BF2210 PORTFOLIO TASK 1- INSPIRE HEALTH- TRADITIONAL/ABC COSTNG TECHNIQUES
INTRODUCTION:
This report is my analysis and recommendation of the Inspire Health hospital’s current costing system and ABC costing. This would be used to derive what costing system to adopt in 2016 to enable the hospital compete with new competitors.
Absorption costing:
Total patient fee income: 1,456,000
Overheads: 640,640
Absorption rate: 640640/1456000= 0.44 %
Absorption costing means that all cost associated with manufacturing are absorbed by the units produced. In order words, direct materials will be included in the cost of a finished unit in inventory.
Current accounting position
FEET(000’S)
Knee(000’s)
Hip(000’s)
Material
550
700
800
Labour
200
400
550
Overheads
1100
1848
2112
Total Cost
1850
2948
3462
Selling Price
2500
4200
4800
Profit
650
1252
1338
% Margin
26%
29.8%
27.8%
ABC COSTING:
ABC costing is a methodology for accurately allocating overhead costs to items that actually use it. It can be used to target the reduction of overhead costs.
Proposed accounting position
Feet
Knee
Hip
Theatre Prep*
128.62
514.48
771.72
Operation Time
160.56
481.56
722.52
Consultation Follow up
0
243.58
487.17
Overnight Stay
182.52
547.56
730.22
Total Overhead
471.17
1787.18
2711.63
Materials
550
700
800
Labour
200
400
550
Unit Production Cost
1221.17
2887.18
4061.63
Selling Price
2500
4200
4800
Profit
1278.83
1312.82
738.37
Profit Margin
51.2%
31.3%
15.4%
Analysis of my findings
After conducting my research using both costing methods, I have been able to identify some prominent contrasts between ABC costing and your current accounting system. Firstly, the hip operation under your current accounting system generates the most profit, £1338, while using the ABC costing method the hip operation generates the least profit, £738. Also, under your current accounting system, the feet operation has the lowest profit margin, 26%, but my findings after using ABC costing shows that feet operation has the highest profit margin of 51.2%. I also found that under your current accounting system the feet operation generated the least profit which amounts to £650, but under the ABC costing system the feet operation generates more profit which sums to £1278.8. The main sector that changed total cost and consequently changed the profit margins for the 3 operations is the total overhead. The total overhead for the feet operation under your current accounting system, £1100, compared to the total overhead for ABC costing £471.17, which is lower due to the fact that consultation follow up is for the feet operation is £0, which is the reason why the feet operation has the lowest total overhead.
Advantages and disadvantages of changing the costing for the hospital
Advantages
Disadvantages
RECOMMENDATION AS TO WHETHER THE HOSPITAL SHOULD IMPLEMENT ABC
I have concluded that the ABC system is more cost effective. This is because the cost of both the feet and knee are lower than that of your current accounting system. Also from my analysis the profit margin with the ABC is greater with feet (51.13%) and knee (31.25) this would allow the operations to be more susceptible to change in costs and selling price. ABC is though time consuming, so this would therefore reduce the efficiency of the operations. In conclusion, ABC should be adopted as it is easier to identify arising issues, helps provide accurate analysis of costs and would reduce total overhead costs which would allow the business to be more competitive.
Appendix:
Feet: (0.44*250,000)/100 = £1100
Knee: (0.44*630,000)/150 = £1848
Hip: (0.44*576,000)/120 = £2112
ABC COSTING
Theatre Preparation: 50 + 300 + 360= £710
182,640/710= 257.2
Operation Time: 200 + 900 + 1080= £2,180
175,000/2180= 80.28
Consultation Follow up: 225 + 360= £585
95,000/585= 162.39
Overnight Hospital Stay: 100 + 450 +480= £1,030
188,000/1030= 182.52
Feet:
Theatre prep: 257.2*0.5= £128.62
Operation Time: 80.28*2= £160.56
Consultation Follow up: N/A
Overnight Stay: 182.52*1= £182.52
Knee:
Theatre prep: 257.2*2= £514.4
Operation Time: 80*28*6= £481.56
Consultation Follow up: 162.39*1.5= £243.58
Overnight Stay: 182.52*3= £547.56
Hip:
Theatre prep: 257.2*3= £771.6
Operation Time: 80.28*9= £722.52
Consultation Follow up: 162.39*3= £487.17
Overnight Stay:182.52*4= £730.08
TASK 2 – RELEVANT COSTING
ITEM
REASON
RELEVANT COST
Material X
Material X already held at book value sunk cost and the relevant cost would be the future purchase at 5.55 per kg.
27.50*200=£5550
Material P2
£5-£1.40=£3.60*400kg= £1,400
400*3.60=£1440
Material P.244
The future cost of this material is 55
55*200=£11000
Skilled Labour
The spare capacity is 0. The relevant cost would be the replacement hourly rate at £11/hour.
11*1000=£11000
Semi-skilled labour
600 hours at the hourly rate of £7/hour and no further information about additional employee.
7*600=£4200
Variable Overhead
The relevant cost would be the incurred cost for 4 machine hours
6*800=£4800
Fixed Overhead
The relevant cost is the additional increase in fixed cost for the contract duration.
£3500
The total relevant cost would amount to £41,490
The total revenue for 200units= £180*200units= £36,000
Loss= £36,000 – £30,000= (£5,490)
Product should be rejected because it makes a loss.
Factors needing consideration
PORTFOLIO TASK 3 – MULTI PRODUCT CVP ANALYSIS
Variable Costs
AA
BB
CC
Raw Material
25
40
15
Labour Hours
48
36
60
Manufacturing VC
15
25
18
Total VC
88
101
93
Selling Price
160
190
180
Contribution
72
89
87
1) Sales Mix Ratio
AA: BB: CC
3000: 1500: 750
4: 2: 1
2) Margin of safety
MOS = Budgeted Units – Breakeven point
Budgeted Units
= 5250 – 784 * 100 = 85.1%
5250
Contribution Per Batch
= (4*72) + (2*89) + (1*87)
= 288 + 178 + 87
= 553/Batch
Total Fixed Costs = £15000 + £26000 + £21000
= £62,000
Break Even Point (BEP) = Fixed Cost
Contribution Per batch
= 62,000
553
= 112.12 batches
Each Batch is made up of 4AA: 2BB: 1CC
Therefore, Total Number of units = (4*112.12) + (2*112.12) + (1*112.12)
= 784.84units
Breakeven point = 784units
Portfolio Task 4- Limiting Factor
Wood: (1*1000) +(4*300) +(2.50*150) = 2575 (Not limited)
Preservative: (0.10*1000) +(2.00*300) +( 1.00*150) = 850 (Not Limited)
Nails: (0.20*1000) +(5.00*300) + (3.00*150) = 2150 (Not Limited)
Skilled Labour Grade A: (0.50*1000) + (5.0*300) + (3.5*525) = 2525 (Not Limited)
Skilled Labour Grade B: (0.25*1000) +(2.0*300) + (3.5*150) = 1375 (Limited)
CONTRIBUTION PER UNIT FOR EACH PRODUCT
FENCE
Selling Price: £80
Variable Cost: 45+ 0.50 + 2 + 2.50= £56
Contribution: £24
Sheds
Selling Price: £550
Variable Cost:180 + 10 + 60+ 20= £320
Contribution: £23
Gazebos
Selling Price: £450
Variable Cost:112.50 + 5 + 30 + 42 + 35= £224.50
Contribution: £225. 50
Contribution per unit of scarce resource and rank
Contribution per unit
Fence
Sheds
Gazebos
Material Requirement
0.25
2.0
3.5
Contribution per hrs
£96
£115
£64
Ranking
2
1
3
Production Plan
Production Plan
Contribution
Sheds
1,200hrs-600= 600hrs
230*300
69,000
Fence
600-250= 350
24*1000
24,000
Gazebos
350/3.5= 100
225.5*100
22,550
Total
115,550
Other factors to consider when implementing my recommendations
1. They would need to consider looking for an alternative to wood supply. I suggest changing to a closer supply or a home-based supply to reduce cost
2. They would need to implement the strategy to consider the inconsistent supply of wood
3. They would need to hire younger employees as this would as this would reduce the number of matured employees retiring
PORTFOLIO 5
My reflection was based on CIMA Search Report, ‘Diffusion of management accounting innovations’. This report was put together based on a detailed research carried out in the UK, Australia and New Zealand concerning the diffusion of cost and management accounting techniques and procedures. The main objective of this research was to discover the significance of the contextual factors are on the diffusion of cost and management accounting innovations. My first finding is based on new cost and management accounting practices. It came to my attention that only ‘benchmarking’ out of all five new management accounting techniques was above 50%. The purpose of Benchmarking is to understand and evaluate the current position of a business in relation to its best practice. An advantage of benchmarking is it helps in improving product quality, this is as organisations can compare their products with competitors and evaluate the sectors I which they’re lacking and this could be the reason behind why at least 51% of the data research has either chosen to introduce it on a trial basis or accept and implement benchmarking technique.
The next finding is in regards to the views within independent and dependent(subsidiary) companies, the research indicates that dependent companies are more willing to adopt new techniques than the independent companies, except for target costing. Target costing is a system under which a company plan in advance for the price points, product costs and margins that it wants to achieve for a new product. (suttle, 2017)
With target costing, a management team has a powerful tool for continually monitoring
products from the moment they enter the design phase an onward throughout their product life cycles. Also, subsidiary companies are restricted with implementing new techniques. This could be as parent companies majorly operate standardized systems with their subsidiaries and implementing new techniques would result to incurring high expenses.
Current cost and management accounting practices. It has been indicated that more than 44% of the respondents are either fully satisfied or moderately satisfied with the existing cost and management accounting practices in their firm, but also more than 40% of the respondents indicated that there is still need for improvement for the current cost and management accounting practices, it has also come to my attention that most of the dissatisfaction was expressed by the respondents who work for companies that still use the traditional systems, this is because the respondents have highlighted the role of parent companies in adoption and implementation of new techniques. They have argued that there are instances, where they have to prioritise the expectations of headquarters above the needs of that of the subsidiary companies, which they feel would benefit the parent companies and cost them the subsidiary companies.
Another one of my findings that I noticed involves SMEs. New techniques might not be appropriate for SME’s because they may not have sufficient staff to correctly implement the new techniques which larger cooperation’s can afford to implement. This was from the old research, but the new research has shown that companies hav
ing more than 50 employees were not concerned about the cost of implementing new techniques. The cost issue is still important but the respondents still believe that the costs will still be neutralize quickly if the adopted techniques are fitting for the business.
While going through the research I observed a major implication which is how managerial innovations are a natural consequence of a dynamic business environment. Developing a robust case study provides a sense of direction for those that are learning new managerial innovations containing forecast benefits and costs, and also pilot testing the innovations are equally as important. Constructing a business case that is open to review will inspire the evaluation of alternative innovations and will also halt the adoption from appearing like a of an ’pet project’ of an individual or a knee jerk reaction to the recommendation of management consultants or other groups.
Continuous monitoring and assessment- this basically just means that providers of education and training have to make sure that what they are teaching us both relevant, appropriate and up to date with current standards. As new innovations and techniques are discovered each day businesses have to make sure that they’re not left behind. Their implementations and assimilation should be followed by monitoring and assessing, to make sure that they remain suitable to the organisations need and remain effective. The finance professionals can also have an important role to play in designing and undertaking such monitoring and review. They will also need to determine when it is appropriate to discontinue the use of an innovation.
Support from technology- technology allows cooperation’s to acquire optimum level of data, which can help management accountants with their work, furthermore, the use of ERP or even business intelligence systems, can also help in ways, for example it removes guess work, which means that accountants can be given accurate data, updates in real time, trending and forecasting means and even allows you to predict “what-if” scenarios, therefore removing the need for accountants to guess or estimate.
In conclusion, after assessing both CIMA Research reports, I have received greater insight about the concepts associated with management accounting techniques.
Critical analysis into the reports has helped developed my intuition to the significance of accounting techniques such as ABC costing methods, which as stated earlier can result into beneficial improvements in activities associated with business. I have gained explicit knowledge which has helped to narrow the gap between my knowledge of understanding and practice of accounting.
Bibliography
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