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Learning outcomes assessed:

• Demonstrate competence in the application of Microsoft Excel functions
• Demonstrate an understanding of investment appraisal techniques
• Use Microsoft excel functions to capital budgeting situations
• Make management decisions based on results obtained from their spreadsheet analysis.

Summer Fruits Plc uses a mixture of apples in the manufacture of apple juice at a rateof 75,000 apples per week, with the annual demand evenly spread over 48 working

weeks. An ordering cost of £350 is incurred for every order made (regardless of the quantity ordered), and delivery takes 2 – 4 weeks from the time an order is placed. The selling price is £0.15 per apple, and the holding cost is currently estimated at £0.75. Determine the reorder level.

1. Determine the reorder level. Explaining step by step how you arrived at your figures.
2. Using the figures calculated in I. above discuss the importance of calculating the re-order level.
3. Calculate the economic order quantity using the formula
4. Management accounting is usually referred to as a decision make tool. Write a mini statement to the directors of Summer Fruits advising them how and why the total cost of ordering is so important.

Above is the overhead analysis sheet of Browning Steel Ltd, a tool manufacturing company completed in 2016. Management accounting isconsidered an integral part of all successful businesses, with the aid of a spreadsheet produce a similar overhead analysis for 2017 applying a 5.5% increase to all costs above. Using your figures write a short reportto the management explaining why it is necessary to record overheads. Your answer should mention the process of cost collection, overhead absorption rates. Also mention the two different methods of costapportionment; reciprocal and the direct method.

The costs incurred in the service departments are equally re- allocated to the three production departments. You are required to perform this reallocation and discuss the reasons why an organisation might need to do this.

## Importance of computing re-order level and economic order quantity

Re order level is that level of inventories where a new order would be placed by manufacturing unit. Determination of re order level requires two step. In the first step, it is required to determine daily, monthly or weekly usage. In the concerned question, daily average use of apple in the manufacture of apple is determined. Second step involves determination of lead-time. Lead-time is the time that manufactures take to provide the suppliers with ordered units (Alawattage et al. 2017). Therefore, determination f re ordering level requires two-step calculation.

Maximum daily usage= 75000 apples per week

Lead time= 2 to 3 weeks = 3*7= 21 days

The formula used for calculating re order level is maximum daily usage multiplied by lead-time

Re order level= 75000 * 21 = 1575000 units of apples

Determination of re order level is considered crucial because it enables them to ensure to a high degree certainly that business will never run out of stock. It acts as an indicator that stock needs to be purchased or replenished and accordingly action should be taken. Re order, level enables efficient management of inventory. In order to understand effective management of stocks, it is considered vital to understand about re ordering level.  A clear understanding of re ordering inventory level enables business to evade two types of issues. One is overstocking issue due to over estimation re order point (Ouyang et al. 2015). Another is stock outs issue due to under estimation of re order point.

Economic ordering quantity is the optimum level of quantity at which the total variable cost required to hold and order inventory is minimized.

The formula used for calculating economic order quantity is

EOQ =

Where D is annual demand = 75000*48= 3600000

Co= Cost per order

CH = holding cost

Therefore, EOQ =  = 57965 units of apple

Determination of economic order quantity figure is important for business as it is that level of quantity at which total cost to manufactured products is minimized. The concept is applicable to any quantity decision that requires tradeoff between variable and fixed cost. It provides business with near optimal quantities of order that involves penalties of small management of cash. This would assist management in determining maximum amount of savings. Order quantity decision rile will further assist management in estimating maximum cost management penalty (Wagenhofer 2016). EOQ model helps in customizing recommendations that are provided concerning economic number of units that have been produced.

Inventory is regarded s one of the most important assets for any business. Ordering costs is the fixed cost that is incurred by any business from ordering inventories. Ordering cost helps in determination of economic order quantity that leads to minimization of total costs. An organization is able to minimize or mitigate their ordering cost by placing large blanket of orders by covering long period of time. Importance of ordering cost is realized when an organization seeks reduction of total cost of carrying inventory. Monitoring of ordering cost is essential for properly balancing sizes of orders and thereby reducing the overall cost (Jawad et al. 2015). It is of utmost important for organization to have track of ordering cost for maintaining costs relating to inventory at balanced level that will result in efficient management of inventories.

## The formula used for calculating re-order level and economic order quantity

Overhead cost is one of the important elements of total cost of inventory. It is essential for every organization to identify the cost of providing goods and services. For the preparation of cost statements, an organization is required to determine overhead costs by proper allocation, absorption and apportionment of overheads. Overhead usually comprised of indirect cost of employees, indirect materials and indirect expenses that are not directly allocable or identifiable in an economically feasible way (Chiarini and Vagnoni 2015). Recording and managing of overhead cost helps organization in managing their overhead costs in an appropriate way that enables them to create a competitive ground in market place. One of the success factors for any business is managing its expenses efficiently and in this regard, a pivotal role is played by overhead costs (Otley and Emmanuel 2013). The reason attributable to importance of recording overhead costs is realizing favorable margin of profit.

 Overhead Basis Machinery Assembly Finishing Maintenance Canteen Total Supervisors Salaries Allocated 1950000 1170000 1625000 975000 780000 6500000 Specific overheads Allocation 7800 9750 16250 7150 9750 50700 Rent and rates Floor area 52442 56186 67424.5 29965 14982.5 221000 Machine Insurance Machine value 40001 33332 20000.5 6669 3997.5 104000 Machine depreciation Machine value 105001 87503 52500.5 17498 10497.5 273000 Production supervisors salaries DLH 118183 177274.5 94542.5 0 0 390000 Heating and Lightning Floor area 18505.5 19831.5 23796.5 10575.5 5291 78000 Total overheads 2291932.5 1553877 1899514.5 1046857.5 824518.5 7616700

Two different methods of cost apportionment:

Direct method- Under this method, cost of each service departments is allocated to each operating department based on share of each department in allocation base. It does not take into consideration services of other departments. This method of cost allocation ignores service offered by service department in the cost allocation process (Lukka and Vinnari 2014).   Prior to allocation, there is no interaction between support departments.

Reciprocal method- Reciprocal method is the most complicated and appropriate method of allocating cost. Under this method, allocation of costs attributable to service department is done in both the directions that is forward and backward. Simultaneous use of equations is required under this method. Reciprocal method makes use of simultaneous equations for determining true cost of service department (Bromwic and Scapens 2016). Based on given ratio or percentage, such costs are distributed to production department. Accurate distribution of cost in one single step is one of the benefits of reciprocal method. However, computations under this method are relatively complex compared to direct method.

 Overhead Basis Machinery Assembly Finishing Maintenance Canteen Total Supervisors Salaries Allocated 490000 370000 440000 0 0 1300000 Specific overheads Allocation 3066 3366 4366 0 0 7800 Rent and rates Floor area 13446 14022 15751 0 0 34000 Machine Insurance Machine value 7385 6359 4308 0 0 16000 Machine depreciation Machine value 19384 16692 11307 0 0 42000 Production supervisors salaries DLH 18182 27273 14545 0 0 60000 Heating and Lightning Floor area 4742 4946 5556 0 0 12000 Total overheads 556205 442658 495833 0 0 1471800

## Inventory management and ordering cost

An organization is required to perform the reallocation of costs because the service departments cost is incurred without getting any benefits in return. Reallocation the cost incurred in service department to production department will help in absorption of additional costs incurred. However, these costs can be offset by business in determining their selling price of products. Costs associated with service departments are allocated to internal cost centers that is consumed by its products.

The module of IT applications in management accounting first seemed difficult to me in understanding the concepts. Initially I questions about various concepts that seemed difficult, bit later I started gaining interest in learning. I used to face difficulties in dealing with accounting and solving then I was hesitant to apply my knowledge as it was not clear. I have learned that the business process of organization can be improved by theoretical approaches and techniques by the application of principles of management accounting. IT Applications of management accounting has depicted that there are various alternatives to traditional accounting.

Management accounting is the practice for feeding information into the financial system and assists managers in making effective decisions so that effective control over corporate resources can be exercised. Advanced management accounting incorporating the use of information technology in the forms of software’s that provides business with great analytical tool. Some of the applications that I have learnt that Advanced Excel provides business with inventory management, corporate budgeting, consolidating results and creating forms and finding profits and break even points. Detailed analysis of stock movement and inventory level of business at any point of time can be ascertained. This particular module of management accounting has assisted me in handling how to make use of analytical tool. While learning about management accounting, I have known that Excel is used by large and small business for the purpose of budgeting and acts like a productivity tool.

## Overhead cost allocation and apportionment

Moreover, information about clients and customers can also be stored using MS Excel spreadsheet. Business can use this information to contact with customers as it acts kike their database. While practicing use of Excel, I have learned that adding new flied and updating spreadsheet does not affect or change the content present or mentioned therein.  Therefore, the module has assisted me in shaping my analytical skills relating to accounting. This will help me in enhancing my skills so that I can apply in future at managerial level. Knowledge gained by me has nurtured my accounting skills that I can apply it practically in my profession. In nutshell, the impact of learning this module has contributed positively in enhancing and upgrading my accounting knowledge.

MS Excel software has proven to provide business with many advantages in their day to day business activities. For small business establishment, it is essential to have knowledge of such software so that they are able to reap the results of benefits provided by MS Excel. Beyond my simplistic example, there are many more powers and usage of Mc Excel in business and those usages can be leveraged by business in making more productive, faster and cost efficient. Today’s working environment requires business and its employees to be proficient in Excel. From my point of view, Excel is an essential computing tool for end users.

References list:

Alawattage, C., Wickramasinghe, D. and Uddin, S., 2017. Theorising management accounting practices in Less Developed Countries. The Routledge Companion to Performance Management and Control.

Bromwich, M. and Scapens, R.W., 2016. Management accounting research: 25 years on. Management Accounting Research, 31, pp.1-9.

Chenhall, R.H. and Moers, F., 2015. The role of innovation in the evolution of management accounting and its integration into management control. Accounting, Organizations and Society, 47, pp.1-13.

Chiarini, A. and Vagnoni, E., 2015. World-class manufacturing by Fiat. Comparison with Toyota production system from a strategic management, management accounting, operations management and performance measurement dimension. International Journal of Production Research, 53(2), pp.590-606.

Dekker, H.C., 2016. On the boundaries between intrafirm and interfirm management accounting research. Management Accounting Research, 31, pp.86-99.

Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7), pp.414-428.

Gibassier, D. and Schaltegger, S., 2015.  Management accounting and reporting in practice: a case study on converging emergent approaches. Sustainability Accounting, Management and Policy Journal, 6(3), pp.340-365.

Jawad, H., Jaber, M.Y. and Bonney, M., 2015. The economic order quantity model revisited: an extended exergy accounting approach. Journal of Cleaner Production, 105, pp.64-73.

Lukka, K. and Vinnari, E., 2014. Domain theory and method theory in management accounting research. Accounting, Auditing & Accountability Journal, 27(8), pp.1308-1338.

Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment, management accounting, control, and reporting. Journal of Cleaner Production, 136, pp.237-248.

Messner, M., 2016. Does industry matter? How industry context shapes management accounting practice. Management Accounting Research, 31, pp.103-111

Nielsen, L.B., Mitchell, F. and Nørreklit, H., 2015, March. Management accounting and decision making: Two case studies of outsourcing. In Accounting Forum (Vol. 39, No. 1, pp. 64-82). Elsevier.

Otley, D. and Emmanuel, K.M.C., 2013. Readings in accounting for management control. Springer.

Ouyang, L.Y., Su, C.H., Ho, C.H. and Yang, C.T., 2014. Optimal ordering policy for an economic order quantity model with inspection errors and inspection improvement investment. International Journal of Information and Management Sciences 25 (4), pp.317-330.

Suomala, P., Lyly-Yrjänäinen, J. and Lukka, K., 2014. Battlefield around interventions: A reflective analysis of conducting interventionist research in management accounting. Management Accounting Research, 25(4), pp.304-314.

Taylor, L.C. and Scapens, R.W., 2016. The role of identity and image in shaping management accounting change. Accounting, Auditing & Accountability Journal, 29(6), pp.1075-1099.

Wagenhofer, A., 2016. Exploiting regulatory changes for research in management accounting. Management Accounting Research, 31, pp.112-117.

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