Running Header: Management Accounting

Management Accounting

NAME AND STUDENT ID:

UNIT CODE:

UNIT NAME:

CAMPUS:

TERM AND YEAR:

TUTOR
 1
Management Accounting

To: The Board of Directors

From: Management Accountant
Date: November 26, 2018
Subject: Potential risk in the company

Objectives and Purpose

The CEO and the CFO decide to produce as many units as possible to increase the sales
budget. Meanwhile, the production manager was also told to reduce the Aluminum costs due
to the company’s financial difficulties. As a result, the production manager decided to
switch to another Aluminum supplier who offers 20% cheaper price compare to the current
supplier.
There are various potential risks that might affect the good will and reputation of the
company due to the change in the supplier. The proposed action plan by the production
manager might increase the potential risk of the company.
Potential Risks

There are high chances that the quality of the aluminum will decrease as there been a
decrease in 20% in the price. This will definitely hamper the quality of the products.

July August September

Required production (units) 3,700 4,700 6,050
Aluminium required to produce one unit $ 25 $ 25 $ 25
Production needs (Square meter) $ 92,500 $ 117,500 $ 151,250
Cost of aluminium per Square meter $ 80 $ 80 $ 80
20 % Discount rate $ 64 $ 64 $ 64
Monthly aluminium usage $ 7,400,000 $ 9,400,000 $ 12,100,000
Monthly Aluminium usage (20% Cheap) $ 5,920,000 $ 7,520,000 $ 9,680,000
Discount $ 1,480,000 $ 1,880,000 $ 2,420,000

It can be seen that there are huge reduction in the rate of the aluminum due to the change in
the current suppliers but it will definitely be of not that quality so for long run it affect the
company very badly
Potential Alternative solution

There are two main aspects that can reduce the cost of the production and those are by
increasing the productivity of the company. There are two main fixed costs one is the fixed
overhear and the other is the fixed selling and administration expenses (Boardman et al.,
2017). These costs remain the same till certain among of production. So to increase the
profitability it is important to use these fixed cost as a benefit and increase the production to
 2
Management Accounting

the fullest (Chen & Koebel, 2017). The production can still be increased by 20% so it will
provide a huge benefit for the total cost of production.

The total fixed overheard cost is $75000 and the total fixed overhead selling and an
administrative expense is $3,800. There are huge cost benefits that can be earned from the
fixed overheard cost as the cost is huge.

Overhead Budget Q3

July August September

Required production 3700 1000 4700 1350 6050

Hours required for the production 308 392 504

Total Fixed Cost $ 75,000 0 $ 75,000 0 $ 75,000

Total Variable cost $ 1,542 $ 417 $ 1,958 $ 563 $ 2,521

Total Overhead Budget $ 76,542 $ 417 $ 76,958 $ 563 $ 77,521

It can be seen that the product have increase by 1000 from July to August but the total
overhead expenses have only increased by $ 417. While from July to September the
production has increased from 3700 to 6050, increase of 2350 units and the price have only
increases by $ 980. The increase in the cost is very nominal. Instead of using cheap quality
of aluminum it is be more beneficial if the production can be increase.
 3
Management Accounting

References
Boardman, A. E., Greenberg, D. H., Vining, A. R., & Weimer, D. L. (2017). Cost-benefit
analysis: concepts and practice. Cambridge University Press.

Chen, X., & Koebel, B. M. (2017). Fixed cost, variable cost, markups and returns to
scale. Annals of Economics and Statistics/Annales d'Économie et de Statistique,
(127), 61-94.