monitoring And Control Tool

Technically, variance analysis isn’t a monitoring tool. Instead, forecasts and budgets provide a basis for analyzing costs. However, companies cannot actually monitor their costs if they don’t compare them with actual results. It is where variance analysis is helpful. Companies can use variance analysis to calculate any differences between budgets and actual results. Through this process, companies can actively identify any efficiencies and eliminate them on time. This way, companies can control any deviations from the set plans for performance. Similarly, companies can also accumulate all the information and perform variance analysis at the end of each period. Based on this process, they can make changes that can help avoid any inefficiencies in the future.

2. Focuses On Favourable And Adverse Variances

Unlike some other tools, variance analysis focuses on both favorable and adverse variances. Although favorable variances are beneficial for companies, they still need to the reason behind it. Sometimes, these variances may come from miscalculations or improper budgeting, which companies should investigate. If that is not the case, companies still need to understand how these variances generated so they can build on the favorable performance. Adverse variances, on the other hand, are harmful to the company. By analyzing these, companies can identify problem areas within their processes. By doing so, they can eliminate any problems which can be beneficial in the future. Some companies may only focus on adverse variances, though. However, variance analysis provides a tool to identify both favorable and adverse variances.

3. Considers Significant Variances

Variance analysis is a great tool to catch and rectify significant variances. Companies can suffer variances in actual performance due to several reasons. Sometimes, these reasons may be random or seasonal. However, variance analysis allows companies to adjust for these variances and allows a better performance analysis. Similarly, variance analysis allows companies to consider material variances only. During the process, companies can set a threshold for the difference that they want to investigate. If any variance does not meet this threshold, companies can ignore that. This way, the process is much straightforward.

4. Detects Inefficiencies In Planning Or Operations

Variance analysis takes a budget and compares actual performances with it. However, it doesn’t focus on operational inefficiencies only. It also allows companies to examine their budgets for any unrealistic expectations. This way, companies can identify any problems with their forecasts and rectify them for the future. Most of the time, however, variance analysis catches operational inefficiencies. It is one of the reasons why companies use it. Operational anomalies are common in every business environment. By identifying these, companies can uncover any problematic areas within their process and correct any errors.

5. Provides A Basis For Accountability

As mentioned, companies may focus on variance analysis toward specific areas. This way, variance analysis can allow companies to hold their managers accountable for their performance. Furthermore, companies can differentiate between controllable and uncontrollable variance. Through this process, they can further identify the departments or managers responsible for variances. Some companies may also use variance analysis as a part of their performance appraisal. Similarly, companies may also reward managers for favorable variances. This way, variance analysis can provide an accountability tool for companies. Likewise, if the expectations are reasonable, companies can use variance analysis as a motivation tool.

Question No. 2 - MMPC-004 Accounting for Managers

 

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MMPC - 004 - Accounting for Managers

Solutions to Question No. 2

Activity based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours. Activity based costing first assigns costs to the activities that are the real cause of the overhead. It then assigns the cost of those activities only to the products that are actually demanding the activities.

Let's discuss activity based costing by looking at two products manufactured by the same company. Product 124 is a low volume item which requires certain activities such as special engineering, additional testing, and many machine setups because it is ordered in small quantities. A similar product, Product 366, is a high volume product—running continuously—and requires little attention and no special activities. If this company used traditional costing, it might allocate or "spread" all of its overhead to products based on the number of machine hours. This will result in little overhead cost allocated to Product 124, because it did not have many machine hours. However, it did demand lots of engineering, testing, and setup activities. In contrast, Product 366 will be allocated an enormous amount of overhead (due to all those machine hours), but it demanded little overhead activity. The result will be a miscalculation of each product's true cost of manufacturing overhead. Activity based costing will overcome this shortcoming by assigning overhead on more than the one activity, running the machine.

Activity based costing recognises that the special engineering, special testing, machine setups, and others are activities that cause costs—they cause the company to consume resources. 

Under ABC, the company will calculate the cost of the resources used in each of these activities. Next, the cost of each of these activities will be assigned only to the products that demanded the activities. In our example, Product 124 will be assigned some of the company's costs of special engineering, special testing, and machine setup. Other products that use any of these activities will also be assigned some of their costs. Product 366 will not be assigned any cost of special engineering or special testing, and it will be assigned only a small amount of machine setup.

How to determine the cost under ABC

Activity-based costing includes the following steps:

• Identify activities that are required to complete a product.
• Trace costs to activities and objects and then assign them to different pools.
• Assign specific drivers to each pool, like an hour or unit.
• Calculate cost driver's rates by dividing overhead costs by total cost drivers.
• Divide the total overhead of each pool by total cost drivers to get the cost driver rate of each.
• Multiply your cost driver rate by the number of cost drivers.

You can compare activity-based costing to absorption-costing. Absorption-costing refers to equally assigning the value of overhead costs across all inventory. This accounting method doesn't account for products that may have higher indirect costs, but activity-based costing does.

Benefits of ABC

1. It gives you a realistic and more accurate production cost of specific items

Activity-based costing gives managers more accurate production costs. This can help businesses make more informed decisions about which products to produce or help them find cheaper methods of production. It can also help when determining pricing for individual products.

In addition to having a clearer understanding of the manufacturing costs, the process of gathering the data is also easy with activity-based costing. Most management members can identify the costs of each activity once they have the necessary data. This may also help with making production decisions that affect pricing.

2. It allows you to assign specific overhead costs to more expensive products

Instead of assigning an equal value to all products, you can allocate the necessary budget in each area when using activity-based costing. Some products may be costlier to produce, depending on their indirect costs. This can also help with identifying costs that apply to more than one pool of manufacturing products, which can make resources more valuable.

3. It allows you to evaluate the efficiency of productions and make improvements

This method allows managers to assign value to indirect costs, treating them as if they were direct costs. By breaking down the indirect cost of each activity, they can make improvements. Managers can use the activity-based costing method to evaluate things like management influence, efficient processes and the overall cost of different departments.

4. It gives you more accurate data for profit margins

Because activity-based costing accounts for non-manufacturing costs or indirect costs that you may not have otherwise considered, it can help with improving profit margins. Having more accurate profit margins can help business leaders make important decisions. It can also help reduce or transfer production costs, allowing management to improve their profit margins even further with effective pricing strategies.

Managers can easily identify products of little to no value when using activity-based costing. They can use this information to remove products from inventory and to allocate those manufacturing resources to more profitable items. It also makes it easier to identify products that can be wasteful when it comes to required resources. Some products may not only be of low value but also use necessary resources.

5. It provides benefits in industries that other methods don't work

Traditional costing methods don't always work in certain industries, such as the service industry. This is because service industries have minimal direct costs. However, you can use activity-based costing in these industries since you apply the cost directly to the type of service. This means you can use it to improve results and pricing in industries that are otherwise left out.

Question No. 4 - MMPC-004 Accounting for Managers

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MMPC - 004 - Accounting for Managers

Solutions to Question No. 4

Question No. 1 MMPC-004 Accounting for Managers

 

Solutions to Assignments 

MMPC - 004 - Accounting for Managers

Solutions to Question No. 1

MMPC -004 - ACCOUNTING FOR MANAGERS MBA and MBA (Banking & Finance)

 

Solutions to Assignments 

MMPC -004 - ACCOUNTING FOR MANAGERS

Question No. 1 

From the following Trial Balance prepare Trading and Profit and Loss Account for the year ended 31st December, 2020 and Balance Sheet as on that date:

Adjustments: 

(a) Provide for wages Rs. 5,000. 

(b) Write Off 5% depreciation on freehold premises and 10% on office furniture. 

 (c) Insurance to the extent of Rs. 200 relates to 2021. 

(d) Stock on 31.12.2020 is Rs. 5,20,00. 

(e) Charge interest on capital 5% and on drawings Rs. 300. 

(f) Further bad debts are Rs. 1,000. 

(g) Provide for doubtful debts @ 5% on sundry debtors. 

(h) Make provisions for discount on debtors and reserve for discount on creditors @2%.

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Question No. 2 

What is activity based costing (ABC)? How product costs are determined in ABC? Discuss the benefits of ABC. 

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Question No. 3 

What is variance? Explain the need for variance control and discuss the importance of variance control in operational and management control. 

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Question No. 4

From the following information presented by a firm for the year ended 31st December, prepare the Balance Sheet:

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Question No. 5

What is Forensic Accounting? Explain the method of fraud detection and discuss the techniques used for forensic audit. 

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