Management Accounting for Planning and Control - myassignmenthelp

Question: Discuss about theManagement Accounting for Planning and Control Approach. Answer: In order for us to draw a conclusion whether to accept the special order or not we need to compare the contribution for each unit, as it will help us to determine that whether the recovery of the fixed cost will be possible or not. Contribution is the amount of money that has been left to recover the fixed cost incurred because of manufacturing. As fixed overhead does not change with the level of production, the same amount will be charged i.e. 540000. Therefore, we need to compare the contribution per unit and the calculations are shown below: Contribution per unit Normal Special order Selling price per unit 2.2 1.4 Less: Direct material 0.39 0.39 Direct labour 0.24 0.24 Variable overhead 0.16 0.16 Contribution per unit 1.41 0.61 A company should not accept the special order if it takes its decision with respect to recovering the fixed overhead also. Let us now see, what the profit of the company is if it sells 20000 units of special order at 1.4 as demanded and the remaining 740000 units at 2.2 which is normally done and then compare it with the profit if it sells the entire production at 2.2. Calculation of profit if the company sells all its 760000 units at 2.2 without accepting the order: Particulars Amount Sales 1672000 Less: Direct material 300000 Direct labour 180000 Variable overhead 120000 Fixed overhead 540000 Profit 532000 Calculation of profit if the company accepts the order: Particulars Amount Sales 1656000 Less: Direct material 300000 Direct labour 180000 Variable overhead 120000 Fixed overhead 540000 Profit 516000 Therefore, it is clear that the company should not accept the order on the basis of financial grounds. In the above answer, I have stated that the company should not accept the offer on the financial grounds. However, there may be certain non financial grounds that a company should consider before taking its final decision (Khan Jain, 2013). On the financial grounds, the company could have bought the canisters from the Canister Company and then sell it at 1.4 per unit as demanded; in that case the company could have expected to generate profits. On the basis of non financial factor, the company should analyse the impact of rejecting or accepting the order it may have on future. There may be a scope to increase the selling price in the future along with the sales volume. Some projects may not be beneficial in the short run but could be in the long run. This also helps to build good relation with the customer which also leads to enhancing the goodwill of the company as we know customer satisfaction is the most important aspect on which the company should pay attention in order to survive and compete. Sometimes there may not be any profits but the company has to accept the order to meet up with the industry standards. Nowadays, along with the financial aspects it is equally important to consider the non financial aspect also (Pandey, 2010). References: Khan, M., Jain, P. (2013).Management accounting. New Delhi, India: McGraw-Hill Education (India). Pandey, I. (2010).Management accounting ; planning and control approach. Noida: Vikas Pub. House Pvt. Ltd.