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Diploma in Business
Unit Number and Title
|Unit 9 Management Accounting Costing and Budgeting|
Unit 9 management accounting costing and budgetingassignment helps you in providing an in-depth knowledge about different costs involved in a running business. By going through this, students will able to know what are the tools or techniques followed by the business to analyze the cost and prepare the cost reports of the organization. The problem solving assignments also help them in understanding and taking different decisions related to costing and budgeting.
Every organization follows the cost structure involved in the business in order to reach the goals and run the business successfully. For this the organization needs to understand and classify different cost under different overheads and also specific needs to pay interest in making different cost reports and budgets of the business process.
Here we have taken into consideration the manufacturing unit of Buccaneers Ltd. in our case study. Below mentioned is the classification of costs based on information related to Buccaneers Ltd (Farr, 2011).
Before going to the types of cost let us understand what cost actually is. The word cost denotes the real amount of money that a company spends on the creation of goods and services which include expenditure on raw materials, equipments, supplies, services, labour, products, etc.
Cost is mainly classified into three main elements:
Based on these elements cost can be divided into Product cost and Period cost.
Thus, total of direct costs are known as Prime Cost and Product cost is the summation of Prime Cost and Overheads,
Product Cost = Prime Cost + Overheads.
Indirect Cost-The indirect cost includes the cost which are incurred in the factory but not directly incurred on manufacturing of a product (Rouwendal, 2012). The indirect cost includes the following:
Period cost-Period cost is the cost that includes Administrative cost, Selling and Distribution cost and Finance cost.
Cost can be further classified on the following basis:
Based on behaviour:Based on behaviour the costs are divided into 3 types they are fixed cost, variable cost, and semi variable cost.
Based on controllability:Based on controllability the costs are divided into 2 types one is controllable which is controllable by the business management and another which is not controllable by the management.
Based on time:Based on timing the costs are classified into 2 types one is historical costs and Predetermined cost.
There are different types of costing methods which are followed by an organization. In order to run the business successfully in typical situations. They are as follows:
In case of Buccaneers Ltd. Job costing method has been used to ascertain the cost of the specific job given in this case study.
Marginal costing:This technique is used by the organization when it wants to produce any extra unit. According to this method variable cost is charged on the individual product and fixed cost will be written off in the income statement of the organization (Harris, 1995).
The given equation below is used to derive the Marginal Cost:
Marginal Cost = Fixed Cost + Variable Cost.
Absorption costing: Absorption accounting is a part of management accounting cost method. It is the manufacturing cost which is absorbed by the units produced. This cost can be fixed or variable which are apportioned to different cost centres where they are accounted for absorption rates (Rouwendal, 2012). By using this method cost incurred is recovered from the selling price of goods and or services. This technique includes cost related to the production and which are directly charged to the products and services.
As per assignment absorption costing has to be used to find out the solution to the problem of Buccaneers Ltd.
Allocate and apportion overheads to the three production departments
Rent and rates
Heating and lighting
Depreciation of machinery
Basis of apportionment
Direct labour cost (180:120:75)
Maintenance costs (Time)
Forming department 15% x 50 = 7.5
Machining department 75% x 50 = 37.5
Finishing department 10% x 50 = 5
Rent and rates (Total floor space= 50,000)
Forming department 20/50 x 100 = 40
Machining department 15/50 x 100 = 30
Finishing department 10/50 x 100 = 20
Administrative dept. 5/50 x 100 = 10
Heating and lighting (Total floor space= 50,000)
Forming department 20/50 x 20 = 8
Machining department 15/50 x 20 = 6
Finishing department 10/50 x 20 = 4
Administrative dept. 5/50 x 20 = 2
Building Insurance (Total floor space= 50,000)
Forming department 20/50 x 10 = 4
Machining department 15/50 x 10 = 3
Finishing department 10/50 x 10 = 2
Administrative dept. 5/50 x 10 = 1
Machine Insurance (Total machine hours =25,000)
Forming department 5/25 x 10 = 2
Machining department 15/25 x 10 = 6
Finishing department 5/25 x 10 = 2
Depreciation of machinery (Total machine hours =25,000)
Forming department 5/25 x 120 = 24
Machining department 15/25 x 120 = 72
Finishing department 5/25 x 120 = 24
Administrative cost (Total direct labour cost =375,000)
Forming department 180/375 x 83 = 39.84
Machining department 120/375 x 83 = 26.56
Finishing department 75/375 x 83 = 16.60
B. Deduce overhead recovery rates for each department using two different bases for each department overheads.
Departmental overhead recovery rate
Using machine hours
Departmental overheads / Machine hours
Using labour hours
Departmental overheads /labour hours
Using machine hours £245,340/5,000hrs = £49.07 per machine hour
Using labour hours £245,340/30,000 = £8.18 per labour hour
Labour hours = £180,000/£6 = 30,000hrs
Using machine hours £281,060/15,000hrs = £18.74per machine hour
Using labour hours £281,060/20,000 = £14.05per labour hour
Labour hours = £120,000/£6 = 20,000hrs
Using machine hours £143,600/5,000hrs = £28.72per machine hour
Using labour hours £143,600/12,500 = £11.49per labour hour
Labour hours = £75,000/£6 = 12,500hrs
C. Calculate the full cost of a job with the following characteristics for the information in the case study
Direct material costs –
Total material cost
Direct labour costs –
Forming dept 4hrs x £6
Machining dept 4hrs x £6
Finishing dept 1hr x £6
Total labour cost
Overhead costs –
Forming 1hr ´ £49.07
Machining 2hrs ´ £18.74
Finishing 1hr ´ £28.72
Total overhead cost
Total job cost
D. Explain why you consider the basis used in (c) to be the more appropriate
The machine hour rate has been used to allocate the overheads as machine hour rate has a more rational approach. The machine hour rate is free from bias and at the same time machining expenses are major contributors to the overall expenses (Rouwendal, 2012).
Performance indicator is a type of measurement scale that is used to evaluate the success of an organization.
The various performance indicators used by business to measure the performances are:-
1. Balance scorecard- it is the most important tool used to measure the performance as it includes both financial and non-financial measures. It measures the strategy of the organization.
2. Financial measures- It includes gross profit margin, net profit margin and operating margin.
Gross profit = Revenue (Sales) – Cost of goods sold.
Non-financial measures- it includes customer satisfaction , number of units manufactured, goodwill, etc. Customer feedback plays a crucial role as positive feedback shows an improvement and negative shows the opposite.
Cost reduction refers to the actual reduction on the cost of goods manufactured and services delivered. These costs can be reduced in two ways:
As a management accountant I would suggest the following methods to reduce cost and enhance value and quality:-
Target costing=Expected selling price-desired profit
Budget – As future is uncertain; so budget is prepared to overcome this uncertainty. Budget is a plan made for future. In other words, budget is a financial plan of probable expenditure and income for a defined period of time.
Purpose of budgeting process-
The three most important purpose of budgeting process includes the following:-
It acts as a tool:
To forecast income and expenditure –budgeting is an important part in the planning process of the business (Grabski, Leech and Sangster, 2009). Here, the managers should be able to predict whether the business will make profit or loss. For the success of a business, the expenditure part should be tightly controlled.
For Decision making – Budgeting provides a financial overview for the decision making process. For example, in a manufacturing business, the budget shows how much to expend on the production of any product.
To monitor business performance- Budgeting helps to measure the actual business performance with the estimated one. It shows whether the business is living up to the expectation or not (Grabski, Leech and Sangster, 2009).
Other purposes of budgeting process includes:-
Nature of budgeting process-
There are different types of budgeting methods such as:-
In case of Antonio Ltd. the company has asked us to prepare different budgets for six months on the basis of the information given at the beginning of the period. It is a Periodic budget.
Suggestion:-Here the company has purchased raw materials in advance without issuing it to the production department. So, the company should avoid this period of holding in order to reduce holding cost. The trade payable budget is showing that one month credit has been allowed by the suppliers, it should be increased as the liquidity position of the company is not so good. The cash budget is showing decrease in cash which should be taken into care by reducing the outflow of cash.
As we know budget is one of the quantitative expression of plan in a defined period of time. Budget is generally prepared for to purpose of attaining a particular financial goal such as reducing expenditure, increasing the savings etc. So in order to reach the goal of the organization one is to know the process followed to prepare the budget (Bowhill, 1995).
Generally budget is prepared on the basis of regular time period like on yearly or half yearly basis, on monthly basis, on quarterly basis, etc. After preparing the budget it is required to monitor and review the budget so that the organization will be able to obtain the benefit from the preparation of budget.
First and foremost thing in preparing the budget is that we should classify the important types of budget which is to be prepared by the organization. As per case the organization has to prepare raw material budget, cash budget and trade payable budget.
Raw Material Budget:Raw material budget can be prepared by taking historical data regarding raw material which have been used by the production department. This historical data will give the idea in estimating the quantity which is required in future.
Cash budget:To prepare the cash budget the organization must evaluate different cash inflows and outflows of the business like receipts of cash, payments of cash etc. (Bowhill, 1995). In order to evaluate the cash flows the companies need to go through different month’s cash received by the debtors and cash paid to creditor etc. This helps in estimating and preparing the appropriate budget.
Trade budget:This trade budget is prepared when the company is in risk and unable to pay money to the creditors. In such cases if the time given by creditors is completed then the company will start preparing the trade budget (Bowhill, 1995).
These are the different types of budget prepared by the organization to reach the objectives of the business and also to take some effective decision in making investment for the business.
A raw materials inventories budget, showing both physical quantities and financial values.
Production in units
Raw materials purchases (units)
Financial values (£)
Trade payable budget.
iii) Cash budget
Payments to creditors(£)
Direct labor expenses
Closing cash balance
After taking into account the two months credit allowed for 40% of the sales amount and 60% of the sales affected for the current month the cash collection has been computed.
Cash outflow for overhead during the six months
Suggestion– the cash budget is showing cash deficit in the month of October and November. So, the management should avoid excess cash outflow by undertaking the benefit of lease financing.
As every organization prepares the budget to estimate the cost involved in the project. It is prepared according to the capability of the business and necessity of the business. This budget should be compared with actual performance of the organization with estimated one. Obviously, there will be difference between actual performance and the estimated one (Drury, 1992). So the role of manager is to monitor and analyse the budget in order to find out the difference in amount and also to rectify the problem by decision making some changes in the budget.
The budget should be monitored on regular basis throughout the year. It may be yearly basis, half yearly basis, quarterly basis, or monthly basis. If the organization constantly reviews the budget it may help them in finding the solution of different problems.
So how often the organization monitors and reviews the budget will make the organization stay out of risk. If the organization falls in to different typical situation like unable to meet the debt obligation, shortage of turnover etc. In such cases there is a possibility of company to reduce the risk by making some changes in the long term budget. So for this the organization has to first find out the variance.
Material cost variance: (The table below has been prepared on the basis of table of variancescalculated at the end)
Labour variance: (The table below has been prepared on the basis of table of variancescalculated at the end)
Fixed overhead variance: (The table below has been prepared on the basis of table of variances calculated at the end) (Huitson, 1966)
Sales variance: (The table below has been prepared on the basis of table of variancescalculated at the end)
Table of variances:
Actual results of Toscanini Ltd.
Material Usage: An adverse material usage points to the fact that the raw-material purchased was not of standard quality or in other words was of inferior quality. Adverse material usage also indicates excessive process loss which is of abnormal nature.
Labour efficiency:Labour efficiency can be gained through employment of skilled work force. This improves the productivity of the concern (Drury, 1992).
Sales price: The selling price has been forced to bring down compared to the budgeted level in order to market competition.
Fixed overheads: These include those overheads which are fixed in nature. In this scenario the company might need to go for external borrowing for which it has to pay interest.
Given what you know about the business performance for May. If it were discovered that the actual total world market demand for the business product was 10% lower that estimated when the may budget was set, explain how and why the variances that you identified in the above could be revised to provide that would be potentially more useful (Chadwick, 1998).
Finally from thisunit 9 management accounting costing and budgeting assignment we came to know the importance of classifying the cost and evaluating the cost. What are the tools involved in while evaluating the cost. It also helps us knowing how one can find out the variance between actual cost and standard cost which helps in taking corrective measure in improving the performance of the organization.
Baum, M. (2013). Service business costing. Wiesbaden: Springer Gabler.
Bowhill, B. (1995). Why budgetary control systems fail. Engineering Management Journal, 5(6), p.284.
Chadwick, L. (1998). Management accounting . London: International Thomson Business Press.
Czopek, K. (2004). Fixed and variable costs. Krakow: Art-Tekst.
Drury, C. (1992). Standard costing. London: Published in association with the Chartered Institute of Management Accountants [by] Academic Press.
Farr, J. (2011). Systems life cycle costing. Boca Raton, FL: CRC Press.
Grabski, S., Leech, S. and Sangster, A. (2009). Management accounting in enterprise resource planning systems. Oxford: CIMA.
Harris, E. (1995). Marginal costing. London: Chartered Institute of Management Accountants.
Harris, E. (1995). Process costing. London: Chartered Institute of Management Accounts.
Lucey, T. (2002). Costing. London: Continuum International Publishing Group.
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