Management Accounting

Topics: Costs, Economics, Activity-based costing Pages: 7 (1239 words) Published: October 12, 2014

1. Direct material efficiency variance
The firm was faced with limited storage space at their premises and were unable to relocate or rebuild their premises or use Just-In-Time inventory. Therefore storage costs increased; this increased the DMs costs since storage is part of in-transit costs, which are considered part of DMs cost. Thus, the Materials Efficiency Variance calculated as $800 unfavourable. DL efficiency variance

Change in the layout of the manufacturing space should reduce the standard time per product in the long run. Besides, new materials are easier to work with in terms of both cutting and sewing, which means workers spend less time. This is reflected in a favourable calculation of LEV at $950. Variable OH Efficiency Variance

Variable OH efficiency variance was a favourable amount of $150. There were two key reasons for this. The first is that there was a change in the layout of the manufacturing space, which reduced the standard time per product. The second reason was that a new material was used, which was easier to work with in terms of cutting and sewing, leading to less labour hours spent per unit. Ultimately this means less variable OH is spent as variable OH used DL as the cost driver. 2. Improvement (1)

The only material that is considered as a DM is fabric .The other materials are treated as indirect materials and are treated as OH. Using traditional costing, the total of the OH costs will be calculated accurately, however when allocating the amount of OH to each product the amount of each individual indirect material will not be allocated accurately. If each material is treated as a DM, the amount of material per unit will be costed more accurately as they will be based on actual usage per unit. Improvement (2)

The treatment of on-costs as direct costs rather than indirect costs will have an impact on accuracy. If these costs are based on DL rather than as an OH cost, the accuracy of their cost per person will be more precise. 3. Fixed OH volume variance compares the budgeted fixed OH to the applied fixed OH used during production (based on standard fixed OH per unit). The fixed OH variance was reported as $338 unfavourable. An unfavourable fixed OH volume variance indicates that the firm spent more on fixed OH costs in actual fact than it had planned to spend for the period. This shows management’s observation that the fixed OH volume variance is favourable to be incorrect. Furthermore, management’s belief that a favourable variance means that “everything is ok” is not valid since a favourable or unfavourable variance is not an indicator of good or bad. Rather, variances are indicators of potential problems, which should be investigated. Consequences for the firm

The consequences of having limited storage space are increased storage costs. As such, expanding existing space via purchasing or renting should be considered to hold all inventory produced. The firm should be particularly careful in not producing more than it can store. Another consequence of having limited storage space is the opportunity cost in not being able to meet customer demands. If customers demand more than the firm can store, the firm will miss out on potential sales. The firm should also be careful in producing only what is required to meet demand as because of the products’ short lifetime due to styles going out of fashion, the firm might not be able to sell all of its inventories in time and would consequently suffer a loss. 4. Activity Based Costing Discussion (maximum 2 full pages double spaced) ABC should be used by the firm instead of traditional costing. Traditional costing uses a single OH cost pool, whereas ABC assigns a cost for each activity based on actual consumption. ABC assigns more costs as direct costs, whereas traditional costing assigns more indirect costs.

The differences between traditional and ABC can be seen in the books of Sneakers Unlimited. Under...

Bibliography: Baker, W. M. (1994). Understanding activity-based costing. Industrial Management, 36(2), 28. Retrieved from
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