| http-equiv="Content-Type" content="text/html; | | | | From the above discussion unit cost is derived |
| charset=utf-8"> | | | | from total costs divided by units produced, Drury |
| 1. What is Management Accounting? | | | | (2000) states that the total cost is equal to |
| Management accounting: | | | | variable cost plus the fixed costs, the following |
| Management accounting according to Chadwick | | | | information is provided: |
| (1998) can be defined as the evaluation and | | | | Units=1000 |
| planning of accounting information, management | | | | Variable cost=650 |
| accounting concentrates on planning business | | | | Fixed cost=9000 |
| processes, cost allocation and budgeting. | | | | Total cost = 650 + 9000 = 9650 |
| Weetman (2002) also state that management | | | | Therefore unit cost is =9650/1000 = 9.65 |
| accounting is a process that involves preparation | | | | Variable cost per unit = 0.65 |
| of both statistical and financial information used in | | | | Fixed cost per unit=9 |
| decision making. | | | | Total cost per unit = 9.65 |
| 2. Identify which cost item above is fixed and | | | | Total annual cost = 9650 |
| variable and why? | | | | 4. Unit cost when producing 6000 units: |
| Fixed cost-building rent | | | | Previously number of units produced was 1000, |
| Chadwick (1998) defines fixed costs as the costs | | | | variable cost (raw materials) was 650, and |
| incurred that do not depend on the level of | | | | therefore each unit consumes the following |
| activities in a business. On the other hand defines | | | | variable cost (raw materials): |
| fixed costs as the costs incurred by a firm that | | | | 650/1000 = 0.65 per unit |
| do not depend on the level of sales or production. | | | | Increasing the level to 6000 will increase the |
| In this case building rent is a fixed cost and this is | | | | following variable cost: |
| because it does not depend on the level of | | | | 6000 X 0.65 = 3900 |
| activity, therefore when the firm produces 1000 | | | | Rent cost remains constant = 9000 |
| or 6000 units the rent costs will remain constant. | | | | Total cost = 9000 + 3900 = 12900 |
| Variable costs- material cost: | | | | Total unit cost = 12900/6000 = 2.15 |
| Chadwick (1998) defines these costs as the costs | | | | Variable cost per unit = 0.65 |
| incurred that depend on the level of activity, in | | | | Fixed cost per unit=1.5 |
| this case the raw material cost is a variable cost, | | | | Total cost per unit = 2.15 |
| this is because as the level of production | | | | Total annual cost = 12900 |
| increases the firm demands more volumes of | | | | Therefore the unit cost declines from 9.65 when |
| raw materials and this increases the total cost of | | | | producing 1000 units to 2.15 when the firm |
| raw materials. | | | | produces 6000 units. |
| Economies of scale: | | | | 5. Unit cost when producing 8000 units: |
| According to Stratton (2002) the cost of | | | | Variable cost =0.65 per unit |
| producing one unit of a product is determined by | | | | Rent cost remains constant = 9000 |
| dividing total cost by the number of units | | | | 8000 X 0.65 = 5200 |
| produced, given that fixed costs remain constant | | | | Total cost = 9000 + 5200 = 14200 |
| then as the number of units increase the value of | | | | Total unit cost = 12900/8000 = 1.775 |
| total cost divided by number of units produced will | | | | Variable cost per unit = 0.65 |
| decline, this decline in unit costs due to fixed costs | | | | Fixed cost per unit=1.125 |
| being distributed to more units is what economists | | | | Total cost per unit = 1.775 |
| refer to as economies of scale. | | | | Total annual cost = 14200 |
| 3. Unit cost when producing 1000 units: | | | | Therefore the unit cost declines from 9.65 when |
| Two costs are provided and they include raw | | | | producing 1000 units to 1.775 when the firm |
| material costs (650) and building rent (9000), raw | | | | produces 8000 units. The decline in the cost per |
| materials in this example is the variable cost while | | | | unit as shown above is as a result of the firm |
| rent in this case is the fixed cost, this is because | | | | realizing economies of scale. Stratton (2002) |
| if the firm decides to increase production then | | | | Reference: |
| raw material cost will increase, however rent cost | | | | Colin Drury (2000) Management and cost |
| will remain constant. | | | | accounting, New York: McGraw hill |
| Unit cost (1000 units): | | | | Horngren, C., Sundem, G. and Stratton, W. |