Accounting For Managers For IAS 36–Impairment: Existing Sales, Tom Tune Proposal, Mary Watson Proposal, Segment Costing And Activity Based Costing – Description And Analysis

Existing Sales – Calculation and Analysis

Describe about the Accounting for Managers for IAS 36–Impairment.

Particulars	Note	Details	Current Sales Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
Existing Sales (A)	Units	Per annum	20,000
Estimated Sales (B)	Units	Beginning 3 months	6,000
Estimated Sales (C)	Units	Remaining Period	14,000
Sales per/unit (D)	$	Beginning 3 months	130
Sales per/unit (E)	$	Remaining Period	130
Variable manufacturing cost per/unit (F)	$	Provided	50
Variable selling and administrative cost per/unit (G)	$	Provided	30
Total sales (G)	$	[(B) x (D) + (C) x (E)]	2600000
Total variable manufacturing cost (H)	$	[(A) x (F)]	1000000
Total selling and administrative cost (I)	$	[(A) x (G)]	600000
Contribution (J)	$	[(G) – (H) – (I)]	1000000
Fixed manufacturing cost (K)	$	Provided	4,00,000
Fixed selling and administrative cost/unit (L)	$	Provided	3,00,000
Advertising and promotion cost (M)	$	Provided	0
Profit	$	[(J) – (K)- (L) – (M)]	3,00,000

As per Rossi Proposal

Particulars	Note	Details	Rossi Proposal
Existing Sales (A)	Units	Per annum	20,000
Estimated Sales (B)	Units	Beginning 3 months	6,000
Estimated Sales (C)	Units	Remaining Period	14,000
Sales per/unit (D)	($)	Beginning 3 months	140
Sales per/unit (E)		Remaining Period	140
Variable manufacturing cost per/unit (F)		Provided	50
Variable selling and administrative cost per/unit (G)		Provided	30
Total sales (G)		[(B) x (D) + (C) x (E)]	2800000
Total variable manufacturing cost (H)		[(A) x (F)]	1000000
Total selling and administrative cost (I)		[(A) x (G)]	600000
Contribution (J)		[(G) – (H) – (I)]	1200000
Fixed manufacturing cost (K)		Provided	4,00,000
Fixed selling and administrative cost/unit (L)		Provided	3,00,000
Advertising and promotion cost (M)		Provided	1,25,000
Profit		[(J) – (K)- (L) – (M)]	3,75,000

In consideration to the above calculation it should be noted that if 20,000 units are produced and the variable cost standing derived from the manufacturing and selling overhead is $12,00,000. According to the Rossi’s proposal of increasing the price by $10 would ultimately, lead to higher sales is entirely dependent upon the administrative expenses. However, the advertising and sales promotion cost of 125,000 would ultimately lead to fall in the profitability. Advertising and promotion is considered as the additional marketing cost, which either can attract new customers or might affect the estimated net profitability.  

As per Tom Tune Proposal

Particulars	Note	Details	Tom Proposal
Existing Sales (A)	Units	Per annum	25000
Estimated Sales (B)	Units	Beginning 3 months	6,000
Estimated Sales (C)	Units	Remaining Period	19,000
Sales per/unit (D)	$	Beginning 3 months	130
Sales per/unit (E)	$	Remaining Period	130
Variable manufacturing cost per/unit (F)	$	Provided	55
Variable selling and administrative cost per/unit (G)	$	Provided	30
Total sales (G)	$	[(B) x (D) + (C) x (E)]	3250000
Total variable manufacturing cost (H)	$	[(A) x (F)]	1375000
Total selling and administrative cost (I)	$	[(A) x (G)]	750000
Contribution (J)	$	[(G) – (H) – (I)]	1125000
Fixed manufacturing cost (K)	$	Provided	4,00,000
Fixed selling and administrative cost/unit (L)	$	Provided	3,00,000
Advertising and promotion cost (M)	$	Provided	50,000
Profit	$	[(J) – (K)- (L) – (M)]	3,75,000

According to the proposal proposed by Tom, he predicts an estimated sales of 25,000 units with overall variable manufacturing cost of $11,25,000. Tom proposal includes an advertising and promotional cost of $50,000 however, there does not exists any considerable amount of change in profit. The contribution margin is lower than the Rossi’s proposal however, lower advertising and sales promotion cost is beneficial for the proposed strategy as there is lower risk of failure out of loss.   

As per Mary Watson Proposal

Particulars	Note	Details	Mary Proposal
Existing Sales (A)	Units	Per annum	24000
Estimated Sales (B)	Units	Beginning 3 months	10,000
Estimated Sales (C)	Units	Remaining Period	14,000
Sales per/unit (D)	$	Beginning 3 months	120
Sales per/unit (E)	$	Remaining Period	130
Variable manufacturing cost per/unit (F)	$	Provided	50
Variable selling and administrative cost per/unit (G)	$	Provided	30
Total sales (G)	$	[(B) x (D) + (C) x (E)]	3020000
Total variable manufacturing cost (H)	$	[(A) x (F)]	1200000
Total selling and administrative cost (I)	$	[(A) x (G)]	720000
Contribution (J)	$	[(G) – (H) – (I)]	1100000
Fixed manufacturing cost (K)	$	Provided	4,00,000
Fixed selling and administrative cost/unit (L)	$	Provided	3,00,000
Advertising and promotion cost (M)	$	Provided	40,000
Profit	$	[(J) – (K)- (L) – (M)]	3,60,000

 

Mary on the other hand would propose to undertake the promotion campaign where a rebate of $10 will be offered on all kinds of drills sold during. She further proposes a lower advertising and promotion cost of $40,000. She proposes estimated sales of 24,000 units per annum but undertaking the proposal it has been found that the net profit has fallen to $360,000 and such proposal does not seem to be profitable. To comment further on the three proposals offered it should be understood that the best-suited proposal is of Tom, which as the advertising cost is lower with net profit of 375,000. According to the proposal made by Tom, increasing the sales volume by 25% would be ideal for the business.

Activity Level	Price Per Unit ($)	1,50,000	2,00,000	1,80,000
Direct Material	2.50	375000	500000	450000
Direct Labour	3.00	450000	600000	540000
Direct variable expenses	5.50	825000	1100000	990000
Variable Overhead:
Variable Factory Overhead	1.50	225000	300000	270000
Variable selling and administrative cost	2.00	300000	400000	360000
Total cost or production	3.50	525000	700000	630000
Fixed Overhead:
Fixed factory overhead	2.00	300000	400000	360000
Fixed selling and administrative cost	1.50	225000	300000	270000
Fixed Cost	3.50	525000	700000	630000
20% Mark Up	2.50	375000	500000	450000
Selling price	15.00	2250000	3000000	2700000

Particulars	Details	Price (in $)
Total price for 40,000 units (A)	(30,000 x 8.4) + (10,000 x 10.9)	361000
Average price for 40,000 units	(A)/40,000	9.03

Cost such as salaries and depreciation can be included in the assets side of the balance sheet. It is worth mentioning that if a business firm operates on the accrual basis pay off its expenses prior to which it is incurred originally it can be shown in the form of assets under the asset side of the balance sheet for Prepaid Salaries or Prepaid Depreciation (Andersson and Wenzel 2014). As the expenditure are incurred once it is shifted to the profit and loss account in the form of expenditure.

Tom Tune Proposal – Analysis

It is noticed in the majority of the business that the rate of depreciation creates an impact on the level of profitability and the amount of tax, which a business is willing to pay in one financial year. Depreciation is tax deducted expenditure with higher incidence of depreciation a business can reduce the tax bill in any financial year.

Particulars	Note	Details	Amount ($)
Indirect/Overhead cost (A)	$	Provided	98,400
Direct labour hours (B)	Hours	Provided	25,795
Overhead allocation rate	$	(A)/(B)	3.81

Particulars	Note	Details	Amount ($)
Direct cost of material (A)	$	(2,100 x 16.1)	33810
Direct cost of labour (B)	$	(327,600/25,795) x 1400	17780.19
Indirect/overhead cost (C)	S	(1,400 x 3.81)	5334
Total cost of the special order	S	(A) + (B) + (C)	56924.19

Particulars	Note	Details	Amount ($)
Overhead cost (A)	$	Provided	98,400
Machine hours (B)	Hours	Provided	9,840
Overhead allocation rate	$	(A)/(B)	10

Particulars	Note	Details	Amount ($)
Direct cost of material (A)	$	(2,100 x 16.1)	33810
Direct cost of labour (B)	$	(327,600/25,795) x 1400	17780.19
Indirect/overhead cost (C)	S	(525 x 10)	5250
Total cost	$	(A) + (B) + (C)	56840.19

Particulars	Details	Minimum price/trailer (in $)
Labour hour rate	56,924.19/350	162.64
Machine hour rate	56,840.19/350	162.40

Activity based costing is referred as a costing methodology which helps in recognising the activities of an organisation by allocating the cost of each activity with the resources of the all the products and goods produced in accordance with the actual cost of production. On the other hand, the choice of an allocation method is entirely depended upon the group of overhead cost for a desired accuracy of the product cost information (Kaplan and Atkinson 2015).  Such method when employed by a business entity can easily evaluate the cost of elements of entire product activities and services. 

Implementing the segmented cost of overhead pools and activity based costing can assist a business firm to identify the accurate cost of pricing a product and eliminate the product and service which are not profitable. Such pricing methods help a business organisation to reduce the production of goods and services, which are ineffective, and this will help in yielding a better production (Horngren et al. 2013).  Such methods help a business to organise resources through which an activity pricing of each activity can be determined in terms of the resources employed. Thus such tool enables a business unit to understand the product and cost profitability on the basis of the production and performance.

Reference list:

Andersson, S. and Wenzel, F., 2014. Application of IAS 36–Impairment of fixed assets-A qualitative study about the main challenges for companies regarding impairments.

Balakrishnan, R., Labro, E. and Soderstrom, N.S., 2014. Cost structure and sticky costs. Journal of Management Accounting Research, 26(2), pp.91-116.

Carlsson, B., Meir, M., Rekstad, J., Preiß, D. and Ramschak, T., 2016. Replacing traditional materials with polymeric materials in solar thermosiphon systems–Case study on pros and cons based on a total cost accounting approach. Solar Energy, 125, pp.294-306.

Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

Domeika, P., 2015. Creation of the Information System of Enterprise Fixed Asset Accounting. Engineering Economics, 60(5).

DRURY, C.M., 2013. Management and cost accounting. Springer.

Horngren, C.T., Sundem, G.L., Schatzberg, J.O. and Burgstahler, D., 2013.Introduction to management accounting. Pearson Higher Ed.

Kamala, P., Struwig, J., Bornman, M., Boersman, R., Vermaak, M., McGill, M., Jordaan-Marais, J., Matthew, J., Hurter, C. and Taylor, P., 2015.Principles of Cost Accounting. Oxford University Press.

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Kumbhakar, S., Lozano-Vivas, A. and Sun, K., 2013. A flexible cost function model with risk.

Rieckhof, R., Bergmann, A. and Guenther, E., 2014. Interrelating material flow cost accounting with management control systems to introduce resource efficiency into strategy. Journal of Cleaner Production, 30, p.1e17.

Schmidt, A., Götze, U. and Sygulla, R., 2015. Extending the scope of Material Flow Cost Accounting–methodical refinements and use case.Journal of Cleaner Production, 108, pp.1320-1332.