Management Accounting Assignment

602 attention Accounting David Xu Id 65990771 Session Preparation Assignment ( health club) 2 Understanding Key Cost Relationships 1. Read Chapter 2 of SN, Key meanings in the Chapter. Understanding key speak to in a firm is the most grand issue in management accounting. That is because condescension survives on value modify. Customers and business are willing to ex exchange m superstary and services (products) based on the cost. How products cost rat effect a firms fiscal health is very important for managers. Cost objects are the different aspects of a firms operation, or products, it is essential concept in management accounting.If not properly handled, cost objects can hinder, not help, the manager to understand to ships companys reality. The example here is very easy to explain the situation. too cost objects are vital to planning, motivation, and controlling. In some cases, manager makes decision to close or give parvenue store in a region based on the cost objects. We can too see products as cost object, normally happen in manufacture business. Because accrual accounting makes a heel of judgement and assumptions and all that are subjective, so it is common that managers sometimes understate or overdraw a companys profits in a period.Direct cost and indirect cost VS lovesome Material and Maintenance cost The main business in NZ and Australia are service business, mostly transaction with people. Cadbury is a good example for manufacture business. Product cost and period cost. The later is a new concept and is not difficult to understand. Apportion indirect cost. Deciding indirect cost in a company is often not straightforward and sometimes involving a number of judgements and assumptions. We can attach command processing overhead time cost to products to better understanding the reality. Function based costing frame Predetermined Overhead ingress ratesActivity based costing systems Variable cost are normally direct cost, it is used in the cost of work-in-progress and finished good inventories of products. Fixed and shifting costs VS Rates and Raw Materials Variable cost and companys activity level Cost-Volume-Profit Analysis Use of function can help to understand the analytic thinking Very good example to explain the case Contribution margin = Sales Variable be Managers have to make some assumption to in terms of how cost and profits may change at different level of activity 2. Think back to your answers to Section 3 in SPA1. hat might be the key costs of Ryman Healthcare Ltd? What might be the key issues set about Ryman in terms of managing its costs? Why do you think this? What might be the key cost relationship that you would need to deeply understand in order to be able to manage the business of Ryman Healthcare? The key costs according to the principles of cost objects, they can be 1) Costs to maintain the privacy villages, including nursing cost, medical cost, etc. 2) Costs to construct retirement villa ges, including building materials, mortgages and interests, etc. ) Costs to commercialize in selling the retirement village building blocks, including advertise, commercials, etc. 4) Logistics costs, includes warehouse, etc. 5) Overheads, including power, rates, security, etc. If I am the chief executive officer of Ryman Healthcare, I think the key issues in managing the costs will be 1) Hidden costs mingled with different departments in the company. These costs are usually indirect costs in Ryman Healthcare Ltd, kindred costs to fix leaky buildings in the village unit of measurements, ever increasing financial costs in the recession economy. ) How to properly apportion indirect costs to Rymans main service, occupation rights of individual retirement village units. We have to make some judgement and assumptions in the process. For example, when fix a leaky buildings, the costs can be categorized in building maintenance costs when financial costs attachs because of the financi al crisis (more difficult to borrow money), it can be categorized to construction costs. 3) To analysis the fixed and variable costs in the company. Fixed costs are staff wages, electricity, rates, etc. variable osts are village unit construction cost, outsourcing nursing cost when extra help needed, etc. The key task here is to increase profits and also put the variable costs under control, which is big challenge to chief executive officer in Ryman Healthcare. 4) Use different methods in dealing different department of the company. We can use functional-based costing system method in construction department, and use activity-based costing system in nursing department in apportioning of the indirect costs. Key cost relationship in Ryman Healthcare The cost relationship can be best expressed in Cost-Volume-Profit Analysis (CVP).Function y is variable cost and x is number of village unit, then y = f(x). We assume that variable cost is straight-line function, which means when village units increases, the variable costs (costs to run the villages) increase in the same trend. In reality, when running a retirement village, it has a minimum cost regardless how many units are occupied. We call this minimum cost is M. We also use C as cost to run each unit, the total variable costs can be delineated as Y = M + C x X Y variable cost M minimum cost to run a village, it is fixed cost C cost to run one village unitX number of village units From the financial statements of Ryman, it has $40 million profits last year, way to a higher place break-even point, so we will focus on minimising the total cost. In the above function, if we increase the number of units X, and hold in fixed cost at a certain level, then the average fixed cost per unit will reduce. Here we also assume that cost to run per unit is hard to reduce and unchanged at a certain level of village units, and used as constant here. In this CVP analysis, CEO of Ryman Healthcare can deeply understand the cost relationship between fixed cost and variable costs.