Delivery in day(s): 5
Unit 9 Management Accounting Sample Assignment
LO1. Be able to analyze cost information within the business to the task specified
1.1- Classify the different types of cost. How are the costs classified in the case study?
a) Classification of Cost
Classification of Cost can be made in a number of ways. For different classifications manufacturing & service providing units use different costing techniques.
The different costing classification can be summarized as under:
Materials: Materials can be broadly classified as:-
Direct Material & Indirect Materia
Wages: - Wages can be classified as:
Direct wages & Indirect Wages
Direct Expenses & Indirect Expenses
- Direct Material, Direct Wages & Direct Expenses together comprises of Prime Cost andIndirect Material,Indirect Wages & Indirect Expenses together is called overhead.
- Direct Materials are the materials which are directly relates to production.
- Direct Wages are the cost of labour which is directly related with production.
- Direct expenses are the cost which directly varies with the production units such as lighting & heating, fuel & power etc.
- Overhead Expense can be broadly classified as Function Wise &Behaviour wise.
Function Wise Classification:
- Factory/Works/Manufacturing Overhead - It includes all the indirect expenses incurred inside the factory building such as repairing parts for the manufacturing equipment, depreciation of manufacturing equipment, electricity, rent& rates etc.
- Administrative/General/Office Overhead - It related to the expenses which are incurred in relation to general administration. It includes salary of office staff, electricity of administrative building, office equipment, officestationery etc. (Innes and Mitchell, 1993)
- Selling Overhead- Selling overhead are the expenses which are incurred in relation to sales. It comprises of salary & Commission of sales staff, advertisement, promotions etc.
- Distribution Overhead - The expenses which are incurred in connection with delivery of the product such as delivery van expense, salary of deliver boy, etc.
Behaviour wise classification:
Variable overheadare the expenses which proportionately vary with production units such as indirect material, indirect labour, indirect expenses which cannot be directly allocated to a specific product. Fixed Overheads are the expenses which remains fixed irrespective of the production volumes which consist of rent and rates, depreciation on factory equipment,insurance, office expenses etc. The expenses which partly remains fixed and partly variable with the production output is called Semi Variable or Semi Fixed overhead.
The following formula can be used for calculating Semi-variable overhead: Y = a + bX
Where Y = total mixed cost
- a = total fixed cost
- b = variable costs per unit
- x = levels of the activity
Some examples of semi variable overheads are telephone expenses, salary inclusive of bonus etc.
Marginal Costing distinguishes between the fixed and the variable cost of a product. The cost of producing one additional unit is termed as marginal costing. In producing one additional unit there is no change in the fixed cost. It is to be noted that the fixed and variable cost are short term concept. In the long run all costs are variable.
Classification of cost can also be made in relation to Accounting Period. The benefit which is derived in future periods is termed as Capital cost. Such costs have to be amortised in a number of years. On the other hand, the costs which are incurred solely for a particular year are called Revenue Costs. It forms the part of the Total Cost which is incurred solely for that particular year. Classification of Cost can also be made according to the decision-making process such as opportunity cost, sunk cost, controllable &uncontrollable cost, joint cost, differential cost etc.
Standard costs are associated with the manufacturing companies cost of direct material, direct labour &direct expenses. Variance analysis is an important part of Standard costing which shows the actual differences between the actual cost and the standard cost. Some of the major variances are volume variation, material cost variation, labour cost variation, etc.
Value of Classification:
The following are the value of classification which are given as under:
- Cost control and Cost reduction - Cost control and cost reduction is a very important tool for an organization to work efficiently and effectively. Cost reduction aims at reducing the unit cost of goods manufactured or service rendered. While on the other hand cost control aims at achieving the pre-determined cost targets.
- Pricing of output - Sometime the firm has to sell their products at marginal cost in order to be in the market. Cost classification helps in taking such decision.
- Absorption of overhead - Recovery of overhead is another name of Absorption of overhead. It is the process of sharing the overhead cost by all the products of a particular department. It is the allocation of overhead to each unit of output.
- Make or buy decisions - In order to cut down the cost some times the quality managementof the organizations has to decide whether to make of buy any particular component in the manufacturing of a product. Due to large availability of production capacity such decisions has to be made. Classification of cost helps in taking such decisions.
- Product diversification/expansion/discontinue a product-line - Depending upon the profitability of the firm the management has to decide whether to diversify their product or not. After a particular span of time the management of the firm should take initiative for expansion in order to respond to rival firm’s action.
Suitable classification of costs for Launch break Ltd.
Launch Break ltd is a bakery company. The suitable costing method for this organization is the processing costing. As most of the cost expenses are managed by various departments it is accounted as direct cost for the organization except few items of expenses which has to be apportioned. In this process of accounting the organization follows the various type of production cost obtained by the department, to measure cost on production and per units. So, this is process of accounting is far better than job accounting.
The different type of process used department wise:
- Material - The first stage of the production is to issue the raw material. After the first stage of raw material is selected then the other sub-coordinate materials are mixed to follow the further process of production.
- Labour - The costs of wages of the labours are added with the cost of that particular product or process. Common wages are to be classified and apportioned as suitable to the situation. With the help of various factors the cost of common wages can be portioned, e.g. Wages can be portioned according to the time spend for the production of a product per unit.
- Direct expenses - Direct expenses are those which are completely attributed to the production of a specific product. These expenses are directly debited with the process. Some exemptions of direct expenses are Hire charges, Electricity, Depreciation etc.
- Overhead expenses - These expenses are not directly included in the production, but are engrossed on basis of absorption rate. In other words these are the indirect cost to company or an organization. Heads of such expenses may be rents, maintaining plant and machinery etc.
1.2- What are the different costing methods? Identify and explain the costing method used by Launch Break ltd?
a) Calculation of Cost of Job no. 336
b) Costing Methods
There are various methods for computing cost of production, cost of sales, unit cost etc. The organization or the company has the right to choose what kind of methods they are going to adopt for their production depending upon the output. These types of methods can be classified as listed below.
- Single or output Costing - This method is adopted to ascertain the cost of single unit of production. This method is also applied when there is the production of same identical units. To determine or to obtain the cost per unit, cost statements or cost sheets are being prepared. In this method the various expenses are classified and the total expenditure is divided by the total quantity produced to determine the cost per unit. This method is generally suitable for brick making collieries, flour mills, paper mills, cement manufacturers etc.
- Contract Costing - Contract costing is the specific form of order costing. Generally an organization gives a contract when and where a work in undertaken from a customer with some special requirements and for a longer period of time. These works are generally done outside. Such contracts are termed as contract costing. Examples of such contract costing can be building construction, ship building, civil construction etc. (Madegodwa, 2007)
- Job Costing - Job costing refers to those methods of costing where the basic method of costing is applied. These are mainly applicable to those industries or firms where the work contains different contracts and jobs. This follows an order- specific costing technology which helps in using different situations of different jobs with specified customers specifications. Job costing helps in keeping both indirect and direct costing accounts. Job costing methods are similar to contract costing and batch costing.
- Process Costing - Process costing is the accumulated cost prepared in a stage of process or production. Here the cost per unit of a certain product is ascertained at every stage of production by dividing the cost of each process by the normal output unit of the process. CIMA London explains process costing as “that form of operation costing which applies wherestandardizegoods are produced”.These methods can be used in the industries like chemicals, petroleum, textile, rubber, sugar, coal etc.
- Operating Costing - Operating costing refers to those costing where expenses associated with the administrative business. In simple words these expenses are done by the firm or an organization on daily basis or day to day basis. These costs are a mixture of both fixed cost and variable costs. Fixed costs are those cost which remains the same even if the number of production exceeds the actual production, whereas variable cost can vary in irrespective of the quantity produced.
- Multiple Costing - In a multiple costing system the cost of different sections of production are mixed after finding out the cost of each and every part of produced goods. With the help of a assemble computer one can ascertain the variable cost of multiple costing, as different parts of the computer have different manufacturing cost. The various components differ in variety in terms of price, material and manufacturing process. The manufacturing entity uses a separate method for costing of employment in respect of each part.
1.3- How is the cost calculated, using appropriate techniques? What is the costing technique used by the org to calculate its costs?
a) First In First Out
Stores Ledger Account(FIFO)
Closing Stock 25000 units=£4050
b) Direct Labour Cost
Direct Labour Cost:
Standard hours for production 11250 hrs.
Actual hours worked 10750 hrs.
Hours saved11250-10750 500 hrs.
Cost of Direct Labour
Normal wages = 10750*8 £86000
Bonus = .75*8*500 3000
50% of over-time premium
=50% of 2*2400 2400
c) Overhead Analysis
d) (i) Budgeted Fixed Overhead absorption Rate
d) (ii) Distinction between Costing Method and Costing Techniques:
Methods indicate an integrated system applied depending upon the manufacturing technique. The term refers to the cost ascertainment of different methods of costing by different industries. The following are the some important methods of Costing:
- Job Costing &
- Process Costing.
Another name of job costing is terminal costing or specific order costing. Costs are accumulated according to the job or work order. The material, labour and overhead costs are allocated through respective abstracts which are charged on a predetermined basis. Job Costing can be further classified as under:
- Contract Costing;
- Cost plus Contract; and
- Batch Costing
- Contract Costing - This method of costing is applicable where the job work is big like contract of a bridge. Under this method costs are collected according to each work order.
- Cost plus Contract -The contracts which provide for the payments of actual cost of contracts plus a marginal profit. These profits are to be added to the cost. Such profits made may be fixed or a stipulated percentage over cost. These contracts are generally entered into when the actual cost of contacts cannot be determined with reasonable accuracydue to low availability of materials, labours etc. Or else where the contact is extended for a long period of time.
- Batch Costing - Batch Costing is available where the production is carried out in batch. For each batch a separate cost sheet is maintained assigning separate batch number. Batch Costing is mainly carried out in drug industries, readymade garments industries etc.
2. Process Costing:-
The continuous operation of a product through different processes is termed as process costing. This costing method is applicable where the product passes through different process and converted into finished product.Process costing method is mainly applicable in cement industry, sugar industry, textile industry etc.Process costing can be broadly classified into 1) Operation Costing; 2) Operating Costing; 3) Output Costing; 4) Multiple Costing.
Cost control, cost ascertainment and allocation of expenditure are powerfully achieved through the help of costing techniques. It is helpful in supply of information to the management. The following are the various techniques of costing (a) Uniform Costing; (b) Marginal Costing; (c) Standard Costing; (d) Historical Costing; (e) Absorption Costing.
- Uniform Costing - When same costing concepts/principles are being used by several undertakings they are said to be following uniform costing. Adoption of common method of costing by different organization is the main objective of uniform costing.
- Marginal Costing -The costing technique which aims at ascertaining the marginal cost by determining the changes in cost, volume, price etc. is termed as marginal costing. It is achieved by segregating total cost into variable and fixed costs.
- Standard Costing - Standard costs are associated with the manufacturing companies cost of direct material, direct labour & direct expenses. Variance analysis is an important part of Standard costing which shows the actual differences between the actual cost and the standard cost. Some of the major variances are volume variation, material cost variation, labour cost variation, etc. (Madegodwa, 2007)
- Historical Costing - Recording of actual cost after they have been incurred is termed as historical costing.Materials Cost, labour cost, and overhead cost together comprises the actual cost.
- Absorption Costing - It is the technique of charging all variable and fixed cost to operation, product, process or services.Absorption Costing is also termed as Full Costing.
d) (iii) In case of Launchbreak Ltd any one of the techniques discussed above can be adopted. As only marginal costing and absorption costing differ only in the treatment of fixed production overheads in the accounting records and managing financialstatement.
1.4- Analyze the cost data of the org focusing on the technique used for the purpose
Statement of Cost for October
In the above statement, the material cost incurred for preparing 45000 units of cake is £17200 which is includes £6880 for flour and £10320 for other materials. The hours worked by labourers in different production department are: Machinig-3800, Baking-2050, Packing-4900, and normal rate for working an hour is £8. Therefore, the labour cost incurred for producing 45000 units of cake is £86000 i.e. 3800+2050+4900=10500*£8=£86000.
Overhead absorption in the product is an important aspect which an account manager needs to know. The overhead absorption rate is derived for each department by dividing the total overhead amount of each department with their labour hours. Hence, the overhead absorption rate for each department is, Mixing department-£4.194/hour, Baking department-£7.027, Packing-£2.62/hour. Therefore, the overhead cost absorbed by each department for producing 45000 units of cake is, mixing department-£15937.2, baking department-£14405.35, packing department-£12838. The total cost incurred for producing 45000 units of cake is £146380.55 and the cost per cake is derived by dividing the total cost incurred for producing 45000 units of cake from 45000 units of cake produced i.e. £146380.55/45000 units of cake = £3.2529 per cake.
LO2. Be able to propose methods to reduce costs and enhance value within the business 2.1-How are the costs reports prepared and analyzed for Launch break ltd
a) Challenges in preparing Routine Cost Report
Cost of Production Report (CPR) shows all costs chargeable to a department. At the end of each month journal entries are not only the source for summary at the end of each month or a period, but also an effective means in presenting and disposing of accumulated cost during the period. Managerial purposes will not be solved by only identifying the total cost. . The costs are to be divided in details to facilitate cost control and cost reduction.
b) Cost Report Strategy of Launchbreak Ltd.
Lunch break Ltd has adopted Standard Costing technique along with absorption costing system. Since direct labour is a significant input overheads are being absorbed on the basis of direct labour hour.
2.1- What is the various performance indicators used by the org to identify its potential improvements
a) Target Ratios of Takeaway
b) (i) Comparison of Ratios
b) (ii) Limitations of Use of Ratios
There are some limitations of financial ratios that an analyst should take care of
- Many large companies operate differently in different divisions of industries. For such companies it is difficult to find a meaningful set of industry-average ratios.
- Different accounting practices can disturb the comparisons even within the same company (leasing versus buying equipment, LIFO versus FIFO, etc.).
- It is difficult to find out about whether a ratio is good or not. A high cash ratio in a historically assessed growth company may be interpreted as a good sign, but it may also be seen as a sign that the company is no longer a growth company and should command lower valuations.
2.2 – To the chosen case study, identify and discuss the different costs reduction and value enhancement strategies available and how they can be implemented within Launch break Ltd.
Launch break Ltd can go away with the decision of purchasing Takeaway Ltd. As the ratios of Takeaway Ltd are quite satisfactory. Even if the profit percentage is not up to the mark it has the scope of cost reduction. In order to earn a greater profit initiative should be taken to reduce the cost. There are some ways of achieving it, by increasing the sales per customer and efficiently utilizing the money spent. Increasing larger returns from sales promotions and advertising. (Hansen and Palmer, 1997)
Sometimes in order to earn a greater profit it is difficult to cut down the expenses. If the sales are increased substantially, the cost per percentage of sales substantially declines.
The Profit and Loss statement provides a summary of expenses and helps in locating expenses that can be cut. Therefore, the information should be as current as possible. For this reason, monthly Profit and Loss Account needs to be prepared
LO3. Be able to prepare forecasts and budgets for a business
3.1- Explain the purpose and nature of the budgeting process adopted
- Purpose and nature of Budgeting Process : The budget process starts with the formulation of budget. It finds out the resources needed to operate its programme during a particular year. Budget is the process of financial planning and control by using estimated financial and accounting data. The ICWA of UK defines budget as “a financial and or quantitative stamen, prepared and approved prior to a defined period of time, of the policy to be pursued during the period for the purpose of attaining a given objectives”. It may include income, expenditure, and the employment of capital.
2. Key factor : While making budget there some factors which sets out the limitation in making the quantity produced for sale. This is known as Key factor or limiting factor. The ICWA (UK) defines Key-factor as “the factor the extent of whose influence must first be assessed in order to ensure that the functional budgets are reasonably capable of fulfilment”. From the view point of sales, there are many factors by which a demand is influenced. Say for price, quality of the product, purchasing power of the customers etc. The key factor in production may be plant capacity, availability of labour, availability of raw material.
3.2- What is the budgeting method used and reflect its needs
a) Methods of Budgeting : Budgeting Methods are of two types Fixed Budget & Flexible Budget. As defined by the ICWA London fixed budget is the budget is the budget which is designed to remain unchanged irrespective of the level of activity actually attained. It is employed when budgeted output is close to the actual output. Maximum managerial control can be exercised by making comparisons with actual operating results. (Vatter, 1969)
ICWA, UK defines Flexible budget as “a budget which by recognising the difference between fixed, variable and semi-fixed costs, is designed to change in relation to the level of activity attained”. A flexible budget is prepared for more than one level of activity.
b) Zero base Budgeting : Zero Base Budgeting is the process of traditional budgeting which makes planning and decision making easier for an organization the term Zero Base Budgeting is the practice of budgeting of every unit of income received. Zero Base Budgeting also includes the identification of task and funding resources for the completion of the task.
- Advantages of Zero Base Budgeting:- It helps in the allocation of resources more efficiently and smoothly and helps in finding out the new ways by which cost can be reduced effectively. It gives a motivation, communication and coordination by which wasteful operations can be identified and rectified or controlled. It also helps in finding out alternative course of actions.
- Disadvantages of Zero Base Budgeting:- As it is the conventional way of budgeting it consumes more time for its implementation. Justification of every item is not possible by the use of zero base budgeting. It also requires qualified persons for its implementation. (Vatter, 1969)
c) Rolling Budget : Rolling budget is also known as continues budget or perpetual budget in which the budget period automatically extends continuously incorporating the changes in the budget. It adds future accounting periods to replace budgets for an accounting period that has passed.
- It helps to be responsive to unexpected changes.
- It is more up to date than conventional static budget
- Constant revisions may cause distraction and disturbances for the employees.
- Main disadvantage of rolling budget is that it is akin to preparing new budget again and again. (Doerr, 1991)
d) What If Analysis
The other name of what if Analysis is the Sensitivity Analysis which helps in the planning, decision making and managing a business. The management knows the use of what if analysed beforehand and what changes are going to take place in the future and on the basis of that budget are prepared.
3.3- As an accounts manager prepare the required budgets
a) Production Budget
b) Material Purchase Budget
c) Cost of Material
d) Labour Hour Budget
Labour hour required @ 2 hrs. Per unit
Labour hour available
e) Labour Cost Budget
3.4 – Illustrate the cash flow forecast for Launch break and comment on its findings
Add: Cash sales 40% less 10% discount
Collection from debtors
Sale of assets
Purchase of assets
LO4. Be able to monitor performance against budgets within the business
4.1 How are the variances calculated? Identify possible causes and recommend corrective action
a) Calculation of Various Information
(i). Actual price of material per gram.
= 143000.00/27500=£5.20 per gram.
(ii) Standard usage of material for actual production:
Standard quantity per unit=30gms. Thus standard usage for actual production=30 gms.*900=27000gms.
(iii) Actual labour rate per hour=26040.00/4200=£6.20per hour.
(iv) Standard labour hour for actual production=Standard labour hr. per unit*actual units produced.
(v) Budgeted production overhead=Budgeted output*budgeted overhead per unit of output
b) Variance Calculation
(i) Material price variance
= (Standard price-Actual price)*Actual quantity= (5-5.2)*27500=£5500(A)
(ii) Material usage variance= (Standard quantity-Actual quantity)*Standard price
(iii) Labour Rate variance= (Standard rate-Actual rate)*Actual hours
(iv) Labour efficiency variance
=(Standard hours for actual output-Actual hours)*Standard rate per hour
= (5*900-4200)*6= (4500-4200)*6=£1800(F)
(v) Fixed overhead expenditure variance=Budgeted fixed overhead-Actual fixed overhead
(vi) Fixed overhead volume variance=Recovered overhead-Budgeted overhead
Budgeted overhead=£20000, Budgeted labour hour=4500hrs.
Thus overhead recovery rate per labour hour=20000/4500=£4.44 per labour hr.
Actual hours worked=4200hrs. Thus overhead recovered=4.44*4200=£18667
Thus volume variance=18667-20000=£1333(A)
(vii) Fixed overhead capacity variance=Standard overhead-Budgeted overhead
Standard overhead=Standard rate per unit*Standard output for actual time
Thus Capacity variance=18660-20000=£1340(A)
(viii) Fixed overhead efficiency variance=Recovered overhead-Standard overhead
C) Causes of Variance
- Material price variance: Such variances occur when raw materials are purchased at a price different from standard price. It is that portion of direct materials cost variance which is due to the difference between the standard price specified and the actual price paid.(Fleischman and Tyson, 1998, pp. 92--119)
- Material usage variance: material usage variance is determined as a deviation of standard quantity and actual quantity of a given standard price per quantity.
- Material mix variance: Such variance occurs due to the difference between standard and actual composition of mixture.
- Material yield variance: Such variance occurs due to the difference between standard yield specified (In terms of actual output) and actual yield obtained.(Kaplan, 1975, pp. 311--337)
- Labour efficiency variance: Such variances occur when labour operations are either more efficient or less efficient than standard performance.
- Labour rate variance: Such variance occurs when actual direct labour hour rate differs from standard rates.
- Labour mix variance: Such variance occurs when standard mix of labour (different grades) differs from actual mix.
- Labour yield variance: Such variances occur when standard output differs from actual output.
- Overhead expenditure variance: Such variances occur when the actual cost incurred differs from budgeted cost, i.e., the cost should have been incurred.
- Volume variance: Such variances occur due to the difference between standard cost of overhead absorbed and standard overhead allowed for that output.
- Capacity usage variance: This variance shows the effect of working above or below the capacity.
Management action: In a Standard Costing system actual results are compared with standard and the variances either favourable or adverse are determined. The reasons for such variances are found and the person/s or department/s responsible are identified and responsibilities fixed. For material cost variances purchase department, production department, stores department, might be responsible. The management takes necessary remedial action. Similarly for labour or overhead variances, responsibilities are fixed, and corrective action like training, motivation of workers, proper sequencing of machinery etc., are resorted to by the management. Similar remedial actions are taken for variances in overhead costs. Variances obtained under standard costing system have to be reported to management as “management by exception” for taking remedial steps and action.
4.2 Reflect the operating statement and how it is reconciled with the budget and actual result
4.3 Comment on the report findings and address as instructed in the assessment criteria
The following points emerge after analysing the variances and operating statement.
Material cost variance is adverse; all the variances under material cost are adverse. The purchase manager might be responsible, as it might so happen that quality of material is not up to the mark, also the purchase price of material is higher than estimated.
Labour rate variance has occurred adverse balance, but labour efficiency variance has ocurred favourable balance. It means although actual labour rate is higher than budgeted, actual productivity of labour is higher than standard.
All overhead variances except overhead efficiency variance are adverse. It is clear that management should take care to rectify the mismanagement in utilizing overhead cost. (Kaplan, 1975, pp. 311--337)
- Doerr, W. W. 1991. What--if analysis. Risk assessment and risk management for the chemical process industry.
- Fleischman, R. K. and Tyson, T. N. 1998. The evolution of standard costing in the UK and US: fromdecision makingto control. Abacus, 34 (1), pp. 92--119.
- Hansen, B. G. and Palmer, A. J. 1997. FRAN, Financial Ratio Analysis and more. Radnor PA (5 Radnor Corp CTR Suite 200, Radnor 19087-4585): U.S. Dept. of Agriculture, Forest Service, Northeastern Forest Experiment Station.
- Harington, D. 1992. Costing. Open College.
- Innes, J. and Mitchell, F. 1993. Overhead cost. London: Academic Press.
- Jarett, I. M. and Brady, P. A. 1976. A Conference on key factor analysis. Carbondale: Published for the Program and the School by Southern Illinois University Press.
- Kaplan, R. S. 1975. The significance and investigation of cost variances: survey and extensions. Journal of Accounting Research, pp. 311--337.
- Madegodwa, J. 2007. Cost accounting. Mumbai: Himalaya Publishing House.
- Vatter, W. J. 1969. Operating budgets. Belmont, Calif.: Wadsworth Pub. Co.