PAA 208 Introduction To Management Accounting Q Valley Plc is embarking on a profitability enhancement policy through cost savings in the current (2015) accounting period, following a dismal performance in the previous year. With revenues consistent with expectations, rising expenditure was judged to be the source of the poor performance, and the raw materials department was seen as a contributor to this. In 2014, the department spent £2m (a 70% increase on 2013)on ordering material cx235 to meet production demand and avoid shortage, using the newly approved Just in Time (JIT) inventory management system. In 2015, it is estimated that 1million units of material cx235 will be purchased by Valley Plc (consistent with 2014 production levels). The item is purchased in boxes, each containing 200 units at £4,000 per box. The cost of ordering a box can be estimated from 2014, where £2m was spent on 200 orders. The cost of holding a unit of cx235 for one year (including insurance, interest and space costs) is estimated to be 30% of the purchase price. The new managing director has asked you, the management accountant to intervene and come up with a new inventory management system which will minimise total inventory costs. He is particularly interested in a change from the JIT system in order to utilise the spare capacity in the raw materials warehouse for the storage of cx235. Required – Write a report to the managing director addressing the following issues: · Discuss the role of management accounting in an organisation (make comparisons to financial accounting). · Discuss the classification of costs by function (production, non-production); by type (direct, indirect); by behaviour (fixed, variable, stepped fixed). Provide examples and diagrams where necessary. · Calculate the economic order quantity (EOQ) from the information provided above (place your calculation in the appendix of the report). Also calculate the total inventory cost (excluding purchase cost), the number of orders to be made in 2015, and the order frequency (in days). · Provide an analysis of the Just in Time inventory control system, contrasting it with the re-order level (two-bin) system.Discuss the benefits and limitations of both systems. · Compare the total inventory cost (excluding purchase cost) for 2015 with that of 2014. Based on your calculations, make a recommendation to the managing director on the continuation or discontinuationof the JIT system. Your coursework must be in a report format, with an introduction, the main body addressing the above issues, a recommendation and a conclusion summarising your coursework. The EOQ calculations must be placed in the appendix of the report. All external sources used must be adequately cited and referenced using the Harvard style of referencing.