Unit 9 Management Accounting Assignment

Unit 9 Management Accounting Assignment

Introduction

Management accounting include different aspects, concepts and provisions that help out the management in effective decision making. With the help of concepts and provision they made effective planning related to the use of their resources. There are two main parts one is costing and other is budgeting. Costing describes the cost of the production process or process of measuring cost. Budgeting is the process of preparing budgets or planning for the future incomes and expenditures. The management accounting  different aspects of costing and budgeting get discussed effectively.

Task 1

1.1 Classify different types of cost.

There are different form of cost that get discussed below in effective manner such as: -

• Material cost: For running the production process material is required as it is the key essential element. In the absence of the material production process is not process single step (Drury, 2012). For purchasing material Sparky Ltd. need to pay some cost and this cost is referred as material cost.
• Labour cost:The second major element in the production process is labour. As labour is that element that execute the assigned activities. Without labour or workforce Sparky ltd. is not able to process the activities of production process (Drury, 2012). They pay wages to the labour and these wages referred as labour cost.
• Overhead cost: There are various cost incurred over the different activities having relation with the product and production process too. It make inclusion of insurance paid, legal fees, rent and repair payments, taxes, and many more (Drury, 2012). These costs overall termed as overhead cost.
• Direct cost: That part of cost that have direct and complete attribute towards the production of specified product of Sparky ltd. is termed as direct cost. The cost that get paid for raw material purchases, paid to labour, manufacturing supplies, etc.
• Indirect cost:That part of cost that has indirect attribute towards the production process of Sparky Ltd and it get denoted as indirect cost (Drury, 2012). The cost paid in the form of administrative expenses, overhead expenses, etc. fall under it.
• Fixed cost:That part of cost that didn't get increased or decreased with the effect of increase or decrease in the production or sales of products or services is denoted as  fixed cost. This cost make inclusion of insurance amount, rent amount, etc.
• Variable cost:That part of cost that get change in the proportion or ratio of goods and services they produce is denoted as variable cost. The cost of materials, etc. get included in it (Drury, 2012).
• Semi-variable cost: There are various names to denote it such as semi-fixed cost or mixed cost. The reason behind this cost is it is a great composition of variable and fixed cost component. Costs remain fixed for a certain level of production and after that it get converted into variable cost. If there is no production then the share of fixed cost get incurred.
• Stepped cost: That part of cost that didn't get change steadily with the change in activity but it get changed at discrete points (Drury, 2012). Step cost remain fixed for a certain boundary and out of that boundary this get change.

1.2 Use different types of costing methods (Define the following methods)

• Job costing:Under this costing method different costs related to each job get collected and accumulated separately (Feng & Ho, 2016). Each job is separately identified and become essential for analysing cost as per the job.
• Batch Costing:Under this costing method batch get utilised for calculating cost. It is the extended version of job costing and every batch is considered for unit cost.
• Process costing: When product process include different stages in order to produce product then cost get calculated at every step of production process (Feng & Ho, 2016). This is because at every process there is a different product as finished product of one process become raw material of another process.
• Contract costing: There is a separate account of each contract and it is similar to the job costing. Contract costing get utilised when the job is big in nature and run for a longer period of time.
• Service costing: This costing method get adopted by the service industry as they are dealing in services instead of producing products (Feng & Ho, 2016).

1.3 Calculate cost using appropriate techniques

FIFO Method: As per this method goods purchase first also get sold first. It is considered as correct inventory valuation method.

Closing stock cost is $280 (Bhimani, 2012).

LIFO Method:

Cost of closing stock is $240(Bhimani, 2012).

AVCO method:

Cost of closing stock is $240. (Langfield-Smith, et. al., 2015)

1.4 Analyse cost data using appropriate techniques

In the above section cost of closing stock is valued with the use of different methods. Cost of closing stock is $280 as per FIFO method, as per LIFO method the cost of closing stock is $240 and cost of closing stock is $240 as per AVCO method (Lalli, 2012). Different methods put different impact over the income statement and balance sheet such as: -

FIFO method: This method focused over selling such items that purchased or produced first also get sold first. The closing inventory amount reflect the amount of recent inventory. If there is rising prices then the closing inventory is having higher cost that results into increase in current assets. Cost of goods sold is lower and gross profit realised higher. In case of falling prices then the closing inventory is having lower cost that results into decrease in current assets. Cost of goods sold is higher and gross profit realised lower (Lalli, 2012).

LIFO method: -This method focused over selling such items that purchased or produced last also get sold first. If there is rising prices then the closing inventory is having lower cost that results into decrease in current assets. Cost of goods sold is higher and gross profit realised lower (Lalli, 2012). In case of falling prices then the closing inventory is having higher cost that results into increase in current assets. Cost of goods sold is lower and gross profit realised higher.

Average cost method: -This method relies over the average unit cost in order to calculate the cost of goods sold as well as closing inventory. It doesn't put much impact over the balance sheet and income statement as average cost is utilised for selling as well as recording the closing inventory (Lalli, 2012).

Task 2

2.1 Prepare and analyse routine cost reports.

Routine cost reports such as: - 

Flexible cost report: -

Working notes: -

Calculation over cost of electricity: -

Calculation over cost of maintenance: -

Calculation of total cost (for 1900 units): -.

Routine cost report analysis: -Cost report get prepared for the purpose of comparing the actual and budgeted results that results into variances (favourable and adverse). These variances get utilised further for getting information related to their overall performance. From the starting there is difference between the produce units as management fails to produce units as per budget and there is difference of 100 units. Secondly the actual expenses made over the labour unit is bit higher as compare to the budgeted cost as the difference is of £1,000 (Alino & Schneider, 2012). The cost of electricity and maintenance is lower than their budgeted cost that shows that management make adequate utilisation of electricity. These favourable outcomes of variances helps in getting normal profits.

In context to this flexible cost report is get prepared that helps in making better evaluation of the organisational performance. Under this report all other factors become favourable except one and that factor is none other than labour as it yields adverse outcome of £1,000 (Alino & Schneider, 2012). This is the only factor that lower down the overall profit share in both the reports.

Suggestions for better improvements: - Both reports stated that there is only one factor that adversely impact their profit earning capacity and this factor is labour department. Management need to seriously improve their labour efficiency. To improve their efficiency they need to segregate them in different segments as per their skill set and then arrange training and development sessions accordingly. Once their labour get enhanced then there is adequate level of enhancement is noted down among other factors whether it is material usage or any other factor (Weetman, 2013).

2.2 Use performance indicators to identify potential improvements

Performance indicators: -Performance indicators or key performance indicators are such measurable value that helps in measuring the organisational effectiveness in order to attain their set objectives. Organisation make use performance indicators for the purpose of evaluating their overall performance or success as whether they are attaining their set targets or not (Pazarceviren, et. al., 2015). There are various performance indicators are there that get segregated into two parts such as: -

Financial performance indicators: - In order to evaluate the overall performance of the business organisation there are various financial accounting measures get utilised. These performance indicators get further classified into four segments such as profitability, liquidity, gearing and investors ratios. Profitability measures focused over the profit earning capacity as whether they are earning as per the set targets or not (Pazarceviren, et. al., 2015). Liquidity measures helps in knowing their ability of maintaining liquid funds availability with them in order to meet out their routinely expenditure. Gearing measures focused over the usage of their debt finance in the ratio of their equity funds. If the ratio of debt get increased as compare to equity funds then it shows that business become more risky and vice versa. And investor ratio measures the status of their investment status as they are well enough to attract the investments or not.

Non-Financial performance indicators: - Indicators other than financial indicators termed as non-financial performance indicators. These factors or indicators majorly focused over ensuring the success of the organisation such as management of human resource, quality of their services and products and their brand awareness and profile of company (Pazarceviren, et. al., 2015). As per the management of human resource there are various areas that get included such as staff turnover ratio, rate of absentees, status of job satisfaction ratio and many more related to human resource of company. Quality of product or service get evaluated with the help of the responses made by their customers in the form of feedbacks and suggestions. So non-performance indicators are necessarily required to be focused as they are essential in order to satisfy the customer's need and make the brand effective and well-known within their target market (Pazarceviren, et. al., 2015).

2.3 Suggest improvements to reduce costs, enhance value and quality

There are various methods or techniques are available that get utilised for the purpose of reducing costs, enhancing values and quality and these are balance scorecard as it helps in reducing their costs, lean system for the purpose of increasing values and lastly total quality management in order to improve the overall quality feature (Kinney & Raiborn, 2013).

By following these techniques there are effective benefits get observed such as by implementing total quality management overall quality of the process get enhanced that rendered various benefits such as increase in optimum utilisation of the resources, reduction in the normal wastage and with these effect of these benefits there is adequate fall is noted down among the costs.  All these factors interlinked with each other (Kinney & Raiborn, 2013). Balanced scorecard get utilised for the purpose of managing, controlling and monitoring the consequences arise while performing the activities that helps in reducing unnecessary rise in costs. Lean system helps in reducing the number of errors occurred among the activities that ultimately increases its value (Kinney & Raiborn, 2013).

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Task 3

3.1 Explain the purpose and nature of the budgeting process

Budgeting:The process that followed in order to prepare budgets as per the set objectives. All the incomes and expenditures get forecasted in order to recorded in it. There are various information get included such as financial resources, previous year budget, variance, performance evaluation information and many more. This information is utilised for the purpose of enhancing their performance, put control over their resources and activities, allocate the available resources in appropriate ratio and many more as per the requirement (Horngren, et. al., 2014). Organisational management get diverse information which helps in their decision making as well as helps in forecasting their expenditure and revenues.

Purpose:The purpose of budgeting process are as followed such as: -

Revenue and expenditure forecasting: - With the help of the actual outcome of previous year and variance with budget management forecast their current year's revenues and expenditure effectively. Management get benefited with the availability of diverse information and easily forecast the revenues and expenditure for current period (Horngren, et. al., 2014).

Decision making tool: -Budget is considered as effective tool for decision making as there are diverse information is utilised in preparing budget. Or it is denoted as summary of different information that helps in effective decision making. Budget is considered effective source of getting information related to the estimated incomes and expenses.

Monitoring business performance: - Managers make use of budget for the purpose of building effective monitoring over activities preformed. The procedure described within budget is followed in effective manner so that set objectives of organisation get attained and in the end it get utilised for evaluating their overall performance (Cohen & Karatzimas, 2011). It also get utilised for getting variances by comparing their budgeted results with actual results.

Nature: Organisational management make use their previous year budget and actual results for the purpose of making effective estimations. With the help of this information set it become easy to make forecasting and estimations. Management utilise that information set for improving their overall performance and functionality, they enhance their allocation system in order to utilise their available resources effectively (Cohen & Karatzimas, 2011). Their decision making process get enhanced as they utilise their budget information. The previous year information get utilised for preparing their current year's budget which is prepared effectively and efficiently.

3.2 Select appropriate budgeting method for the organisation and its needs

There are various and effective budgeting methods are available that get utilised by the organisation as per their need such as: -

Incremental budgeting method: According to the incremental budgeting method management made adequate and required changes in their previous year's budget. The adverse results activities get modified while preparing their new budget for current year. The previous year budget is utilised for extracting information related to the improvement needed (Mehdi & Reza, 2012). This information set is utilised in order to improve their processing, efficiency and setting new goals.

Zero-based budgeting method: According to the zero based budgeting method management prepare new budget for every year. Mostly new start-up business follow this method because they don't have any kind of information or experience. While preparing budget the figures and strategies utilised are fresh and new. Every time new strategies get build up and fresh figures get utilised that helps in innovating the ways of processing and enhance thinking process.

Fixed budgeting method: According to the fixed budgeting method organisational management prepare the budget for one time only and follow it for longer period of time. This type of budget is followed in such business units where repetition of work is processed (Mehdi & Reza, 2012). It increases the rigidity factor among the employees and they didn't adopt any new way of processing the things in order to complete the work. No new budget is prepared by them in order to support their functioning and their management follows the same budget every year.

Flexible budgeting method: According to the flexible budgeting method budget get adjusted according to the changes among the volume of activity. This budget is considered as sophisticated and useful in order to render adequate information. Management made adequate changes in the budget during the year if there is such requirement raises (Hansen & Mowen, 2014).

3.3 Prepare budgets according to the chosen budgeting method

Production units: - 

Closing stock calculations:Closing stock is 15% of total budgeted material of that month.

Material purchases budget: -

Working note: -

Closing stock @ 25% of budgeted material of same month

3.4 Prepare a cash budget

Cash budget is prepared below such as: -

Working notes: -

Cash sales calculation: -

2. Calculation of variable overhead: -

3. Calculation of direct wages: -

Task 4

4.1 Calculate variances, identify possible causes and recommend corrective action

Variance causes and improvement suggestions: -

Material variance: - As per the calculation results it is identified that variance of material price is not adverse nor favourable as it is remain neutral. On the other hand variance of material quantity is resulted adverse. The reason behind the adverse results for material quantity utilise is low quality raw-material utilised in production process, improper allocation, high ratio of normal wastage during production (Oseifuah, 2013). In order to improve the condition for getting better results there are few things that need to be followed such as firstly there is need to get high quality raw material, second they need to make adequate allocation of their available material, and lastly, control the ratio of their normal wastage.

Labour variance: - As per the calculation made in order to get the variance of the labour efficiency and labour variance the outcomes are bit favourable. It shows the efficiency of the workforce as labour force are performing their activities in effective manner. But after getting positive outcomes there is need to made improvements and for this purpose they arrange training and development sessions for their labour force (Oseifuah, 2013). It helps in further better improvements in other departments such as better utilisation of resources, execute the activities in adequate manner and many more.

Sales variance: -The outcomes of the calculation made in order to get the variances it is indentified that both sections rendered adverse results whether it is sales margin or it is sales price variance. The ratio of the sales get dipped down as the actual sales is actually low as compare to their budgeted sales ratio (Oseifuah, 2013). Behind this adverse outcomes there are various reasons such as poor promotional activities, poor marketing activities, high prices and many more.

There is a huge requirement of getting overcome from the adverse variances and for this purpose management need to improve their efficiency and capabilities. For improvement business management need to re-develop their strategies related to marketing, promoting product and others as it helps in enhancing their capabilities. There is need to follow the updated measures of promoting their product in the market such as social media marketing and many more in order to capture the larger market area. They need to improve their data collection procedure so that they get current information for decision making (Hopper & Bui, 2016). Management need to adapt aggressive marketing strategies for the purpose of promoting their product in their target market. Lastly there is need to improve their pricing strategy and set competitive price in order to get better response from the market.

4.2 Prepare an operating statement, reconciling budgeted and actual results

Operating statement, reconciling budgeted and actual results are as follows: - 

Budgeted profit calculation: -

Budgeted profit variance calculation: -

Calculation of actual operating profit: -

4.3 Report findings to management in accordance with identified responsibility centres

Introduction:There are various variances get calculated that helps in realising the performance of the different segments. The outcomes can be favourable or adverse. There are different sections that get evaluated such as material, sales, labour and others. Their variance outcomes helps in knowing that Whether the performance is adequate or there is requirement of improvement.

Findings: The outcomes of the calculations made over the different heads provide diversified information such as there are various areas that require huge improvement as the outcomes of the variance calculation is not favourable (Uyar, 2010). In variance calculation outcomes of budget and actual performance is utilised and with the help of variances or outcomes it is realised that expenses, volume and sales performance is not satisfactory. The sales department and expenses ratio rendered adverse outcomes due to which these get considered as cost centres. The overall performance of organisation get supported by the labour department as this department perform their work according to their set budget (Uyar, 2010). The outcome of labour department is much better as compare to their budgeted criteria and it is the only section that reduces the cost and helps in getting profit in the end.

Recommendations: Organisation require adequate level of improvement in their performance so that they enhance their position and become competitive. For making improvement there are some recommendations are made as firstly there is need to replace obsolete machinery with new and advanced machinery. By doing this the material get utilised in appropriate manner. Then secondly management need to update their plans and strategies in order to enhance their performance. With the help of this change they adequately allocate their available resources (Uyar, 2010). After it thirdly there is need to arrange training and development program for their labour for the purpose of enhancing their skill level. When labour efficiency get enhanced it ultimately put effect over their overall performance. With the help of improved efficiency it become easier for them to achieve their set targets.

Conclusion

In the end it is concluded that there is decrease is noted down among the performance of the organisation as the results of the variance calculations are not satisfactory except labour efficiency. For organisation it become important to improve their efficiency and for this purpose they need to replace their obsolete machinery with new machinery, render training and  development programs to enhance the skill set of the employees and many more. Enhancement in employee efficiency helps in improving the overall condition of the organisation (Uyar, 2010)

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Conclusion

In the end whole discussion get concluded that costing part focused over realising different cost types and methods in order to control and monitor the usage of the cost over different activities. In order to measure the overall performance cost reports get prepared and costs get utilised to measure their overall performance. There are various measures or techniques get utilised for improving their performance such as total quality management, lean system and balanced scorecard. Budgeting section covered different budgeting method followed by the management to prepare their different budgets. Prepared budget get utilised further for executing variance analysis in order to measure their overall performance and helps in making adequate improvements.

References

Alino, N.U. & Schneider, G.P. 2012, "Conflict reduction in organization design: budgeting and accounting control systems", Academy of Strategic Human Resources Management Journal, vol. 11, no. 1, pp. 1.
Bhimani, A. 2012, Introduction to management accounting, Financial Times Prentice Hall, Harlow.
Cohen, S. & Karatzimas, S. 2011, "The role of the human resources department in budgeting: evidence from Greece", Journal of HRCA : Human Resource Costing & Accounting, vol. 15, no. 2, pp. 147.
Drury, C. 2012, Management and cost accounting, 8th edn, Cengage Learning, Andover.
Feng, S. & Ho, C. 2015;2016;, "The real option approach to adoption or discontinuation of a management accounting innovation: the case of activity-based costing", Review of Quantitative Finance and Accounting, vol. 47, no. 3, pp. 835.
Frow, N., Marginson, D. & Ogden, S. 2010, "“Continuous” budgeting: Reconciling budget flexibility with budgetary control", Accounting, Organizations and Society, vol. 35, no. 4, pp. 444-461.
Hansen, D.R. & Mowen, M.M. 2014, Cornerstones of cost management, Third edn, South-Western, Cengage Learning, Australia.
Hopper, T. & Bui, B. 2016, "Has Management Accounting Research been critical?",Management Accounting Research, vol. 31, pp. 10-30.
Kinney, M.R. & Raiborn, C.A. 2013, Cost accounting: foundations and evolutions, 9th edn, South-Western, Cengage Learning, Mason, OH.
Lalli, W.R. 2011;2012;, Handbook of Budgeting, 6. Aufl.;6th;6; edn, Wiley, US.
Langfield-Smith, K., Thorne, H., Smith, D.A. & Hilton, R.W. 2015, Management accounting: information for creating and managing value, 7e [] edn, McGraw-Hill Education, North Ryde, N.S.W.