Name: Amit Chhetri

Student ID: AIA220028

Task 1 and 2

TASK1

QN.1 answer

Cost behavior is the process through which costs adjust to variations in activity levels. Effective cost
management and decision-making depend on having a solid understanding of cost behavior. The premise
behind the concept of cost behavior is that specific costs can be divided into several groups based on
how they respond to variations in activity levels.

Variable Costs: Variable costs change in direct proportion to changes in activity levels. As the level of
activity increases, variable costs increase, and as the level of activity decreases, variable costs decrease.
Examples of variable costs include direct materials, direct labor, and sales commissions. For instance, in a
manufacturing company, the cost of raw materials used to produce a product will increase as the
production volume increases.

Fixed costs: Fixed costs don't vary with activity levels as long as they fall within a reasonable range. They
remain constant regardless of production or sales volume changes. Rent, the salaries of permanent
employees, and insurance premiums are a few examples of fixed costs. Normally, these expenses are
incurred whether or not there are any manufacturing or sales activity.

Mixed costs, also referred to as semi-variable costs, have elements of both fixed and variable expenses.
Both a fixed component that doesn't vary regardless of activity levels and a variable component that
does fluctuate depending on activity levels are present. A utility bill, which has a fixed base rate plus
additional fees based on the amount of electricity used, is an illustration of a semi-variable cost. For
efficient cost management and decision-making, it is essential to understand cost behavior. Businesses
can forecast future costs, create budgets, and decide wisely about pricing, output levels, resource
allocation, and profitability by analyzing cost behavior. Analysis of cost behavior identifies cost causes,
evaluates cost structures, and improves operational effectiveness.

QN,2 Answer

For successful cost management, decision-making, and financial planning, it is essential to comprehend
cost behavior. Businesses can pinpoint the causes of their expenses and implement the necessary
controls by looking at how costs fluctuate in response to variations in activity levels. This information
aids in developing sensible budgets, selecting fair prices, and assessing the financial effects of various
options. Cost behavior analysis helps firms plan resources and establish realistic goals by estimating
future costs based on anticipated changes in activity. By comparing actual costs to anticipated expenses
and emphasizing areas of cost efficiency or overruns, it also makes performance evaluation easier. In the
end, a thorough grasp of cost behavior equips companies to enhance productivity, maximize profits, and
realize long-term financial success.

Q.N3, answer

Characteristics of fixed costs:

 Fixed costs are time-based: Instead of being directly related to production or sales volume, fixed
expenses are often incurred over a certain time, such as a month or a year. These expenditures
are frequently linked to recurring costs like rent, insurance, or the wages of permanent
employees.
 Predetermined fixed costs can be budgeted for because they are often known in advance. They
don't vary in response to variations in activity or output levels. Compared to variable costs,
which can fluctuate based on production or sales levels, this predictability makes it easier for
firms to estimate and budget for fixed costs.

In conclusion, fixed costs show consistency over a range of relevant activity levels, endure regardless of
production or sales, have a predictable timing, and can be planned for advance.

Q.N 4, Answer

Two variable characteristics of variable costs are:

 Variable costs vary proportionally with activity levels: Variable costs change in direct correlation
to the amount of production or sales activity. As activity increases, variable costs increase, and as
activity decreases, variable costs decrease. The relationship between activity and variable costs
can be linear or non-linear, depending on factors like economies of scale or volume discounts.
 Variable costs are dependent on the utilization of resources: Variable costs are incurred based on
the actual utilization or consumption of resources, such as raw materials, direct labor hours, or
utilities. The more resources used in the production or sale of goods or services, the higher the
variable costs. Variable costs do not arise when there is no activity or production taking place.

Q.N.5, answer

The purpose of costing systems in a workplace is to accurately determine the cost of producing goods or
providing services. Costing systems provide a structured framework for assigning costs to products,
services, or activities, helping in decision-making, cost control, pricing, budgeting, and evaluating
profitability. They enable businesses to track and analyze costs, identify areas of cost inefficiency, and
make informed management decisions.

Q.N.6, answer

Differences between financial accounting and cost accounting:

Financial accounting focuses on providing financial information to external stakeholders like investors,
creditors, and regulators. It follows generally accepted accounting principles (GAAP) and produces
standardized financial statements. Cost accounting, on the other hand, is focused on internal reporting
and analysis of costs within an organization. It provides detailed cost information for internal decision-
making, cost control, and performance evaluation.

Q.N.7, Answer

The four basic steps in accounting to determine process cost are:

a) Identify and accumulate direct material costs used in the process.

b) Identify and accumulate direct labor costs associated with the process.

c) Allocate or apportion indirect costs (overhead) to the process.

d) Calculate the total cost of the process by summing up the direct material, direct labor, and allocated
indirect costs.

Q.N.8, Answer

Critical success factors (CSFs) are the key areas in which an organization must excel to achieve its
objectives and succeed in the market. They define the key management information requirements by
identifying the critical factors that have a significant impact on the organization's performance. CSFs help
organizations focus their efforts, allocate resources effectively, and monitor the key areas crucial for
achieving strategic goals.

Q.N9, answer

A benefit of budgeting is that it provides a roadmap for financial planning and control. Budgeting allows
businesses to set specific targets, allocate resources efficiently, and monitor performance against
predetermined goals. It helps in identifying potential issues or deviations from plans, facilitates decision-
making, and provides a basis for evaluating performance and taking corrective actions.

Q.N.10, answer

In a top-down budget approach, senior management or executives set the budget targets and allocate
resources to various departments or units within the organization. The budget is then cascaded down to
lower levels, and managers at each level develop detailed budgets that align with the overall targets and
objectives set by top management. This approach ensures consistency and alignment with strategic goals
but may lack input and buy-in from lower-level managers.
Q.N.11, answer

In a bottom-up participative budget approach, managers and employees at all levels are involved in the
budgeting process. Each department or unit prepares its own budget proposal based on its specific
needs and goals. These proposals are then consolidated and reviewed by top management. This
approach encourages participation, ownership, and accountability among employees, as they are
actively involved in setting their own budget targets. However, it may be time-consuming and may result
in less consistency across departments.

Q.N.12, answer

Principles to observe when developing budgets:

 Realism: Budgets should be based on realistic and achievable targets, considering historical data,
market conditions, and operational capabilities.
 Accuracy: Budgets should strive for accuracy in estimating revenues, expenses, and other
financial elements to provide a reliable basis for decision-making.
 Flexibility: Budgets should be flexible enough to accommodate changes in business conditions,
allowing for adjustments and revisions when necessary.

Q.N.13, answer

Variance analysis in management accounting refers to the process of comparing actual financial
performance against the planned or budgeted performance. It involves analyzing the differences
(variances) between actual revenues, costs, and other financial metrics and the corresponding budgeted
amounts. Variance analysis helps identify areas of underperformance or overperformance, understand
the causes of deviations, and take corrective actions to achieve desired results.

Q.N14, answer

Examples of commonly derived variances in variance analysis:

 Sales variance: Compares actual sales revenue to the budgeted or expected sales revenue,
highlighting the difference in performance.
 Direct material variance: Compares the actual cost of materials used in production to the
budgeted or standard cost, showing the variance in material expenses.

Q.N.15, answer

Two reasons why variance analysis may not be a useful tool:

  Lack of context: Variance analysis alone may not provide sufficient information about the
underlying causes of variances. Additional analysis and investigation are often required to
understand the reasons behind the differences.
 Overemphasis on short-term variations: Focusing solely on variances may lead to overlooking
the bigger picture or long-term trends. It is important to consider the overall performance and
strategic objectives of the organization.

Q.N,16,answer

Horizontal analysis is a financial analysis technique that compares financial data or performance
indicators over a series of periods. It involves analyzing the percentage changes or differences in line
items or ratios from one period to another. Two reasons why horizontal analysis is useful:

 Trend identification: Horizontal analysis helps identify trends or patterns in financial

performance over time, enabling management to assess the direction and pace of change.
 Benchmarking: By comparing financial data with previous periods, industry averages, or
competitors, horizontal analysis provides benchmarks for evaluating the company's performance
and identifying areas that need improvement.

TASK2

Case Study 1

Q.N.1, ANSWER

Based on the provided information, the appropriate cost pools and their corresponding driver units are
as follows:

Cost pool: Salaries

Driver: Driver hours

Driver unit: Hours

Driver rate: Salaries / Driver hours

Driver rate for Taxis: $1,360,000 / 67,500 hours = $20 per hour

Driver rate for Limousines: $1,360,000 / 10,000 hours = $136 per hour
Cost pool: Booking fees

Driver: Bookings

Driver unit: Number of bookings

Driver rate: Booking fees / Number of bookings

Driver rate for Taxis: $22,750 / 44,000 bookings = $0.52 per booking

Driver rate for Limousines: $22,750 / 1,500 bookings = $15.17 per booking

Cost pool: Fuel

Driver: Kilometers

Driver unit: Number of kilometers

Driver rate: Fuel / Number of kilometers

Driver rate for Taxis: $1,193,000 / 1,200,000 kilometers = $0.99 per kilometer

Driver rate for Limousines: $1,193,000 / 150,000 kilometers = $7.95 per kilometer

Cost pool: Call centre booking fees

Driver: Bookings

Driver unit: Number of bookings

Driver rate: Call centre booking fees / Number of bookings

Driver rate for Taxis: $45,500 / 44,000 bookings = $1.03 per booking

Driver rate for Limousines: $45,500 / 1,500 bookings = $30.33 per booking

Cost pool: Vehicle maintenance

Driver: Kilometres

Driver unit: Number of kilometres

Driver rate: Vehicle maintenance / Number of kilometres

Driver rate for Taxis: $35,500 / 1,200,000 kilometers = $0.03 per kilometer

Driver rate for Limousines: $35,500 / 150,000 kilometers = $0.24 per kilometer

QN2, ANSWER

Product Line Profitability Report using Activity Based Costing:

Revenues:

Taxis - $3,475,000

Limousines - $375,000

Total Revenue - $3,850,000

Cost Pools:

Salaries - $1,360,000

Booking Fees - $68,250 ($22,750 + $45,500)

Vehicle Costs ($1,193,000 + $35,500 ) = $1,228,500

Activity Cost Drivers:

Salaries - Driver hours

Booking Fees - Bookings

Vehicle Costs - Kilometres

Activity Cost Driver Rates:

Salaries ÷ Driver hours = $1,360,000 ÷ 67,500 = $20.11 per hour

Booking Fees ÷ Bookings = $68,250 ÷ 44,500 = $1.53 per booking

Vehicle Costs ÷ Kilometres = $1,228,500 ÷ 1,350,000 = $0.91 per kilometre

Costs allocated to each Division:

Taxis:

Salaries = 67,500 hours * $20.11 = $1,358,825

Booking Fees = 44,000 bookings * $1.53 = $67,320

Vehicle Costs = 1,200,000 km * $0.91 = $1,092,000

Total Costs - $2,518,145

Limousines:

Salaries = 10,000 hours * $20.11 = $201,100

Booking Fees = 1,500 bookings * $1.53 = $2,295

Vehicle Costs = 150,000 km * $0.91 = $136,500

Total Costs - $339,895

Overall Profit = $3,850,000 - ($2,518,145 + $339,895) = $991,960

Q.N3, ANSWER

Key observations:

 Using ABC, the limousine division has a higher profit margin (over 47%) vs. the taxi division
(under 28%)
 The traditional approach under allocated costs to limousines, making their margins appear
higher than reality. ABC provides a more accurate picture of profitability.

Case Study 2

QN. 4, answer

Standard quantity of bricks = 50,000 bricks

Standard cost per 1,000 bricks = $500

Standard cost of bricks = Standard quantity of bricks / 1,000 * Standard cost per 1,000 bricks

Actual quantity of bricks = 75,000 bricks

Actual cost per 1,000 bricks = Total cost of bricks / Actual quantity of bricks * 1,000
Direct materials price variance = (Actual cost of bricks - Standard cost of bricks) * Actual quantity of
bricks

Standard quantity of timber = 1,000 square metres

Standard cost per square metre of timber = $15

Standard cost of timber = Standard quantity of timber * Standard cost per square metre of timber

Actual quantity of timber = 2,000 square metres

Actual cost per square metre of timber = Total cost of timber / Actual quantity of timber

Direct materials efficiency variance = (Actual quantity of timber - Standard quantity of timber) * Standard
cost per square metre of timber

QN.5, answer

Standard hours for builders = 800 hours

Standard rate for builders = $55 per hour

Standard cost for builders = Standard hours for builders * Standard rate for builders

Standard hours for specialists = 400 hours

Standard rate for specialists = $70 per hour

Standard cost for specialists = Standard hours for specialists * Standard rate for specialists

Actual hours for builders = (Total hours of labour / 2) - Actual hours for specialists

Actual rate for builders = Total labour cost / Actual hours for builders

Labour price variance = (Actual rate for builders - Standard rate for builders) * Actual hours for builders

Labour efficiency variance = (Actual hours for builders - Standard hours for builders) * Standard rate for
builders
QN6, Answer

To calculate the project overhead variance, we need to compare the actual overhead cost with the
budgeted overhead cost. Given the following information:

Standard other fixed costs: $45,000 per construction project

Actual other fixed costs: $47,500

Project Overhead Variance = Actual Other Fixed Costs - Standard Other Fixed Costs

Project Overhead Variance = $47,500 - $45,000

Project Overhead Variance = $2,500

Therefore, the project overhead variance is $2,500.

CASE STUDY3

Q.N7, ANswer

To determine the sales volume and break-even point for each option, let's consider the given
information:

Option 1: 10% price reduction with a 30% increase in sales

Option 2: Investment of $30,000 in machinery reducing variable costs by $3 per unit

Current Situation:

Selling price per unit: $20

Current sales volume: 10,000 units

Variable costs per unit: $8 ($80,000 total variable costs / 10,000 units)

Fixed costs: $40,000

Calculations for Option 1:

Price reduction: 10% of $20 = $2

New selling price per unit: $20 - $2 = $18

Increase in sales: 30% of 10,000 units = 3,000 units

New sales volume: 10,000 units + 3,000 units = 13,000 units

Calculations for Option 2:

Variable cost reduction: $3 per unit

New variable costs per unit: $8 - $3 = $5

Break-even point calculation:

Break-even point (in units) = Fixed costs / (Selling price per unit - Variable cost per unit)

Break-even point for Option 1:

Break-even point = $40,000 / ($18 - $8) = $40,000 / $10 = 4,000 units

Break-even point for Option 2:

Break-even point = $40,000 / ($20 - $5) = $40,000 / $15 = 2,666.67 units (rounded to 2,667 units)

Therefore, for Option 1 (10% price reduction with a 30% increase in sales), the sales volume is 13,000
units, and the break-even point is 4,000 units.

For Option 2 (investment of $30,000 in machinery reducing variable costs by $3 per unit), the sales
volume remains at 10,000 units, and the break-even point is 2,667 units.

Q.N8, ANSWER

To complete the 12-month budget for Majestic Enterprises, let's use the current information provided
and incorporate the additional information given:

 Create a new worksheet in the FNSACC517 AT2 Workbook and name it "Budget."

 Set up the necessary columns for each month (Month 1 to Month 12) and the corresponding
categories: Sales, Variable Costs, Fixed Costs, and Admin Expenses.

 Fill in the known values for Month 1 based on the current information provided:

Sales: 10,000 units * $20 (selling price per unit)

Variable Costs: 10,000 units * $8 (variable cost per unit)

Fixed Costs: $40,000

Admin Expenses: $5,000

 Use the given monthly growth rates to calculate the values for the subsequent months:
Sales: Multiply the previous month's sales by 1.10 (10% increase)

Variable Costs: Multiply the previous month's variable costs by 1.05 (5% increase)

Fixed Costs: Remain the same for the first 9 months, then add $10,000 starting from Month 10

Admin Expenses: Multiply the previous month's admin expenses by 1.02 (2% increase)

 Continue this calculation for each category and each month until Month 12.
 Check all calculations for accuracy

Case study 4

QN,9, answer

During our meeting, I would like to gather some information from you to determine the most profitable
product manufacturing mix for Mixed Meats Industries. Your insights as the company's bookkeeper are
crucial for this analysis. Here are the key points we will discuss:

 Demand Information: Please provide the current demand levels for burgers and sausages. This
includes the quantity of burgers and sausages sold or projected to be sold in a given period, such
as per week, month, or year.
 Cost Information: I would like to understand the production costs associated with manufacturing
burgers and sausages. This includes the direct costs (e.g., raw materials, labor, packaging) as well
as any indirect costs (e.g., factory overheads) that are specific to each product.
 Selling Price: Could you confirm the current selling prices for burgers and sausages? Additionally,
if there are any pricing considerations or strategies that need to be considered, please share
those with me.
 Capacity and Labor Hours: It would be helpful to determine the capacity of the production
facility in terms of maximum production volume or weight for both burgers and sausages.
Additionally, I need information on the labor hours required to produce a certain quantity of
each product.
 Profitability Analysis: Are there any specific profitability targets or metrics that Mixed Meats
Industries aims to achieve? This will help me assess the profitability of each product and
determine the optimal mix that maximizes overall profit.

During our discussion, I will actively listen to your responses, ask clarifying questions, and seek
confirmation to ensure I have a clear understanding of the information provided. I appreciate your
valuable insights and look forward to working together to determine the most profitable product
manufacturing mix for Mixed Meats Industries.

QN. 10, answer

Here are the calculations in short to determine the maximum profit mix:
Contribution margin per kg:

Burgers: $10 - VC = $7

Sausages: $15 - VC = $11

Constraint:

Maximum labor hours = 48,000

Calculations:

1 kg burgers needs 0.5 labor hours

1 kg sausages needs 0.3 labor hours

Produce maximum demand:

50,000 kg burgers needs 25,000 labor hours

150,000 kg sausages needs 45,000 labor hours

Total contribution margin:

50,000 kg burgers x $7 = $350,000

150,000 kg sausages x $11 = $1,650,000

Total = $2,300,000

So the maximum profit mix is:

50,000 kg burgers

150,000 kg sausages

Giving a total profit of $2,300,000

This maximizes contribution margin while meeting the labor hour constraint.
CASE STUDY 5

QN11, ANSWER

Here are two potential KPIs for each Balanced Scorecard quadrant for GFG's R&D department:

 Internal Process Perspective: Number of new product ideas tested per staff member: This
indicates the productivity of the R&D process in generating and testing new product concepts,
normalized for staff size.
 Percentage of products approved by quality agency on first submission: This shows how well the
R&D process is designing products that meet external quality standards, avoiding costly re-
submissions and rejections.

Learning and Growth Perspective:

 Number of research papers published: This reflects the knowledge generated and shared by the
R&D team, important for building reputation and intellectual capital.
 Training hours completed per staff member: This indicates the level of skills and competencies
developed within the R&D team to design innovative, high quality products, normalized for staff
size.

These KPIs focus on both the efficiency and effectiveness of GFG's R&D processes as well as the
knowledge, skills and capabilities of the R&D team. By monitoring and improving these metrics, GFG can
strengthen the foundation of its innovation capabilities and growing reputation for quality products.

The proposed KPIs aim to:

 Be actionable and measurable

 Reflect aspects of the R&D department that GFG can reasonably influence and improve
 Account for changes in staffing levels by normalizing per staff member