I.

Introduction

As a newly appointed member of the accounting department at FPT Corporation,

my role focuses on contributing to the company's overall financial performance
and operational efficiency. My responsibilities include analyzing financial data,
monitoring cost variances, and preparing reports to assist management in making
informed decisions. By ensuring accurate budgeting, controlling costs, and
identifying areas for improvement, I aim to support FPT’s strategic objectives and
promote its continued growth in the competitive technology market.

II. Body

1. Calculation of the relative effects on the monthly operating profits of FPT.

Absorption Costing Profit Statement

Absorption costing ensures full cost allocation by including both fixed and
variable production costs in product valuation, making it ideal for external
financial reporting (Weetman, 2019). This approach provides a comprehensive
view of total costs, enabling businesses to assess profitability over time and
develop long-term pricing strategies while ensuring that pricing covers all
expenses and supports regulatory compliance.

Absorption costing can lead to overstated profits when inventory levels

increase because fixed costs are carried forward in unsold units, inflating profit
figures. Additionally, it has limited utility for short-term decision-making, as
fixed costs remain unchanged regardless of production volume, making it less
effective in analyzing the immediate impact of changes in sales or production.
Marginal Costing Profit Statement

Marginal costing is highly effective for short-term decision-making as it

emphasizes the contribution margin and the impact of variable costs, providing
clear insights into profitability (Horngren et al., 2021). Additionally, it offers a
simplified costing approach by excluding the complexity of allocating fixed
costs to individual units, making it straightforward and practical for managerial
use.

Marginal costing has limitations as it excludes fixed costs from unit costing,
which can result in underpricing products over the long term. Furthermore, it
lacks compliance with financial reporting standards like IFRS, making it
unsuitable for external reporting and limiting its applicability to internal decision-
making processes.

2. Calculation the number of units needed to be sold in scenario 2 and

comment on the results.
CVP analysis is a valuable tool for determining the break-even point, providing
clarity on the minimum sales volume required to prevent losses (Drury, 2020). It
also aids in profit planning by identifying the sales volume necessary to achieve
target profits and supports flexible decision-making by adapting to variations in
costs, prices, or sales mix. For example, in Scenario 2, CVP analysis enabled
FPT to calculate the units required to break even and meet a target profit of
$1,000,000. However, its simplifying assumptions—such as linear cost and
revenue relationships, fixed costs, and a constant sales mix—may not reflect
real-world complexities, reducing its relevance for long-term strategic
planning.

Introducing Version 3 alongside Versions 1 and 2 significantly alters the break-

even dynamics. While Version 3 achieves the lowest break-even point at 734
units, its low sales mix ratio (1) and relatively low contribution per unit ($102)
lead to a higher number of units required to achieve profitability. Before adding
Version 3, Version 1 requires 2,842 units and Version 2 requires 11,368 units to
meet the target operating income. Despite Version 3’s lower break-even point,
Version 2 remains the most efficient product, with a higher contribution per unit
($105), ensuring faster and more stable profitability.

To efficiently achieve the company’s profit goals, it is recommended to prioritize

Version 2 due to its strong contribution margin and profitability potential.
Targeted marketing strategies and production improvements should be
implemented to enhance sales and operational efficiency. Version 1 can serve as a
supportive product to diversify offerings, while introducing Version 3 is not
advisable at this stage. Focusing on Versions 1 and 2 will optimize resource
allocation, streamline operations, and enable the company to achieve profitability
effectively.

3. Evaluation of the utility of management accounting techniques to inform

decision making and optimal resource allocation.

3.1. Absorption Costing and Marginal Costing

 Absorption Costing
In Scenario 1, absorption costing offers FPT a full view of profitability by
including fixed costs in the cost of goods sold. It aids in external financial
reporting and meeting regulatory requirements. However, this method may distort
internal profit analysis when inventory levels fluctuate. For example, if inventory
increases, reported profits might rise artificially, even though cash flows remain
unchanged. While useful for external reporting, it provides limited value for
operational decision-making.

 Marginal Costing

In Scenario 1, marginal costing helps FPT focus on the contribution margin,

enabling the company to analyze how changes in sales volume affect profitability.
This approach is particularly useful for assessing short-term pricing or production
decisions. For example, marginal costing highlights how selling an additional unit
contributes to covering fixed costs and generating profit. However, it does not
provide a complete picture of overall profitability, as fixed costs are not allocated
to individual units. Therefore, while marginal costing is effective for operational
decisions, it is not suitable for external reporting or long-term pricing strategies.

3.2. Cost – Volume – Profit Analysis

In Scenario 2, CVP analysis determines that FPT requires 4,403 units in a sales
mix of Version 1, Version 2, and Version 3 (3:2:1) to break even, with
contributions of $55, $105, and $102 per unit, respectively. To achieve a target
profit of $1,000,000, the company must sell 16,981 units, distributed as 8,491
units of Version 1, 5,660 units of Version 2, and 2,830 units of Version 3. This
insight facilitates strategic decision-making in production planning, sales strategy,
and resource allocation. However, assumptions about fixed costs and a static sales
mix may limit the analysis’s applicability in dynamic market conditions.

4. Critical assessment of alternative management accounting approaches and

techniques in supporting the achievement of organisational objectives.

Kaizen Costing is a cost management method focused on continuous

incremental improvements in processes to reduce costs and eliminate waste
(Imai, 2012). Kaizen Costing has been extensively applied in manufacturing
industries, particularly by Toyota, which has integrated it into its production
system to achieve cost efficiency while maintaining quality standards (Imai,
2012). For instance, Toyota’s implementation of Kaizen Costing has enabled it to
optimize production costs while fostering innovation through small, incremental
improvements in its assembly lines (Ohno, 1988). This approach has proven
instrumental in supporting Toyota's organizational objectives of lean
manufacturing and operational excellence.

Activity-Based Costing (ABC) has been implemented by companies such as

Procter & Gamble (P&G) to better allocate overhead costs and improve
profitability. P&G uses ABC to assign indirect costs, such as warehousing and
distribution, to specific products based on their consumption of resources
(Shah & Hollier, 2010). By identifying cost drivers, P&G has improved its pricing
strategies and identified unprofitable product lines, leading to better resource
allocation and enhanced decision-making. The adoption of ABC has been
particularly beneficial for complex manufacturing environments where traditional
costing methods failed to provide accurate cost insights.

Throughput Accounting has been successfully utilized by Dell to enhance its

production efficiency by focusing on bottleneck management. Rooted in the
Theory of Constraints, Dell used Throughput Accounting to increase its
throughput rate by addressing constraints in its supply chain and assembly
processes (Goldratt, 2004). This allowed Dell to align its operations with
customer demand and improve profitability. For example, Dell's "build-to-order"
strategy benefits significantly from Throughput Accounting by emphasizing the
flow of products and minimizing delays in the production process.

Life-Cycle Costing has been adopted by companies like Rolls-Royce in the

aerospace industry to manage the total cost of its aircraft engines over their entire
life cycle. Rolls-Royce uses this approach to assess costs during design,
manufacturing, maintenance, and disposal stages, ensuring cost-effectiveness
and sustainability (Bhimani et al., 2019). This comprehensive view enables the
company to make informed decisions about long-term investments in design
innovations and maintenance contracts, aligning with its organizational goals of
providing high-quality and durable products while maintaining profitability.

5. Preparation of the operating statement for InnoTech for the month ended
31 December and Evaluation of the impact of identifying variances to
control, monitor and improve organisational performance.
Direct Material Variance Analysis
 Price Variance
Tech Co recorded an adverse price variance of £78,000, reflecting higher actual
material costs compared to the standard price. This was likely driven by external
factors such as market inflation, supply chain disruptions, or a reliance on
imported materials. While a favorable offset of £50,000 partially reduced the
impact, an adverse component of £128,000 underscores the challenges in
managing rising material costs. To mitigate this, Tech Co should focus on
negotiating long-term supplier contracts, exploring local sourcing options,
and adopting strategies to stabilize input costs.

 Usage Variance
The favorable usage variance of £30,000 indicates improved material efficiency,
as actual material usage fell below the standard level. However, an additional
adverse impact of £50,000 highlights inconsistencies in production efficiency,
which were offset by £80,000 of favorable adjustments. These variances suggest
that while Tech Co has optimized material utilization in certain areas,
inefficiencies remain. Strengthening production controls, reducing material
wastage, and improving employee training will further enhance efficiency and
help address unfavorable usage variances.

Direct Wages Variance Analysis

 Rate Variance
Tech Co achieved a favorable rate variance of £5,000, as the actual rate per
hour (£15) matched the standard rate (£15). However, effective labor cost
management resulted in small savings over 55,000 actual hours worked. This
demonstrates that Tech Co successfully managed labor rates within budget
expectations, contributing to the overall favorable variance. To sustain these
savings, Tech Co should focus on consistent wage management strategies,
ensuring stable labor costs while maintaining competitiveness in the job market.

 Efficiency Variance
The efficiency variance, amounting to a favorable £75,000, was the major
contributor to the total variance. This resulted from actual labor hours worked
(55,000 hours) being significantly lower than the standard hours required
(60,000 hours), based on production units and standard hours per unit. This
indicates improved labor productivity, likely driven by optimized work
scheduling or the adoption of more efficient production methods. To maintain
these productivity gains, Tech Co should continue monitoring workforce
performance, investing in employee training, and refining work processes to
ensure operational efficiency.

Fixed Overhead Variance Analysis

 Expenditure Variance
Tech Co recorded an adverse expenditure variance of £60,000, as the actual
overhead cost (£960,000) exceeded the budgeted amount (£900,000). This
unfavorable variance likely resulted from unplanned maintenance, higher
utility costs, or inefficiencies in fixed cost management. Such deviations
indicate the need for closer monitoring of fixed cost expenditures and better
alignment of budgets with operational realities. Implementing cost control
measures and conducting regular audits can help minimize unexpected overhead
expenses and enhance financial discipline.

 Volume Variance

A favorable volume variance of £37,500 was achieved despite actual

production (11,500 units) falling short of the standard production (12,000
units). This favorable result stems from cost absorption efficiency, using an
Overhead Absorption Rate (OAR) of £75 per unit. However, the shortfall in
production highlights potential issues like underutilization of capacity or lower-
than-expected demand. To address these challenges, Tech Co should focus on
improving production output and optimizing resource utilization to capitalize
on its cost absorption efficiency and offset adverse expenditure variances.

Sales Variance Analysis

 Price Variance

Tech Co achieved a favorable price variance of £345,000, as the actual selling

price (£500) exceeded the standard price (£470). This reflects effective pricing
strategies and an ability to capitalize on strong market demand, maximizing
revenue per unit sold. The favorable variance indicates Tech Co’s success in
leveraging market conditions to drive profitability. To sustain this advantage, Tech
Co should continue implementing flexible pricing strategies that adapt to
customer preferences and market dynamics, ensuring long-term revenue growth.

 Volume Variance

An adverse volume variance of £117,500 resulted from the actual sales volume
(11,500 units) falling short of the budgeted volume (12,000 units). This
shortfall, magnified by the standard margin per unit, likely stems from lower
market demand, production constraints, or competitive challenges. To address
this, Tech Co should focus on increasing market share, enhancing production
capacity, and improving demand forecasting. By addressing these underlying
issues, Tech Co can minimize adverse variances, balance sales volume with
pricing strategies, and optimize overall sales performance.

Budgeted Profit Analysis

Tech Co's budgeted profit was projected at £1,920,000, based on a contribution

per unit of £235 (50% of the selling price) and a total contribution of £2,820,000.
The fixed costs were estimated at £900,000, representing the planned expenses
that do not vary with production volume. The budget reflects an expectation of
efficient cost control and steady revenue generation. This projection assumes that
both sales volume and production costs align with the planned targets, allowing
Tech Co to maintain a stable margin. However, achieving this profit relies heavily
on meeting budgeted assumptions regarding material costs, labor efficiency, and
sales price, which may not hold true in a dynamic market environment.

Actual Profit Analysis

Tech Co's actual profit exceeded expectations, reaching £2,002,000, driven by a

higher actual contribution of £2,962,000 and efficient cost management. While
total variable costs were £2,788,000, including direct material costs of
£1,968,000 and direct wages of £820,000, these expenses remained controlled
relative to revenue. Notably, the direct material costs were split into £1,200,000
for X and £768,000 for Y, suggesting effective resource allocation. The fixed cost
remained stable at £900,000, further supporting the profit increase. This favorable
result highlights Tech Co’s ability to manage costs effectively while increasing
revenue, leading to a profit improvement of £82,000 over the budget. Moving
forward, Tech Co should continue monitoring cost efficiencies and sustaining its
contribution margin to maintain strong profitability.
6. Discussion on the concept of variance analysis as well as its importance for
budgetary control.

6.1. Concept of Variance Analysis

A variance is the difference between the standard cost or revenue and the actual
outcomes, providing critical insights into business performance. In a
manufacturing context, cost variances highlight deviations in material, labor, and
overhead costs, reflecting efficiency and cost management. Revenue variances,
on the other hand, capture differences between actual and budgeted sales, offering
insights into pricing strategies and market performance. Variance analysis serves
as a powerful tool for identifying inefficiencies, monitoring budget adherence,
and enhancing decision-making. By analyzing these variances, organizations can
take corrective actions to optimize operations, improve cost control, and align
business strategies with financial objectives.

6.2. Role of Variance Analysis in Budgetary Control

Performance Measurement: Variance analysis provides a mechanism to measure

and assess the performance of departments, teams, and managers. It identifies the
efficiency of processes and the effectiveness of resource utilization (Drury, 2018).
By comparing actual performance against the budgeted performance, companies
can determine which areas of operation are underperforming or overperforming
(Bhimani et al., 2019)

Cost Control: It helps managers to detect cost deviations, identify inefficiencies,

and address them promptly. For example, a significant adverse direct material
price variance may prompt procurement managers to negotiate better prices with
suppliers (Horngren et al., 2020).

Strategic Decision-Making: Variance analysis highlights the areas where

operational improvements are necessary, which can inform managerial decision-
making and strategy development (Bhimani et al., 2019).
Accountability and Responsibility Accounting: Variance analysis enables
responsibility accounting by holding specific departments and managers
accountable for deviations. For instance, procurement managers are held
responsible for price variances, while production managers are responsible for
usage variances (Drury, 2018).

Early Warning System: It acts as an early warning system, alerting management

to potential financial risks. This allows corrective action before the situation
worsens, thereby mitigating risk exposure (Horngren et al., 2020)

7. Justification of the impact of different management accounting techniques

used by InnoTech on resource allocation, risk minimisation and profit
maximisation.

Standard costing is a management accounting technique that establishes

predetermined costs for products or services, serving as a benchmark for
evaluating actual costs. It involves setting standard costs for direct materials,
labor, and overheads, and comparing them against actual performance to identify
variances for control and decision-making purposes (Drury, 2018).

SKF successfully applied standard costing as part of its cost management

strategy to improve cost control, monitor production efficiency, and enhance
decision-making processes (Bromwich, 2000). By implementing standard costing,
SKF set predetermined costs for materials, labor, and overhead, allowing for
accurate benchmarking against actual costs. This systematic approach enabled the
company to detect cost variances and take corrective actions promptly, ensuring
resource optimization and performance improvements.
The Standard Cost Calculation Model (Figure 4.5) further exemplifies SKF’s
structured process, integrating forecasted costs by responsibility centers and
forecasted production volumes to determine the standard cost per product
using a defined calculation technique. This model provided SKF with a robust
framework to identify inefficiencies, allocate resources effectively, and maintain
financial control (Bromwich, 2000).

The case study of South East Toyota demonstrates the ineffective application of
standard costing, which limited the company’s ability to achieve its objectives
(Gubunje, 2015). While standard costing was used to set cost benchmarks, the
system's rigidity conflicted with the dynamic nature of Toyota’s operations.
Challenges such as subjectivity in setting standards and delays in corrective
actions undermined the relevance of the cost standards, leading to operational
inefficiencies. Additionally, resistance from employees further complicated the
implementation process, highlighting a lack of alignment between the costing
method and the organization's culture (Gubunje, 2015). These shortcomings
indicate that standard costing, while useful in certain environments, was not
suitable for Toyota’s need for flexibility and responsiveness to market demands.
This misalignment reflects the broader limitations of standard costing in dynamic
and customer-driven industries (Bhimani et al., 2013; Alfino et al., 1998).

The case studies of SKF and South East Toyota highlight differing outcomes of
standard costing. SKF successfully improved cost control and efficiency, while
Toyota faced challenges such as rigid standards and employee resistance,
limiting its effectiveness (Bromwich, 2000; Bhimani et al., 2013). For FPT,
standard costing can work if made flexible and supported by real-time data
analytics. Alternatively, combining Activity-Based Costing (ABC) with standard
costing could balance accuracy and adaptability, ensuring better alignment with
FPT’s dynamic operations.

III. Conclusion

The recommended strategies for FPT focus on utilizing advanced management

accounting techniques, such as CVP analysis and standard costing, to improve
cost control, resource allocation, and profitability. These approaches address
operational inefficiencies while fostering financial stability and adaptability. By
integrating data-driven tools and aligning operations with strategic objectives,
FPT can strengthen its market position and drive sustainable growth in the
technology sector.
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