Unit 5 Accounting Management Assignment

Unit 5 Accounting Management Assignment

Unit 5 Accounting Management Assignment

Introduction

Management accounting assignment is held responsible for managing the organisational activities as well as their funds in effective manner. To manage their activities they prepare different policies. BRUNEI Co. follows the budgeting process to manage their liquid funds that helps in balancing their cash flows. Different budgeting methods will be discussed and utilised. They will make their performance evaluation with the use of variance analysis.

Accounting Management Assignment | HND Assignment

Task 1

A. Explain why organisations use budgeting (LO 1.1; 1.2)

  • Budgeting: It is the process of allocating the available resources in effective manner for the purpose of optimum utilisation. It also make inclusion of forecasting related to income and expenditure. There are various benefits due to which organisation follow the budgeting process such as:
  • Manage cash flows: It helps in effective forecasting that helps in estimating requirement of funds and also estimate the expenses ratio. With the use of this estimation information they make adequate level of balance in their cash flows (inflows and outflows) (Ya & A, 2012).
  • Decision making: With the help of the estimating they gather effective set of information that get utilised for decision making process. With the use of this information they took decisions related to the use of available finance as well as made expenses accordingly.
  • Setting benchmark: With the use of budget results they set the effective benchmark for their department. By following these benchmarks they control their mismanagement of available resources (Ya & A, 2012).
  • Evaluate performance: It also get utilised for the purpose of making evaluation of their performance. In order or make performance evaluation they compare their actual outcomes with their budgeted outcomes. With the help of attained variances the evaluate their performance as they attain favourable results or adverse results.
  • Allocate resources properly: Budgeting process renders adequate requirement of the resources that helps in allocated resources properly. On the basis of the requirement they allocate and utilise their available resources in order to get desired outcomes.
  • Proper communication: Management make effective communication with the use of the prepare budget in order to process the activities accordingly. They set effective benchmark for the purpose of processing and executing their activities in effective manner (Anessi-Pessina, et. al., 2016).

B. Explain the administrative procedures used in the budgeting process. (LO 1.1; 1.2)

The administrative procedures having three steps process that get utilised in budgeting process. Below three steps get discussed such as:

  • Appoint budget officer: Budget officer is such authorised body that put adequate level of control over budgeting process. He/she can be elected preferentially or from the members of their budget committee. He plays a channel role or mediator among the budget committee and managers & employees. They effectively deal with the problems or issues raised so that they make effective changes in their budget well before time. He is responsible for making effective communication in context to budget.
  • Budget committee: It is a team of authorised persons that engaged into supervision of budgeting process. Member form every department get included in budget and these get selected on the basis of their designations and experiences. They also get termed as coordinator. They effectively measure the organisational performance by conducting variance analysis and if they get adverse results they search reasons for it. They also engage into approving budgets and after this they send it to management accounting department for the preparation of "Budget Manual" (Anessi-Pessina, et. al., 2016).
  • Prepare budget manual: It is such document that explain the prepared budget in a documented form. It make inclusion of all the details related to different division and processes. It shows the deadlines for attaining the desired results and departments follow them in effective manner. It also make segregation of the liabilities among the authorised personals after which they attain responsibility to make communication related to the budget among their employees and make them motivated so that they attain it effectively (Anessi-Pessina, et. al., 2016).

C. Describe the stages in the budgeting process (including sources of relevant data, planning and agreeing draft budgets and purpose of forecasts and how they link to budgeting). (LO 1.1; 1.2)

Budgeting process is denoted as strategic management tool and it get utilised for forecasting and decision making. Below are the stages involved in budgeting process such as:

  • Budget preparation: It is first stage and it include the basic requirements of every department. In budget preparation below points get followed such as: -
    • Follow organisation structure: It make inclusion of the goals and objectives, vision and missions of the organisation.
    • Forecast revenue and expenditure: Make forecasting in context to revenue and expenditure. For this purpose make use of adequate sources.
    • Budgeting technique: Make use of optimum budgeting technique such as zero based or incremental or any other. Their management utilise best suitable technique.
    • Allocate the resources: It is necessary to allocate the resources in adequate manner as it results into proper utilisation of resources.
    • Follow government policies: Management need to follow all the implied policies in order to make the budget most effective and efficient (Morozov, 2013).
  • Budget approval: It is 2nd step where prepared budget need to be approved from the budget committee. Budget committee is such authorised body that approve the budget prepared by their management. The make effective analysis and if it is not prepared accordingly they must reject it. They make effective alternations or amendments before approving prepared budgets.
  • Budget execution: It is the 3rd step where approved budget get executed in effective manner. Budget manual is required for the purpose of making effective communication among different department. Effective changes are made in the approved budget also with any change in their market (Morozov, 2013).
  • Budget evaluation: It is the last and final step of budgeting process where worthiness of prepared budget get evaluated. It can be termed as audit of the budget where variances get calculated. If the variances are favourable then it can be termed as successful budget otherwise different reasons get measured. Benchmark or standards get set in order to make adequate use of their budgets (Morozov, 2013).

Task 2

a) Explain and illustrate with examples classifications used in the analysis of the product/service costs including by function, direct and indirect. Fixed and variable, stepped fixed and semi variable costs. (LO 2.1)

  • Function cost: It is such part of cost that get segregated as per the requirement of the activity. It also denoted as activity based cost.
  • Direct and indirect: The cost that have direct relation with the product and its absence impact its profitability directly. Cost of material is production process having direct relation.
    The cost that have indirect relation with the product and its absence is having indirect impact over its profitability. Depreciation over machinery having indirect relation in production process (Brook, 2012).
  • Fixed and variable: The cost which remain same from the starting point to the end point termed as fixed cost. Rent is best suitable example..
    The cost that keep on varying with the change in activity is denoted as variable cost. Material cost is best suitable example.
  • Stepped fixed: The cost which is fixed for a group but it is variable for different cost. Maintenance cost is best suitable example (Brook, 2012).
  • Semi variable: The cost which is fixed from starting to an extent after which it become variable. Electricity bill is best suitable example (Brook, 2012).

b)Calculate the fixed and Variable cost using the high low method and justify your reason of application. (LO 2.1)

Given data:

Months

Units

Costs

Jan

6,200

£69,700

Feb

3,500

£45,300

March

3,100

£44,100

April

4,900

£64,100

May

7,100

£88,100

June

4,200

£57,800

Formula: Variable cost per unit = Total cost (high cost - low cost) / Total units (High level unit - low level unit)

Particulars

Amount

High cost

£88,100

Low cost

£44,100

High units

7,100

Low units

3,100

Per unit variable cost = (88,100 - 44,100) / (7,100 - 3,100)

= 44,000/4000 = £11 per unit (Liou, 2011)

Calculation of fixed and variable cost using high low method such as: -

At high level

Particulars

Amount

At 7,100 units

Variable cost (7,100 units * £11/ unit)

£78,100

Fixed cost (£88,100 - £78,100)

£10,000

At low level

Particulars

Amount

At 3,100 units

Variable cost (3,100 units * £11/ unit)

£34,100

Fixed cost (£44,100 - £34,100)

£10,000

Analysis: In the above tables variable and fixed cost get calculated in order to segregate the semi-variable cost of organisation. Previous years costs as well as units get utilised for the purpose of making calculation with the use of high low method. In calculation high and low costs as well as units get utilised (Liou, 2011).

Task 3

a. Demonstrate and discuss the effect of absorption and marginal costing on inventory valuation and profit determination. (LO2.1 & 2.2)

BRUNIE Co. follow two costing methods for making inventory evaluation and profit determination such as:

  • Absorption costing: - This costing method emphasis over inclusion of all available costs whether it is variable (direct cost) or fixed cost (indirect cost) as well as all other overhead costs.
  • Marginal costing: - This costing method emphasis over the inclusion of all variable costs but didn't make inclusion of fixed costs. Only direct cost is utilised for calculation (Srithongrung, 2010).

For inventory valuation and profit determination they make use of the marginal costing as they include all the variable costs for their calculation without inclusion of fixed cost as it is not incurred directly over the production of their product. It helps in focusing over the direct costs that has fluctuations on the other hand fixed cost having same nature during whole process. There is effective level of differentiation among the marginal costing and absorption costing for the purpose of profit determination such as: -

  • High level of profits get extracted in absorption costing when there is increase in the inventory level.
  • As per the marginal costing method organisation attain higher profits when their inventory level decreases.
  • When inventory level remain fixed or didn't show any change it results into similar profit (Srithongrung, 2010).

b. Differentiate between Job costing, Batch costing, Process costing and Service costing. (LO2.2)

Differentiation shows in below table such as:

Job Costing

Batch costing

Process costing

Service Costing

Cost calculation is based over cost of every order.

Cost calculation make inclusion of the batch or unit of same product.

Production process include lots of steps and each step is taken in to consideration for cost calculation.

Organisation renders services instead of products and cost is calculated over services only.

Different and unique products are included and it can be termed as customised products.

In batch standardized products are included.

At every step or process product is easily differentiated.

Services are considered instead of products.

Under this costing type products size is small.

The size of batch is big as there are lots of products included under it.

Size get varies as it can be small or big.

Services are rendered and cost is calculated over them only.

Customised industry follows this type of method.

Most of the standardised industry follows it.

Majority of standardised industry follows it.

Both type of industry whether it is customised or standardised follow this method.

c. Prepare a profit and loss statement for each area, East and West, and in total, on an absorption costing basis.  (LO2.2 & 2.3)

 

slim

soccer

Decani

 

£

£

£

selling price

50

58

70

purchasing price

32

36

44

gross profit

18

22

26

Profit and loss account for area East and West such as:

area

 

east

west

total

gross profit:

 

 

£

 

£

£

 

slim

 94000*18

  1,692,000.00

 32000*18

     576,000.00

  2,268,000.00

 

soccer

 45000*22

     990,000.00

 46000*22

  1,012,000.00

  2,002,000.00

 

decani

 26000*26

     676,000.00

 42000*26

  1,092,000.00

  1,768,000.00

 

 

 

  3,358,000.00

 

  2,680,000.00

  6,038,000.00

Packaging

 

 

437768.24

 

162231.76

 

Advertising

 

 

486315.79

 

353684.21

 

Transport

 

 

335291.96

 

264708.04

 

 total cost

 

 

1259375.99

 

780624.01

 

Profit

 

 

2098624.01

 

1899375.99

 

Working notes: Cost apportionment

Workings

 

 

 

 

 

 

cost app.

 

 

 

 

 

 

 

basis of App.

 

 

 

 

 

Packaging

no of orders

East

85000

(220000+380000)/116500

 

5.15

 

 

West

31500

 

 

 

 

 

 

116500

 

 

 

Advertising

sales units

East

165000

(280000+560000)/285000

 

2.95

 

 

West

120000

 

 

 

 

 

 

285000

 

 

 

Transport

 

East

9130000

(350000+250000)/16338000

 

 £ 0.037

 

 

West

7208000

 

 

 

 

 

 

16338000

 

 

 

 

 

 

 

 

 

 

 

 

Slim

soccer

decani

 

 

East

S.P.

50

58

70

 

 

 

no of units

94000

45000

26000

 

 

 

total sales value

4700000

2610000

1820000

9130000

 

 

 

 

 

 

 

 

 

 

Slim

soccer

decani

 

 

West

S.P.

50

58

70

 

 

 

no of units

32000

46000

42000

 

 

 

total sales value

1600000

2668000

2940000

7208000

 

 

 

 

 

 

 

 

d. Prepare a profit and loss statement for West only, using marginal costing, showing the relevant information for each product and the total profit or loss in that area. (LO2.2 & 2.3)  

Profit and loss account for west only such as:

Marginal Costing

 

Slim

Soccer

Decani

Total

 

 

£

£

£

£

gross profit per unit

 

18

22

26

 

no. of units

 

32000

46000

42000

 

gross profit

 

576000

1012000

1092000

2680000

Packaging

 

£12,274.68

£28,326.18

£18,884.12

£59,484.98

Advertising

 

£31,438.60

£45,192.98

£41,263.16

£117,894.74

Transport

 

£34,275.92

£57,155.10

£62,982.01

£154,413.02

TVC

 

£77,989.20

£130,674.26

£123,129.28

£331,792.74

contribution

 

£498,010.80

£881,325.74

£968,870.72

£2,348,207.26

fixed cost

(380000+560000+250000)-331792.74

 

 

 

858207.26

Profit

 

 

 

 

£1,490,000.00

Working notes: Cost Apportionment

Particulars

Basis of apport.

Calculations

 

Results

 

Packaging

no of orders

220000/116500

 

£1.89

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising

sales units

280000/285000

 

£0.98

 

 

 

 

 

 

 

 

 

 

 

 

 

Transport

 

350000/16338000

 

£0.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Slim

soccer

decani

 

west

s.p

50

58

70

 

 

no of units

32000

46000

42000

 

 

total sales value

1600000

2668000

2940000

7208000

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Task 4

a) Advise the BRUNEI CO. with supporting figures as to whether to cease production of A and D. (LO 2.4)

Calculation of contribution without A & D:

details

B

E

TOTAL

 

£'000

£'000

£'000

SALES

1100

1200

2300

 

 

 

0

MATERIAL

-290

-290

-580

LABOUR

-280

-280

-560

VAR OVERHEADS

-250

-280

-530

FIXED OH

-300

-300

-600

PROFIT/(LOSS)

-20

50

30

ORIGINAL PROFIT

130

200

 

CHANGE

-150

-150

 

Calculation of contribution made by A & D:

 

A

D

SALES

760

900

MATERIAL

-185

-290

LABOUR

-240

-280

VAR OH

-210

-310

TOTAL VAR. COSTS

-635

-880

CONTRIBUTION

125

20

Analysis: BRUNEI Co. management propose to close down the production of Product A & D as it is considered that they lead to loss situation. As per the results of the profit calculation without inclusion of A & D results that Product B is yielding loss whereas Product E yields only minor profit. With the inclusion of Product A & D it is clearly observed that they are not attaining huge profits but they didn't attain loss and with the help their sales they easily meet out their expenditure and earn adequate level of profits for their business. Now it is suggested that they need not to close down the production of Product A & D (Libby & Lindsay, 2010).

b) Based on the above figures, calculate

(i) The contribution to sales ratio, based on the sales mix of the four products above. (LO 2.4)

Calculation is in below table such as:

Details

A

B

D

E

TOTAL

 

£'000

£'000

£'000

£'000

£'000

SALES

760

1100

900

1200

3960

MATERIAL

-185

-290

-290

-290

-1055

LABOUR

-240

-280

-280

-280

-1080

VAR OVERHEADS

-210

-250

-310

-280

-1050

TOTAL VAR. COSTS

-635

-820

-880

-850

-3185

CONTRIBUTION

125

280

20

350

775

 

 

 

 

 

 

CONTRIBUTION TO SALES RATIO

16.45%

25.45%

2.22%

29.17%

19.57%

(ii) The break-even point in £000.  (LO 2.4)

Breakeven point = Total fixed cost / contribution to sales ratio

Total fixed cost = 600

Contribution to sales ratio = 0.1957

= 600/0.1957 = 3,065.806

Breakeven point = £3,605.806 (Pollack, 2014)

(iii) The required sales in £000 to earn a profit of £200,000.  (LO 2.4)

Targeted sales = Total fixed cost + targeted profit/ contribution to sales ratio

Total fixed cost = 600

Targeted profit = 200

Contribution to sales ratio = 0.1957

= 600 +200/ 0.1957

= 800/0.1957= 4,087.742

Required sales = 4,087.742 (Pollack, 2014)

c) If labour is paid at a rate of £10 per hour and labour is restricted to 98,000 hours, state, with supporting figures, the combination of products (in £000) that would maximise profit for the period.  (LO 2.5) 

Particulars

A

B

D

E

TOTAL

 

 

 

 

 

 

 

 

Labour cost

240000

280000

280000

280000

1080000

 

Lab. Cost/hr

10

10

10

10

10

 

No. of lab. Hrs/product

24000

28000

28000

28000

108000

Hrs. needed

 

 

 

 

 

98000

Hrs. available

 

 

 

 

 

-10000

Hrs. Shortage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A

B

D

E

 

 

 

 

 

 

 

 

 

No. of lab. Hrs/product

24000

28000

28000

28000

 

 

Contribution

 £ 125,000

 £ 280,000

 £ 20,000

 £ 350,000

 

 

Contribution/lab. Hr.

 £       5.21

 £     10.00

 £     0.71

 £     12.50

 

 

Ranking

3

2

4

1

 

 

Product mix: -

Product

Sales value

No. of Lab. Hrs

Contribution / lab hr.

Total contribution

 

E

 £1,200,000

28000

£12.50

 £      350,000

 

B

 £1,100,000

28000

£10.00

 £      280,000

 

A

 £760,000

24000

£5.21

 £      125,000

 

 

 

80000

 

 

 

D

 £ 578,571.43

18000

 £  0.71

 £   12,857.14

 

 

TOTAL

98000

 

 

 

 

 

 

 

 £ 767,857.14

Maximised Cont.

 

 

 

 

 £ 600,000.00

Less: Total FC

 

 

 

 

 £ 167,857.14

Maximised Profit

d) If a further 8,000 hours become available, calculate the increase in profit that would arise. (LO 2.5)

If there is an extra 8,000 Hrs. available then the profit will arise by: -

8,000 hrs. * 0.71 = £5,714.29

Increase in profit is by £5,714.29 (Alino & Schneider, 2012)

Task 5

a) Board of BRUNEI CO. Ltd wants you explain the differences between these budgeting methods and to advise which one will be more appropriate to which type of business (LO 3.1)

  • Incremental: The management of BRUNEI Co. make use of their previous year's information or figures for the purpose of preparing their budget for current year. In previous year budget they made effective changes on the basis of required improvements, current trend as well as changes in the market. These changes shows increment in their budget and with this effect budget get known as incremental budget (Kurunmäki & Miller, 2011).
  • Zero based: The management of BRUNEI Co. prepare the budget with the fresh figures no information related to their previous year get utilised. They are not allowed to make use of previous year's figures for preparing their current year budget. New organisation follows this method for preparing their budget (Kurunmäki & Miller, 2011).
  • Fixed: The management of BRUNEI Co. prepare budget report for one time and it get followed by them for a longer time period. There is no change is made into it and most of the time it provide rigidity among organisation.
  • Flexible: The management of BRUNEI Co. prepare budget in the starting of the year and make effective changes into it for the purpose of attain desired results from it. With the use of this method management as well as organisation attain high level of flexibility and helps in attaining desired benefits from it (Easterday & Eaton, 2012).

b) You are required to perform the below listed tasks help the board of BRUNEI CO. understands the cash flow and how they can be managed to improve efficiency within the Working Capital:

(i) Calculate the amount of direct materials purchases in each of the month of July, August and September. (LO 3.2)

The amount of direct materials purchases in each of the month is as follows such as:

 

 

July

Aug

Sept

 

 

£

£

£

 

closing stock

11500

16000

13000

add

usage

22000

28000

32000

 

 

33500

44000

45000

less

opening stock

16000

11500

16000

 

material purchase costs

 £ 17,500.00

 £ 32,500.00

 £ 29,000.00

(ii) Prepare the cash budgets for July, August and September. (LO 3.1, 3.2 and 3.3)

Cash budget for the three months such as July, August and September is as follows such as:

 

 

July

August

September

 

Receipts

£

£

£

 

cash sales

43500

48000

57000

 

receivables

60000

101500

112000

 

Total Receipts

103500

149500

169000

 

Payments

 

 

 

 

wages

38000

42000

47500

 

overheads

16000

20500

24500

 

purchase of direct materials

17500

32500

29000

 

tax bill

 

 

78000

 

Total Payments

71500

95000

179000

 

Net Receipts/ (Payments)

32000

54500

-10000

 

Opening Cash Balance

15000

47000

101500

 

Closing Cash Balance

47000

101500

91500

(iii) Describe briefly the advantages of preparing cash budgets. (LO 3.1, 3.2 and 3.3)

The advantages of preparing cash budgets are as follows:

  • Cash in hand get managed in effective manner.
  • It build savings habit.
  • Unnecessary expenses get minimised.
  • Financial awareness get increased among management.
  • The balance between cash inflows and cash outflows get managed in effective manner.
  • It reduces the chances of getting out of liquid funds.
  • It make the organisation's liquid position strong (M Peter 2010).
(iv) Assess and advise the Board for any changes which should be made to improve the cash flow variances. (LO 3.4)
  • Analysis over the prepared cash budget: As per the prepared budget it get analysed that there is effective level of increase among revenues and expenditure. But the difference is the rate of speed of increase in revenues is bit slower as compare to increase in expenditure. Management need to maintain the balance between the cash inflows as well as cash outflows. For this purpose they need to increase the level of their revenue earning capacity as well as slow down the increment of their expenditure. With the effect of it they become able to manage their cash (M Peter 2010).
  • Recommendations to improvements such as: Management need to lower down their prices but have to increase their product qualities to increase their sales.

They need to shorten the time period for their debt collection to increase the level of their revenues earned.
There is requirement of enhancing their credit policy for the purpose of better cash inflows.
They need to restrict the unnecessary spending that results into huge savings.
In order to lower down the ratio of salaries and wages they need to hire skilled labour that helps in making effective savings (M Peter 2010).

Task 6

(i) Prepare a flexed budget and calculate the total variances (LO 4.1, 4.4)

Flexed budget as well as calculation of total variances is in below table such as:

 

Particulars

original budget

flexed budget

actual budget

variances

 

 

sales units

8100

8400

8400

 

 

 

production units

8900

9100

9100

 

 

 

 

£

£

£

£

 

 

Sales

793800

823200

798000

-25200

adverse

 

Materials

195800

200200

170455

29745

favourable

 

Labour

267000

273000

244515

28485

favourable

 

variable overheads

106800

109200

89348

19852

favourable

 

fixed overheads

160200

163800

136074

27726

favourable

 

production cost

729800

746200

640392

 

 

 

less closing inventory

65600

57400

57400

 

 

less

cost of sales

664200

688800

582992

 

 

 

Profit

129600

134400

215008

80608

favourable

(ii) analyse each of the cost variances clearly identifying possible causes of these variances and recommend corrective action for the identified variances (LO 4.2, 4.3)

a. Materials

Material price variance

 

£

 

actual cost of material for 36464 kg

 

 

 £ 170,455.00

 

36464 kg @ std cost of £5.50/kg

 

 

 £ 200,552.00

 

 

 

 

 £   30,097.00

Fav.

material usage variance (explain)

 

 

 

 

 

 

 

 

 

actual usage

 

 

36464

Kg

std usage for the actual production

 

 

 

 

 

9100 @ 4kg

 

36400

Kg

 

 

 

-64

Adv

 

 

at std cost of £5.50

-£        352.00

Adv

 

 

 

 

 

total material variance=30097-352=

 

 

 £   29,745.00

Fav.

Particulars

Variances

F or UF

Causes

Actions

Material price

£   30,097

F

Availability of low quality material.

Unnecessary wastage get increased.

Fluctuations in its prices

Purchase good quality material

Allocate raw-material following EOQ method

Follow quality standards.

Material usage

64 kg

A

b. Labour

Particulars

 

 

£

 

Labour rate variance

       

actual hours paid at actual cost

 

 

244515

 

actual hours at std cost (46400 hrs @£5)

 

 

232000

 

 

 

 

-12515

A

labour idle time variance

 

 

 

 

 

no. of actual labour hrs paid

 

46400

 

 

no. of actual labour hrs worked

 

45100

 

 

 

 

1300

 

1300 hrs @ std cost of £5

 

 

-6500

A

labour efficiency variance

 

 

 

 

 

 

 

Hrs

 

actual hrs worked

 

 

45100

 

std hrs worked on actual production

 

 

 

 

 

9100*6

 

54600

 

 

 

 

9500

F

 

9500 hrs @ std cost

 

 £ 47,500.00

F

 

 

 

 

 

total labour variance=

 

47500-6500-12515 =

 £ 28,485.00

F

Particulars

Variances

F or UF

Causes

Actions

Labour rate variance

-12515

A

High adverse labour idle time.

Increase in the over shift work

Increase in unskilled labour ratio.

High fluctuation in labour rates

Minimise the idle time ratio.

Remove over shift facility

Introduce new machinery.

Focus on hiring skilled labours

Labour idle time variance

-6500

A

Labour efficiency variance

47,500

F

c. Variable overheads

Variance Overhead

 

 

£

 

actual hours worked@ actual cost

 

 

89348

 

actual hours worked@ std cost

 

 45100*£2

90200

 

 

 

 

 £      852.00

F

 

 

 

 

 

variable overheads efficiency variance

 

 

 

 

actual hours worked

 

 

45100

 

std hrs for the actual production

 

9100*6

54600

 

 

 

 

9500

 

 

at std cost@ £2

 

 £ 19,000.00

F

 

 

 

 

 

total variable overheads variance= 852+19000=

 

 

£19852

F

 

 

 

 

 

 

 

 

 

 

Particulars

Variances

F or UF

Causes

Actions

Variable overhead capacity

£852

F

Available resources utilised in adequate manner.

Set plans get followed in effective manner.

Build adequate contract that helps in reducing price fluctuations.

Allocate resources in efficient manner.

Variable overhead efficiency

£19,852

F

d. Fixed overheads

fixed overheads variance

 

Calculation

Results

 

 

 

 

£

 

actual fixed overheads

 

 

136074

 

original budget total

 

 

160200

 

 

 

 

 £ 24,126.00

F

 

 

 

 

 

capacity variance

 

 

Hrs

 

actual hours worked

 

 

45100

 

budgeted hours

 

8900*6

53400

 

 

 

 

8300

A

 

at std cost of £3

8300*£3

 £ 24,900.00

A

 

 

 

 

 

fixed overheads efficiency variance

 

 

 

 

actual hours worked

 

 

45100

 

std hrs worked for the actual production

 

 

 

 

 

 

9100*6

54600

 

 

 

 

9500

F

 

at std cost of £3

9500*£3

 £ 28,500.00

F

 

 

 

 

 

total fixed overheads variance

 

24126-24900+28500 =

 £ 27,726.00

F

Particulars

Variances

F or UF

Causes

Actions

Fixed overhead variance

£ 24,126

F

Management having poor estimations.

The accuracy level of available information is not adequate.

 

Put emphasis over facts and figures for decision making process.

Review the information reliability before using.

capacity variance

£24,900

A

Fixed overhead efficiency

28,500

F

e. Sales variance

Sales price variance

 

Calculation

Results

 

 

 

 

£

 

actual sales at actual selling price

 

 

798000

 

actual sales at std selling price

 

8400*98

823200

 

 

 

 

-25200

A

 

 

 

 

 

sales volume variance

 

 

units

 

 

actual sales

 

8400

 

 

budgeted sales

 

8100

 

 

 

 

300

F

profit (std profit of £129600/8100) = £16

 

 

 £ 4,800.00

F

Particulars

Variances

F or UF

Causes

Actions

Sales price variance

25,200

A

Fall in the prices of product.

Product get sold over high discount rates.

Set prices get affected due to substitute products.

Improve the quality of products.

Set prices by reviewing competitors prices.

Sales volume variance

300

F

e. Prepare a statement reconciling the budgeted profits to the actual profit

Reconciliation statement of the variances such as:

Particulars

 £

 £

Budgeted profits

 

 £ 129,600.00

Budgeted fixed production overheads

 

 £ 160,200.00

Budgeted contribution

 

 £ 289,800.00

Selling Price Variance

-£   25,200.00

 

Sales Volume Variance

 £     4,800.00

-£   20,400.00

Actual sales minus the standard variable cost of sales

 

 £ 269,400.00

Variable cost variances:

 

 

Material price variance

 £   30,097.00

 

Material usage variance

-£        352.00

 £   29,745.00

Labour rate

-£   12,515.00

 

Labour idle time

-£     6,500.00

 

Labour efficiency

 £   47,500.00

 £   28,485.00

Variable cost variances

 £        852.00

 

Variable efficiency

 £   19,000.00

 £   19,852.00

Actual Contribution

 

 £ 347,482.00

Budgeted Fixed Production Overheads

-£ 160,200.00

 

Fixed cost expenditure variance

 £   24,126.00

 

Capacity Variance

-£   24,900.00

 

Fixed cost efficiency variance

 £   28,500.00

 

Actual Fixed Production Overheads

 

-£ 132,474.00

Actual Profit

 

 £ 215,008.00

(iii) Report these findings to the board in accordance with identified responsibility centres. (LO 4.5)

To,
The Board of Directors,
BRUNEI Co.
Subject: - Report on variances
Date: - XX-XX-XXXX
Sir/Madam,
This report is represented in order to aware about the overall performance of the organisation. The results of variance analysis showcase that different requirements require adequate level of improvements. These variances get utilised for the effective decision making and for these variances different departmental managers are responsible such as:

Variance

Responsible manager

Material variance

Production manager

Labour Variance

Labour manager or Human resource management

Variable overhead

Departmental managers

Fixed overhead

Departmental managers

Sales variance

Sales manager

Conclusion: Management of BRUNEI Co. need to emphasis over their performance enhancement. On the basis of calculated variances management need to put emphasis over improving the performance of the different department as per their variance level. Management need to focus over motivated their employees so that they perform their efficiently.
From:
Management Accountant
(Pilleboue, et. al., 2015)

Task 7

(a) Calculate, both in number of units sold and sales value, the (LO 5.1):

(i) Breakeven point

Breakeven point = Total Fixed cost / Contribution per unit

Total fixed cost = salaries & wages + rent & rates + other fixed costs

= £260,000 + £75,000 + £345,000

Total fixed cost = £680,000

Contribution per unit = Per unit selling price - Per unit buying price

Per unit selling price = £68

Per unit buying price = £53

Contribution per unit = £68 - £53 = £15

Breakeven point = £680,000/ £15 = 45,333.33 units

Breakeven point = Fixed cost/ PV ratio

Fixed cost = = £260,000 + £75,000 + £345,000 = £680,000

PV ratio = Per unit contribution / Selling price per unit * 100

= £15/ £68 * 100 = 22.06%

= £680,000 / 22.06%  = £3,082,502

Breakeven point = £3,082,502 (Simakov, et. al., 2015)

(ii) Margin of safety

Margin of safety = Total sales - breakeven point

Total sales = 56,000 * 68 = £3,808,000

Break-even point = £3,082,502

Margin of safety = £3,808,000 - £3,082,502 = £725,498

Margin of safety = £725,498 (Simakov, et. al., 2015)

(b) Calculate the shop’s profit or loss if 40,500 pairs of shoes were sold during a year. (LO 5.1)

In the below table calculation of profit or loss over sale of 40,500 pairs of shoes such as:

Particulars

Calculation

Amount

Sales (A)

(40,500 units* £68)

£2,754,000

Purchase price (B)

(40,500 units* £53)

£2,146,500

Contribution (A -B = C)

(40,500 units * £15)

£607,500

Fixed cost (D)

NA

£680,000

Profit/Loss (C - D)

NA

(£72,500)

With the sales of the 40,500 pairs of shoes there will be  loss of £72,500 (Li, et. al., 2014)

(c) Calculate how many pairs of shoes would need to be sold if a sales commission of £2per pair of shoes was paid in addition to other costs and the owner required a net profit of £180,025. (LO 5.1)

Formulae of revised sales = Total fixed cost + desired profit / revised contribution

Fixed cost = £680,000

Desired profit = £180,025

Revised contribution = £15 - £2= £13/ unit

Revised sales = (£680,000 + £180,025) / £13 = 66,156 units.

In the below table above revised sales is tested whether it is correct or not such as:

Particulars

Calculation

Amount

Sales (A)

(66,156 units * £68/ unit)

£4,498,603

Purchase price (B)

(66,156 units * £55/ unit)

£3,638,580

Contribution (A -B = C)

(66,156  units * £13/ unit)

£860,027

Fixed cost (D)

 

£680,000

Profit/Loss (C - D)

 

£180,025

The revised sales of 66,156 units results into attaining a additional profit of £180,025. (Li, et. al., 2014)

(d) Calculate how many pairs of shoes would need to be sold to breakeven if an advertising campaign costing £25,000 was undertaken while, at the same time, selling prices were increased by 10%. (LO 5.1 and 5.2)

There is increment in selling prices by 10% so new selling price is = £68 + (£68* 10%) = £74.8

New contribution = New selling prices - Buying prices

= £74.8 - £53 = £21.8

New fixed cost = £680,000 + £25,000 = £705,000

New breakeven point = (£705,000 / £21.8) = 32,340 units or 32,339.45 units

If there is increase in selling price by 10% and fixed cost get increased by £21.8 as advertising campaign then the new break-even point is 32,339.45 units (Li, et. al., 2014).

(e) Recommend and justified appropriate action to improve the financial performance of Indo Ltd in order to improve its profitability using the answers in part d. (LO 5.2)

The calculation made in the above sections helps in analysing that break-even point get decreased with the increase in the selling price. Earlier the breakeven point was 45,333.33 units that get reduced to 32,339.45 units by increasing the selling price by 10% only. By increasing selling price they recover their incurred cost at rapid pace. Breakeven point is at par situation in which organization didn't get losses nor earn profits. When the breakeven point is low then organisation having chance to earn high profits and vice-versa. So it recommended to increase their selling process along with adopt the marketing campaign (Li, et. al., 2014).

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Conclusion

It is concluded that BRUNEI Co. utilised different budgeting method to make adequate use of their available finance. They make cost classification in order to make best utilisation of their cost. They make different use of their prepared budget such as they evaluate performance, extract useful information in their decision making process and many more. They follow the prepared budget in order to process the activities systematically and as per their desired level. In the end they perform variance analysis for the purpose of evaluating their performance so that they make improvements in their processing.

References

Alino, N.U. & Schneider, G.P. 2012, "Conflict reduction in organization design: budgeting and accounting control systems", Academy of Strategic Management Journal, vol. 11, no. 1, pp. 1.
Anessi-Pessina, E., Barbera, C., Sicilia, M. & Steccolini, I. 2016, "Public sector budgeting: a European review of accounting and public management journals", Accounting, Auditing & Accountability Journal, vol. 29, no. 3, pp. 491-519.
Brook, D.A. 2012, "Budgeting for national security: a whole of government perspective", Journal of Public Budgeting, Accounting & Financial Management, vol. 24, no. 1, pp. 32.
Butt, M. 2010, "Variance analysis", Accounting, Auditing & Accountability Journal, vol. 23, no. 6, pp. 816-816.
Easterday, K.E. & Eaton, T.V. 2012, "Double (accounting) standards: a comparison of public and private sector defined benefit pension plans", Journal of Public Budgeting, Accounting & Financial Management, vol. 24, no. 2, pp. 278.