Management Accounting Assignment

980 Words Dec 8th, 2012 4 Pages
602 Management Accounting

David Xu Id: 65990771

Session Preparation Assignment (SPA) #2

Understanding Key Cost Relationships

1. Read Chapter 2 of SN, Key meanings in the Chapter.
Understanding key cost in a firm is the most important issue in management accounting. That is because business survives on value exchange.

Customers and business are willing to exchange money and services (products) based on the costs. How products cost can effect a firm’s financial health is very important for managers.

Cost objects are the different aspects of a firm’s 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 company’s
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Fixed costs are staff wages, electricity, rates, etc. variable costs 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 CEO 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 represented 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 unit
X: number of village units

From the financial statements of Ryman, it has $40 million profits last year, way above break-even point, so we will focus on minimising the total cost. In the above function, if we