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COVER SHEET
INDIVIDUAL ASSIGNMENT
SEMESTER
Student Name (s)*
Maan Majid Ali AL Wahaibi.
Student ID (s)*
23S23878
Module Code*
BUSS 23002
Module Name*
Management accounting for business decision
Session*
A
Submitted to Teacher and
Department*
Dr. Azadeh Hadian
Coursework No.*
Coursework 1
Assignment Title
INDIVIDUAL ASSIGNMENT
Actual Word Count
(Excluding Cover Page,
TOC/Index, references
and appendices)
2,545
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Table of content
Table of content ………………………………………………………………………………………………………………………………………………………… 2
Case study#1…………………………………………………………………………………………………………………………………………………………….. 3
A.
The high-low method, estimate a cost formula for expense …………………………………………………………………………………. 3
B.
The four disadvantages of calculating fixed versus variable cost using the high-low method. …………………………………… 4
Case study #2 ……………………………………………………………………………………………………………………………………………………………. 5
C.
Contribution per unit ………………………………………………………………………………………………………………………………………. 5
D.
Total Contribution …………………………………………………………………………………………………………………………………………… 9
E.
Expected profit …………………………………………………………………………………………………………………………………………….. 10
Case study#3 Cash budget ……………………………………………………………………………………………………………………………………….. 11
Budgeting challenges ……………………………………………………………………………………………………………………………………………. 13
References ……………………………………………………………………………………………………………………………………………………………… 14
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Case study#1
Cargo Oman LLC company, a cargo company on Oman released the following data relating to units shipped. The
information for the total shipping expense for Coolsupport LLC Company and the custom- builtairconditioningunitsforcommercialbuildingsweregiveninthefollowingtable.
Month
March
April
May
June
July
August
September
Units
produced
4
7
5
6
8
9
3
Total shipping
expense($)
$ 1,900
$ 2,500
$ 1,800
$ 2,200
$ 2,400
$ 2,900
$ 1,400
A. The high-low method, estimate a cost formula for expense
The high-low method is a technique that helps determine the cost function of an organization based on a fixed
and variable cost approach. The total costs are divided into fixed and variable costs and calculated separately
before combining the two to find the cost function. The first step is calculating the variable cost using extreme
values of expenses and units produced (CFI Team, 2023). The difference between the highest and lowest
costs is divided by the difference between the highest and lowest units produced. The variable cost is
calculated in dollars per unit. The second is the calculation of the fixed cost using a combination of the highest
costs and units produced or the lowest costs and units produced. The calculations are shown below.
Variable cost per unit = Highest activity cost – lowest activity cost/(highest activity units -lowest activity
units)
Variable cost per unit = (2,900-1,400)/ (9-3)
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Variable cost per unit= (1,500)/ (6)
Variable cost per unit = $250 per unit.
Fixed cost = highest activity cost – (Variable cost per unit *Highest activity units
Or
Fixed cost = Lowest activity cost – (Variable cost per unit *Lowest activity units
Fixed cost = $2,900 – ($250 per unit* 9)
Fixed cost = $2,900 – $2,250
Fixed cost = $650 (CFI Team, 2023).
Or
Fixed cost = $1,400 – ($250 per unit* 3)
Fixed cost = $1,400 – $750
Fixed cost = $650
Cost formula for expense = Fixed cost + Variable cost per unit*unit activity
Cost function = $650 +$250*units produced (CFI Team, 2023).
B. The four disadvantages of calculating fixed versus variable cost using the high-low
method.
The first disadvantage of calculating fixed versus variable cost using the high-low method is that it entails using
multiple steps to get the cost function of an organization. The method requires a separate calculation of fixed and
variable costs before arriving at the cost function. The organizations or individuals using the method must accurately
determine the four items used in the calculation: the lowest and highest costs and units produced (McIntosh, 2022).
The accountant must get data from an organization over a given period, such as months, to determine the lowest and
highest values required in the calculations.
The second disadvantage is that the method relies on estimates since the accountant cannot determine some of the
values. For example, the accountant will use the method to estimate the fixed cost since the accurate value can only
be retrieved from the vendor or supplier of some of the machines. Using estimate values makes the calculation less
accurate since the items used in determining the cost function are inaccurate.
The third disadvantage is that the method does not consider the costs that are not proportional to the change in the
number of units manufactured. The method assumes a state of perfection where costs are directly proportional to
units produced, which is never the case because of the various factors that influence production. For example, an
organization that uses agricultural raw materials may experience price changes based on the season, thus affecting
the actual costs incurred when producing a given number of units (McIntosh, 2022). The changes may lead to errors
between the lowest and highest costs compared to the number of units produced. Accountants may experience great
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challenges when the highest costs do not match the highest number of units produced; the same is true with the
lowest costs and the lowest number of units produced.
The last disadvantage is that the method ignores the impact of inflation in estimating the prices and costs of
production. The organization that uses the high-cost method will experience great change when inflation is factored
into determining the costs. For example, using the high-low method may reveal that the cost of producing each
product is $900; thus, selling each product at $1,000 will generate a profit of $100 (McIntosh, 2022). Including the
inflation rate may show that the actual cost of production per unit is $990, and selling the product at $1,000 will
only lead to a profit of $10, not $100. The disadvantages of the high-cost method are why many accountants opt for
other costing methods such as account analysis, scatter graphs, and regression analysis.
Case study #2
1. Techevolve LLC Company, a leading tech company is required to prepare acost-volume-
profitanalysisreportforthetwoproducts,namelyXandYwhichwereproducedinitscompany.
Marks)
Particulars
Sales price
Material
Direct wages
Variable
expenses
Fixed
expenses
ProductX
Price per unit (RO)
32
13
6
100% of direct wages
(30
ProductY
Price per unit (RO)
26
8
5
100% of direct wages
RO 1200
ThefollowingscenariosarepredictedbytheManagement:
Scenario1:100unitsofproductXand150unitsofproductY
Scenario2:125unitsofproductXand125unitsofproductY
Scenario3:150unitsofproductXand100unitsofproductY
:
C. Contribution per unit
Scenario 1
Contribution per unit
Contribution per unit = Sales price – (material + direct wages + variable expenses)
Contribution per unit Product X = (32 – (13 + 6 +6)
Contribution per unit Product X = 7
Total contribution product X and profit @100 units
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Details
Amount
Sales price @32
3,200
Material @13
1,300
Direct wages @6
600
Variable Expenses @6
600
Total variable expenses
(2,500)
Total contribution
700
Fixed expenses
(1,200)
Net profit/Loss
(500)
Product Y
Contribution per unit
Contribution per unit = Sales price – (material + direct wages + variable expenses)
Contribution per unit Product Y = (26 – (8 + 5 +5)
Contribution per unit Product Y = 8 (Vipond, 2023).
Total contribution product Y and profit @150 units
Details
Amount
Sales price @26
3,900
Material @8
1,200
Direct wages @5
750
VariableExpenses@5
750
Total variable expenses
(2,700)
Total contribution
1,200
Fixed expenses
(1,200)
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Net profit/Loss
0
Scenario 2
Contribution per unit
Contribution per unit = Sales price – (material + direct wages + variable expenses)
Contribution per unit Product X = (32 – (13 + 6 +6)
Contribution per unit Product X = 7 (Vipond, 2023).
Total contribution product X and profit @125 units
Details
Amount
Sales price @32
4,000
Material @13
1,625
Direct wages @6
750
Variable Expenses @6
750
Total variable expenses
(3,125)
Total contribution
875
Fixed expenses
(1,200)
Net profit/Loss
(325)
Product Y
Contribution per unit
Contribution per unit = Sales price – (material + direct wages + variable expenses)
Contribution per unit Product Y = (26 – (8 + 5 +5)
Contribution per unit Product Y = 8
Total contribution product Y and profit @125 units
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Details
Amount
Sales price @26
3,250
Material @8
1,000
Direct wages @5
625
Variable Expenses @5
625
Total variable expenses
(2,250)
Total contribution
1,000
Fixed expenses
(1,200)
Net profit/Loss
(200)
Scenario 3
Contribution per unit
Contribution per unit = Sales price – (material + direct wages + variable expenses)
Contribution per unit Product X = (32 – (13 + 6 +6)
Contribution per unit Product X = 7
Total contribution product X and profit @150 units
Details
Amount
Salesprice @32
4,800
Material @13
1,950
Directwages @6
900
VariableExpenses @6
900
Total variable expenses
(3,750)
Total contribution
1,050
Fixed expenses
(1,200)
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Net profit/Loss
(150)
Product Y
Contribution per unit
Contribution per unit = Sales price – (material + direct wages + variable expenses)
Contribution per unit Product Y = (26 – (8 + 5 +5)
Contribution per unit Product Y = 8
Total contribution product Y and profit @100 units
Details
Amount
Sales price @26
2,600
Material @8
800
Direct wages @5
500
Variable Expenses @5
500
Total variable expenses
(1,800)
Total contribution
800
Fixed expenses
(1,200)
Net profit/Loss
(400)
D. Total Contribution
The analysis reveals that none of the scenarios are profitable since the total costs are greater than the
sales revenue for the two products, except for scenario 2, product Y, where the total cost and total revenue
are the same. The recommendations that would help Techevolve LLC Company address the operations
challenges include the following: The first recommendation is to increase the number of units produced in
each category to at least 175 units for product X and 160 units for product Y to make the organization
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profitable. The increase in the number of units of product X reduces the loss, while the reduction of the units
of product Y increases the loss, as shown in the calculations above.
The second recommendation is the reduction of variable expenses to help improve the contribution margin.
For example, when the organization continues to operate and reduces the total variable cost from 18 to 15,
the total profit will increase from 0 to 450. The organization can reduce variable costs through the following
steps: The first step is negotiating better terms with the suppliers to get discounts and lower production costs.
The second step is efficient management of salaries and wage costs to lower total labor costs (Vipond, 2023).
The last approach is investment in advanced business strategies to lower the overall cost of production.
Virtual cards may help organizations prevent variable costs from going over budget.
E. Expected profit
The first advantage is that calculating break-even points helps organizations analyze product performance. The
calculation would identify how a product performs, thus allowing the organization to decide whether to continue with
production or stop. For example, a product manager may discontinue the production of low-demand or cost-intensive
products, thus helping the organization become financially stable by generating profits from other products (Vipond,
2023). The second advantage is that calculating the break-even point allows organizations to set accurate revenue
targets by knowing the correct number of units they need to sell to reach profitability. An organization would strive
to sell the required units to attain the revenue target within a specific period. The break-even point also guides
organizations toward correct pricing based on market demand and variable and fixed costs.
1. Explain in brief the effect of any following changes on (i) contribution margin,
and (ii) expected profit.
A. A increase in fixed costs.
The increase in fixed cost has no effect on contribution margin because, contribution margin is the difference
between selling price and the variable costs per unit. On the other hand, the increase in fixed cost reduces expected
profit since profit is the difference between contribution margin or operating profit and the fixed cost.
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B. A increase in wages rates applicable to direct, strictly variable labour.
The increase in wages rate applicable to direct labour would reduce contribution margin since it form part of the
variable expenses included in the calculation of contribution margin. The variable costs would increase, thus lowering
the contribution margin. On the other hand, the increase in the wages rate would reduce the expected profit due to the
reduction in the contribution margin or operating profit.
C. A increase in the selling price of the product.
An increase in the selling profit would increase the contribution margin and expected profit because of the
increase of sales revenue. A higher selling price means that the organization would generate higher revenue, thus
having positive impact on expected profit and contribution margin.
D. A increase in production volume
The increase in production volume would increase the sales revenues since more goods would be sold at the current
selling price. The increase in production volume would increase contribution margin and expected profits because of
the increase is revenue that meets the variable and fixed costs.
Case study#3 Cash budget
Ahmed manufacturing LLC Company is providing the following information. You are required to
prepare CashBudgetfortheperiodof6monthsfromMarchtoAugust2023.AllamountsinRials.
Month
March
April
May
June
July
August
Sales
80,000
120,000
100,000
90,000
110,000
130,000
Rent
4,500
6,000
5,000
3,000
5,000
7,000
Marketing
Expenses
2,000
3,500
6,000
2,100
3,500
4,000
Salaries
6,000
3,000
4,500
3,200
4,500
6,000
Administrative
Expenses
8,000
2,300
3,800
2,800
6,500
4,500
Additional information:
a) Cash sales 40% and 60% balance in the following month
b) Commission received RO 10,000 in the month of May.
c) Sale of Fixed Assets in the month of June for RO 4,000.
d) Purchase of Printing Machine in May RO 40,000.
e) Interest payment to bank RO 30,000 in the month of April.
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f) All other expenses are paid on the 1st of next month.
g) Opening Balance for the month of January is RO 25,000.
You are required to
A. Preparation of a cash budget
Details
March
April
May
June
July
August
Total
Sales
80000 120000 100000
90000 110000 130000 630000
Current Month sales
32000
48000
40000
36000
44000
52000 252000
Previous month sales
0
48000
72000
60000
54000
66000 300000
Other income
Commission
10000
Sale of fixed asset
Total income
32000
10000
4000
4000
96000 122000 100000
98000 118000 566000
Expenses
0
Purchase of Printing
Machine
40000
Interest expense
40000
30000
30000
Other expenses
0
Rent
4500
6000
5000
3000
5000
23500
Marketing
2000
3500
6000
2100
3500
17100
Salaries
6000
3000
4500
3200
4500
21200
Administrative
8000
2300
3800
2800
6500
23400
50500
54800
19300
11100
19500 155200
Total expenses
0
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Total net collection
32000
Previous balance
25000
Closing balance
57000
45500
67200
80700
86900
98500 410800
25000
45500
67200
80700
86900
98500 435800
Budgeting challenges
The five budgeting challenges facing companies include the following: The first challenge is collaboration and
coordination because of the involvement of many players and departments in an organization. The managers must
employ more workers to help coordinate departments to ensure that budgeting captures all within individual
departments (Wienhold, 2015). Budgeting also involves a lot of consultation among different leaders, increasing
operational costs. Budgeting challenges are more prominent among large companies because several departments and
employees are involved in the budgeting process.
Companies’ second budgeting challenge is the complexity of preparing the organizational budget. The main
sources of complexity experienced by organizations during budget preparation include the following: The first is the
collection of data from different sources to help complete the budgeting process. The managers in charge of budgeting
may rely on various sources, such as human resources and customer relations management systems. Secondly,
complexity arises from the formula used in a spreadsheet to consolidate all information from different sources.
Thirdly, the process involves updating data and ensuring that the budget preparation details are accurate. Lastly, the
employees in charge of the budget need to examine the changes and alterations based on the market situation to make
the budget relevant and accurate.
The third challenge is the long duration required to prepare the budget since most organizations use manual
systems to prepare their budgets. The organization requires a minimum of three months to complete their budgets,
which is a long period since some employees have to relocate duties to support the budget preparation process. The
long preparation period forces the managers to use earlier months’ data to prepare the next financial year’s budget,
thus reducing its accuracy.
The fourth challenge is continuous planning to help an organization reduce variances. The budget planner
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compares the actual and budgeted costs and items to minimize variances in the previous financial budget and enhance
accuracy. Continuous planning ensures the organization aligns its finances with its goals and objectives (Wienhold,
2015). The last budgeting challenge experienced by companies is accuracy because they rely on previous data that
might have errors. The errors may occur because of the various steps and consolidation processes that a budget
undergoes before approval by the board. The board of directors may have a shorter period to peruse the budget, thus
increasing the chances of oversight and making the budget less accurate to address organizational goals and objectives.
References
CFI Team. (2023, October 3). High-low method. Corporate Finance
Institute. https://corporatefinanceinstitute.com/resources/accounting/high-low-method/
McIntosh, K. A. (2022, July 8). What are the advantages & disadvantages of high-low method accounting? Small
Business – Chron.com. https://smallbusiness.chron.com/advantages-disadvantages-highlow-methodaccounting-24444.html
Vipond, T. (2023, October 2). CVP analysis guide. Corporate Finance
Institute. https://corporatefinanceinstitute.com/resources/accounting/cvp-analysis-guide/
Wienhold, M. (2015). Better Budgeting methods: A comparative effect analysis on traditional budgeting
problems (Doctoral dissertation).
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