Management Accounting Financial Capacity

Question: Discuss about the Management Accountingfor Financial Capacity. Answer: Analysis of Mrs. Luckys Opinion for Receipt of Bill for the Three Sets of Wedding Invitations In the given case, Mrs. Lucky ordered three sets of wedding invitations to her friend Reynolds who assured to provide the product at lower price that is at cost plus 25% instead of cost plus 50%. Consequently, Reynold instructed the concerned person to allocate the overhead cost at lower rate as per the agreement but the actual bill contained lower overhead cost for job 115 whereas higher overhead cost for other two jobs 116 and 117. When Mrs. Lucky receives the bill for the set of wedding invitations, she might feel bemused as the overhead cost of one job 115 is lower while the cost for other two jobs is higher. Since, Reynolds is her friend and assured for allocating lower price, she might feel there must be some mistake or reason for higher charges. Mrs. Lucky might feel the requirement to consult and enquire about the higher charges allocated to job 116 and job 117. It has been observed that the value of overhead for other two jobs has been higher by around $200 while the actual amount of overhead cost reflected $20,000 each month. Explanation on how the Overhead Costs have Been Assigned to Each job Overhead costs are allocated according to the specific department or based on the specific cost centeras well as based on specific cost units. Allocation of overhead costs is done based on the business activities to particular department that is charged on the output units. In order to ascertain appropriate product cost, it is essential to assign costs to each product fairly, which is considered by using different methods (Chikoto Neely, 2014). In case the organization is involved in the business activities with different jobs, it can use activity- based costing in which the overhead costs is allocated on the basis of separate factor for each product or service line. Organizations that are involved in the producing or manufacturing of different products, required to use activity- based costing method to allocate the overhead costs. In the present case, Reynolds conducted services of wedding invitation cards for her friend Mrs. Lucky under three different jobs. It was noted that the allocation of overhead costs in the bill has been different for three jobs whereas the actual overhead cost found to be $20,000 each month. The overhead cost for one job 115 has been $200 whereas the cost for other two jobs were $400 each, higher as compared to the cost as per agreement made with Mrs. Lucky. Further, it has been noticed that the service used 500 labor hours in May and 250 hours each in June and July, that affected that allocation of overhead costs. Accordingly, it can be said that the overhead costs has been allocated based on the labor hours used in different months and in different jobs. Recommendation on Assigning Overhead Costs to jobs in a Better Way As the services provided by Reynolds incorporated average activity for 500 hours per month while the approximate overhead costs amounted to $240,000 each year it can be said that allocation can be considered as per job costing (Plebankiewicz Le?niak, 2013). Method of job costing involves allocation of costs for the products or services that are prepared on custom basis. Under this method, overhead cost is allocated based on the cost allocated in the previous months. Accordingly, in the present case, it has been noted that the services provided by Reynolds used 500 hours per month with a total costs of $240,000. Therefore, overhead cost each month would be $480 ($240000/ 500 hours) for three jobs that is $160 for each of the jobs which is lower than the assigned job as per the accountant of Reynolds. Moreover, it can be said that the amount of overhead costs as per job costing method involves allocation of cost based on the direct labor hours and cost allocated in the previous months . On the contrary, activity based costing method uses allocation of cost only on the basis of machine hours or labor hours used in different jobs or activities in a particular cost centre (Gneezy, Keenan Gneezy, 2014). Considering the calculation of overhead cost as per job costing method, the amount allocated to job 116 and job 117 represented higher cost than that of the cost allocated in job 115. Additionally, the overall cost as per activity- based costing is also higher than the cost determined as per job costing method. According to job costing method, the total cost of three jobs for one month was $480 where as the total cost of one month for all the three jobs has been $600. Therefore, it can be said that the overall cost as well as specific cost to each of the job reflected lower balance under the method of job costing hence it is the best. Reference List and Bibliography Chikoto, G. L., Neely, D. G. (2014). Building nonprofit financial capacity: The impact of revenue concentration and overhead costs.Nonprofit and Voluntary Sector Quarterly,43(3), 570-588. Gneezy, U., Keenan, E. A., Gneezy, A. (2014). Avoiding overhead aversion in charity.Science,346(6209), 632-635. Kesavan, S., Staats, B. R., Gilland, W. (2014). Volume flexibility in services: The costs and benefits of flexible labor resources.Management Science,60(8), 1884-1906. Kocakulah, M. C., Kelley, A. G., Mitchell, K. M., Ruggieri, M. P. (2016). 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