Unit 9 Management Accounting Costing and Budgeting
TABLE OF CONTENTS Introduction ................................................................................................................................ 1 TASK 1 ...................................................................................................................................... 1 AC 1.1 Classification of cost ........................................................................................... 1 AC 1.2 Preparation of job cost sheet ................................................................................ 2 AC 1.3 Calculation of cost of Exquisite........................................................................... 3 AC 1.4 Calculation of overhead absorption rate using direct labour hours ..................... 5 AC 2.1 Preparation of cost sheet for 1900 units for variance analysis ............................ 5 AC 2.2 performance indicators used to identify the potential improvements.................. 7 AC 2.3 Ways to reduce cost, enhance value and quality ................................................. 8 TASK 2 ...................................................................................................................................... 8 AC 3.1 Purpose and nature of budgeting process ............................................................ 8 AC 3.2 Appropriate Budgeting method for the organization and its need ....................... 9 AC 3.3 Production and material purchase budget of Jeffrey & Son's Ltd. ...................... 9 AC 3.4 Cash budget of Jeffrey & Son's Ltd. .................................................................. 10 AC 4.1 Calculation of variances, possible causes and corrective actions ...................... 11 AC 4.2 Operating statement reconciling budgeted and actual results ........................... 12 AC 4.3 Responsibility centres ........................................................................................ 12 CONCLUSION ........................................................................................................................ 13 REFERENCES ........................................................................................................................ 14
INTRODUCTION Management accounting plays a very important role in the organization success and growth. It helps to manage the business operation in an effective manner. It is the financial data analysis technique that helps to take necessary decisions in order to control the cost for business development purpose. This report will help us in identifying the importance and significance of management accounting for Jeffrey and Son's. Jeffrey & Son's is a manufacturing concern that produces many products called Exquisite. Further, the report will discuss that how the company can get benefited through applying different management tools such as budgeting process, cost sheets and variance analysis. The present report mainly aims at determining the importance of management and cost accounting techniques for the business. It aims at identifying that how techniques help to reduce the cost, enhance business incomes and take good business decisions. In this report, various techniques such as budgeting, variance analysis and cost allocation will be discussed for the given scenario.
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TASK 1 AC 1.1 Classification of cost There is various type of cost that is incurred in the organization that is described below: Basis of
Type of costs
classification Elements
There are three types of cost elements that are material, labour and overhead cost. Direct material for Jeffrey & Son's is the cost of purchasing raw material for the production of goods and services such as timber used for furniture production and fabrics for the clothing. However, direct labour includes the expenditures required to be paid to the workers who are employed for producing the product, Exquisite include wages. Further, all the other expenditures that directly can be attributed to the specific product or services known as direct expenses. For instance, expenditures incurred on tools and consumables are direct expenses.
Function
On the basis of function it can be classified to production or factory, administration and selling and distribution expenses. In the factory overhead, it includes productive or unproductive wages, factory rent and power, heating and lighting expenditures (Khan and Jain, 2006). However, office or administration cost involves staff salary, stationery and staff welfare expenditures. Further, all the efforts that are made for selling the products into the market comes under the selling and distribution overhead such as advertisement and marketing expenses. Production expenses includes all the business expenditures that have been incurred in the manufacturing process of Jeffrey & Son's for instance, factory rent, machinery depreciation and wages of helpers. While non production expenditure involves all the expenditures that do not related to the business production hence, cannot be charged to the specific product.
Nature
Direct and indirect cost. Call Us: 44 203 3555 345 Mail Us: help@globalassignmenthelp.com Website: www.globalassignmenthelp.com
Expenditures that can be charged to a specific cost object such as production and department. It involves cost of raw material, labour's wages and cost of purchasing other equipment such as moulds. However indirect cost cannot be attributes to a specific cost object. (Dechow and Skinner, 2000). It is appropriate on the basis of some costs such as direct machine hours and direct labour hours. It includes postage, printing, advertisement, lighting and marketing expenses. Behaviour
Fixed, variable and semi variable cost are prevails under this basis. The expenditures which do not get changes with the production changes are known as fixed cost includes building rent, insurance, and depreciation and watchmen salaries. However, variable cost is directly related to the production and gets changed according to it (Adler, 2013). For example, raw material and labour's wages. On contrary, semi variable cost is remaining constant up to a certain quantity of production and gets changed after this point with the production changes such as electricity bill. Stepped fixed cost remains fixed up to a fixed level of activity. Once, the upper level of activity reached then fixed cost tends to reach at a higher level such as warehousing cost and wages of supervisors.
AC 1.2 Preparation of job cost sheet Cost sheet: It helps to determine the total cost and per unit cost of the job (Cost and Management Accounting, n.d.). The job cost sheet is prepared here for Jeffrey and son's job no. 444 for 200 units:
Job cost sheet for Job no. 444 Particulars
Total cost
Direct material
40000
Direct Labour
54000
Fixed production overhead
24000
variable production overhead
36000
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Total cost
154000
Unit cost
770
Necessary working note:
Direct material = 50kg* 4£ per kg.*200 units= 400000£ Direct labour cost Labour hours = 30 hours per unit*200 Units = 6000 Hours 6000 hours * 9£ per hour = 54000£ Calculation of fixed overhead = Total fixed production overhead/Total budgeted labour hours*Labour hours for job = 80000£/20000 hours* 6000 hours = 24000£ Calculation of variable production overhead = 6£ per hour * 6000 hours = 36000£ Cost per unit = Total cost/ number of units = 154000£/200 Units = 770£ cost per unit AC 1.3 Calculation of cost of Exquisite
Servic e Produ
depart
ction
ment
Machi Basis allocation
of Machine (£)
Indirect wages and supervision
X ne
Maint
Y Assembl Stores enance
(£)
y 1 (£)
(£)
(£)
99500. Given
100000.00
00
Total 362000
92500.00 10000 60000
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.00
10000 Indirect material
Given
253000
0.00 40000.00 4000
100000.00
.00
9000
50000. light and heating
Area occupied
10000
5000
15000
10000. Rent
Area occupied
insurance and
Book value of
machinery
machinery
Insurance of
9933.77
87
salaries of work
No. of
management
employees
5000.00
9
6
7500.00
16000.
0
0
00
346417
00
8000.0 8000.0 80000. 24000.00
0
0
28763 Total
.00
7500.0 2500.0 25000.
0
24000.00
00
4966.8 5960.2 150000
2500.0 Area occupied
.00
993.38 496.69 596.03
49668. 79470.2
building
00
15000.
9
7947.02
machinery
00
30000.00
4966.8
Book value of depreciation
30000. 10000. 100000
00
20000.00
00
15000 5000
00 103500
6
219927 79964 101056
Machine shop
Machine shop
X(£)
Y(£)
Assembly(£)
346417
287636
219927
Store
39982
29987
9995
79964
Maintenance
48506.88
32337.92
20211.2
101056
Total cost
434905.88
349960.92
250133.2
Total(£)
Primary distribution
c) Overhead absorption rate for each of the production department X, Y and assembly Call Us: 44 203 3555 345 Mail Us: help@globalassignmenthelp.com Website: www.globalassignmenthelp.com
0
Overhead absorption rate = Total overhead/ machine hours Overhead absorption rate for department X = 434905.88£/80000 = 5.44£ Overhead absorption rate for department Y = 349960.92£/60000 = 5.83£ Overhead absorption rate for Assembly = 250133.2£/10000 = 25.01£ d). Calculation of the overhead Total overhead cost = (0.8*5.44£) + (5.83 * 0.6) + (25.01£*0.1) 4.35£ + 3.50£ + 2.50£ = 10.35£ Calculation of total cost = Material cost+ labour cost + Overhead cost = 8£ + 15£ + (0.8*5.44£) + (5.83 * 0.6) + (25.01£*0.1) = 33.35£ AC 1.4 Calculation of overhead absorption rate using direct labour hours Calculation of overhead absorption rates = Total overhead/ total labour hours Machine X = 434905.88£ /200000 Labour hours = 2.17£ Machine Y = 349960.92£/150000 labour hours = 2.33£ Assembly = 250133.2£/200000 labour hours = 1.25£ Total overhead cost = (2.17£*2) + (1.5*2.33£) + (1*1.25£) 4.34£ + 3.50£ + 1.25£ = 9.09£ Total product cost = Material + Labour + Overhead = 8£ + 15£ + 9.09£ = 32.09£ Difference: By using the machine hours the overhead cost for Machine X, Machine Y and Assembly are 5.44£, 5.83£ and 25.01£.. However, using labour hour apportion basis overhead cost for all the production departments are 2.14£, 2.3£ and 1.25£. However, total overhead cost charged to the product under the machine hour and labour hour basis are 10.35£ and 9.09£. This in turn, total product cost is 33.35£ and 32.09£ respectively. It is Call Us: 44 203 3555 345 Mail Us: help@globalassignmenthelp.com Website: www.globalassignmenthelp.com
higher in case of using machine hour apportionment basis. However, when Jeffery & Son's uses labour hour basis the product cost get changed to 32.09£ comparatively lower than machine hour basis. Thus, it can be said that this is comparatively a good basis of apportionment.
Interpretation: Material Variance indicates that company is decided the company bear lower the cost as compared to then the budgeted. However, material price variance is zero because the price of material remain same to 12£ per unit. However, total labour cost variance arised to 1000£ due to higher the actual cost. The labour cost is get increased due to higher the labour rate to 10£ per unit. Further, the electricity cost is getting declined to 7625£. However, the budgeted cost is 8000£. Therefore, positive variance is raised to 375£. Maintenance cost is getting affected due to lower the total production arised variance to 200£. As earlier discussed, fixed cost remain same and get changed with the production. Therefore, fixed cost variance do not changed under the output of 2000 Units and 1900 Units. Thus, it can be concluded that labour cost variance, labour rate variance and material cost variance impacts the company in negative direction (Burns and Scapens, 2000). It affects the business profitability to a great extent. Therefore, the management has to search any alternatives to the business that helps to reduce these negative impacts. AC 2.2 performance indicators used to identify the potential improvements Different type’s performance indicators are used by the Jeffrey & Son’s in order to identify the business performances. One of the important tools is business sales higher the business sales indicate improved performance and vice versa. By increasing the business sales or turnover organization can make improvement to a great extent. For this purpose business has to provide better and qualified customer products at justified rates. Moreover effective advertising, sales promotion, before and after sales service can also be provided to the consumers. Further, the product quality may be improved using new and innovative technology for production. Another important tool is that business profitability higher the business profits shows increased performance and vice versa (Needles and Crosson, 2013). Every organization prepares financial statements so as to determine the business operational results. They can identify the important areas through which sales can be improved and cost Call Us: 44 203 3555 345 Mail Us: help@globalassignmenthelp.com Website: www.globalassignmenthelp.com
can be minimized for profit maximization. On contrary, the business position through making comparison with their competitor can be done. It can be done through comparing the total sales and profits in their respective industry. High contribution of the company implies good business performance and vice versa. Further, the customer satisfaction level can be analysed through getting customer feedbacks (Kaplan and Atkinson, 2015). In addition to it, customer waiting time for receiving the products and services offered by Jeffrey & Son's is also an important tool. Reducing the waiting time will indicate better business performance and vice versa. Another, the corporate image and market share of the Jeffrey & Son’s helps to determine the business performance. Increasing the sales in different markets tends to increase the business market share and implies good business performance and vice versa. Improving the business value of Jeffrey & Son's also tends to increase business performance. Utilization of business resources in an effective manner also will indicate good business performance of Jeffrey & Son's and vice versa. Therefore, it can be concluded that Jeffrey & Son’s can improve its performance by maximum utilization of its resources, maximizing its sales and profitability and customer satisfactions. AC 2.3 Ways to reduce cost, enhance value and quality Every business requires reducing its cost, enhancing value and the quality for achieving its objectives. It is also very important for Jeffrey & Son's to get higher the yield. To reduce the cost business has to use better and upgraded technology, cutting off the expenses and maximum utilizing the resources and recycling its waste and scrap. Further, cost per unit can be decreased through large scale of production. Jeffrey & Son's need to identify the sources at which material is available at cheaper the rates but quality should not be affected. Moreover, employing skilled and qualified labour at reasonable wages rate labour payments can be reduced. Value can be enhanced through increasing the sales and the profitability. Shareholders are the business owners. Therefore, to enhance the value Jeffrey & Son’s require paying good return to them (Zimmerman and Yahya-Zadeh, 2011). Moreover, larger the market share, competitive advantages and business expansion also contributes to improve the business value. Competitive advantageous can be taken by providing wide range of products and services to the customers at affordable prices. Further, creating good market image through satisfying the customers helps to enhance value of the Jeffrey & Son's. Good business profitability and strong financial position helps to increase Call Us: 44 203 3555 345 Mail Us: help@globalassignmenthelp.com Website: www.globalassignmenthelp.com
Jeffrey & Son's business value. On contrary, quality can be improved through using better quality of raw material and using good technology (Whitecotton, Libby and Phillips, 2013). Therefore, Jeffrey & Son's requires making upgrade its technology according to the market requirement. Moreover, technological improvement can be done in existing production techniques. All this factors affect the Jeffrey & Son's in a positive manner that helps to occupy larger the market share. This in turn, results in increasing the business growth and sustainability for the future period.
TASK 2 AC 3.1 Purpose and nature of budgeting process Budgeting process: It is the process of estimating the business expenditures and incomes for the future period. In context to Jeffrey & Son's, the managers determine the future business revenues and expenses for the business to determine the cash balance. The purpose of preparing the budget by Jeffrey & Son's is to identify the difference between budgeted and actual figures. It mainly aims at determine business variances and eliminate adverse variance which create negative impact to the Jeffrey & Son's. It assists managers to take qualified business decisions and remove negative business variances. Further, it aims at getting appropriate incomes and allocates it in different operating functions in an effective manner. However, cost control is another purpose of preparing budget by Jeffrey & Son's in which expenditures are controlled through monitoring them. There are different kind of budgets prepared by the organization includes sales budget, purchase budget, production budget and cash budget. The purpose of this process is to take effective decisions and controlling the cost (Ahrens and Chapman, 2007). Further, it is structured to eliminate the negative variances and identify the cash availability at the end of the period. Nature of budgeting Process: Initially, the holders require estimating the cash inflows and cashing outflows. Under the cash inflow, Jeffrey & Son's requires to forecast the business sales and other operation incomes. However, cash outflows can be forecasted through considering the Jeffrey & Son's expenditures on purchase and its operational expenditures such as labour's wages, staff salary and other capital expenditure requirements. Thereafter, Jeffrey & Son's managers identify the cash balance by subtracting total cash payments from the total cash inflows. It may be of two kinds that are surplus and deficit. Higher the incomes of Jeffrey & Son are than expenses results in surplus and vice versa. (Datar and et. al., 2013). Call Us: 44 203 3555 345 Mail Us: help@globalassignmenthelp.com Website: www.globalassignmenthelp.com
Thereafter, cash balance should be added into initial cash balance to determine the cash balance at the end of the period. As per the given scenario, Jeffrey & Son's Ltd. can prepare budgets by considering all the factors that affect the organization. The budget holders of the company are analysing the market trend in order to determine the volatility. Jeffrey & Son's prepares its budgets through adopting incremental budgeting system. The key factor in the budget is sales the company is regularly increased its sales volume. It indicates the management's attitude is to increase the number of units that are selling by the company (Mongiello, 2015). It helps to increase the total business sales on a regular basis. The units may get increased by a specific percentage or a specific number of units. The reason behind that is to establish coordination between all the prepared budgets. AC 3.2 Appropriate Budgeting method for the organization and its need Presently, Jeffrey & sons is preparing its budget following the incremental budgeting system. Therefore, it become advisable that it should prepare the budget through following the Zero based budgeting system as it overcomes the incremental budgeting drawbacks. The advantage of the zero based budgeting is that each period budget is prepared through considering the market changes. In this method, management identify the business operation that will taken place in the future period. Then all the cash inflows are allocated to various activities according to the organization need. Thus, optimum utilization of resources can be done by the company helps to increase the profits (DRURY, 2013). Under this method, the company can analyse the different alternatives and select the best for them. Through this method company can allocate the resources in an effective manner helps to reduce the overall cost. This in turn, results in higher the business profitability and business growth.
Possible causes and corrective actions: Sales amount indicate negative variance to 2180ÂŁ. The possible causes may be decreasing the per unit sales to 3.94ÂŁ. On contrary, the total sales volume also gets declined to 3500 Units. To remove such variance per unit sales price and effective advertising and marketing can be done. However, per unit material price get increased to 0.97. Moreover, the budgeted and actual material quantity for 3500 units is 1400kg and 1425kg. Therefore, material cost variance is incurred amounted to 420ÂŁ. The company should be advised that it should purchase material from the other sources at lower Call Us: 44 203 3555 345 Mail Us: help@globalassignmenthelp.com Website: www.globalassignmenthelp.com
the price (Bisbe, Batista-Foguet and Chenhall, 2007). On contrary, the labour cost variance and overhead variance arrived to 510£ and (100) £. The reason for the labour cost variance is that the decided labour hour per unit is 400. However, actual labour hours take place for 345 hours. Further, the budgeted and actual labour rate are 8£ and 7.8£ respectively. Therefore, to remove these variances the company should improve the labour efficiency. AC 4.2 Operating statement reconciling budgeted and actual results Particular
Per unit Budgeted(4000 Units)
Per unit
Actual(3500) Variance
Sales
4
16000
3.94
13820
-2180
Material
0.96
3840
0.97
3420
420
labour
0.8
3200
0.77
2690
510
4900
-100
Fixed 4800
Overhead Total
2.96
11840
3.14
11010
830
1.04
4160
0.8
2810
1350
Operating profit
AC 4.3 Responsibility centres There are various departments that operate in any organization. In context to given scenario, purchase department, sales department and production department can take decisions through using these variances. Purchase department should clearly identify the quantity and rate of material requirements. However, sales department is responsible for achieving the target sales in unit as well as value terms. Jeffrey and Son’s Ltd. sales do not meet the budgeted values. Therefore the department should analyse the reasons for it. In order to remove such variances organization can make effective marketing plans. Moreover, selling price per unit and customer demand also should be analysed (Kokubu and et. al., 2009). Further, the production department is responsible for producing the adequate amount of quantity as per the market requirement. In context to Jeffrey & Son's, cost can be increasing due to higher the labour charges, higher purchases of raw material and other operating expenditures. Further, the sales variance may be arise due to lower the business sales because of lower the selling prices from 4£ to 3.94£. Further, material prices may got increase due to higher the material prices per unit Call Us: 44 203 3555 345 Mail Us: help@globalassignmenthelp.com Website: www.globalassignmenthelp.com
from 0.96£ to 0.97. Another, lower the number of unit’s sales causes lowers the sales and also the profits. This in turn, profits may get decrease from the set budgeted targets of Jeffrey & Son's. Moreover, spoilage and wastage of raw material also tends to improve the material cost of Jeffrey & son's. Furthermore, higher the product cost and lower the sales prices results in lower the profit per unit from 1.04£ to 0.8£.
CONCLUSION The presented report conclude that by adopting variety of management tools business can take necessary decisions for attaining the organization goals and its objectives. Moreover, it helps to compete effectively from the market competitors. It helps to reduce the cost so as to improve business operational performance. This in turn, results in long run survival of the business organization.
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REFERENCES Books and Journals Adler, R., 2013. Management Accounting. Routledge. Ahrens, T. and Chapman, C.S., 2007. Management accounting as practice. Accounting, Organizations and Society, 32(1), pp.1-27. Bisbe, J., Batista-Foguet, J.M. and Chenhall, R., 2007. Defining management accounting constructs: a methodological note on the risks of conceptual misspecification. Accounting, organizations and society. 32(7). pp. 789-820. Burns, J. and Scapens, R.W., 2000. Conceptualizing management accounting change: an institutional framework. Management accounting research. 11(1). pp.3-25. Datar, S. M. and et. al., 2013. Cost accounting: a managerial emphasis. Pearson Higher Education AU.
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