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Diploma in Business
Unit Number and Title
Unit 5 Management Accounting
The Management Accounting Solution discuss about cost information which are incurred by the company at both at the current and future level. It also discuss about the various method which are to be followed to record the inventory. In the assignment various cost variance are calculated by comparing with the actual budget to find its effect on the business. The Management Accounting also includes various budget which are helping in comparing these to actual business result. The assignment also contains different costing and budgeting system and the cause of resulting variance. It also discuss various corrective action which will help the business strategy to improve its process.
Report showing variance
variance in £
production unit variance
sales revenue variance
direct material variance
direct labour variance
rent and rates variance
Comparison, explanation and implication of variance-
Production unit variance- The ABC LTD. Has produced 1000 extra unit in comparison to those which was set in the budget. The per unit cost of manufacturing the 2000 units was 9.05 which increased to 9.06 per unit. There was not much difference in the per unit cost in comparison but the company may have reduced the per unit cost by having effective control over the cost.
Sales revenue - The sales revenue was increased by 10000 which was due to increase in production unit made by the company. There was not much increase in revenue in comparison to the cost which was incurred in manufacturing the extra unit.
Direct material - The budgeted per unit cost of material which was used during the production was 3 per unit. The actual per unit cost of material was 2.83. So the company has made optimum utilization of raw material (Miao, Xu, Qiu, Qing & Tao, 2015).
Direct labour – The budgeted per unit labour cost was 2 per unit and the actual cost was 2.83 which was much higher than the planned budget. So the company needs to make effort to reduce it’s per unit labour cost.
Maintenance cost- The change in the maintenance cost was 400 which was not much higher in comparison to those which was set in the plan.
Depreciation- The change in depreciation cost was 200 which is also not high in comparison to the planned budget.
Rent and rates – The rent and rates also increased by 100 so it also doesn’t have much changes with the cost which was determined in the budget.
Insurance – The insurance cost was increased by 1400 from which was much higher from those which was set in the plan (Pilleboue, Singh, Coeurjolly, Kazhdan & Ostromoukhov, 2015).
Production variance –The production variance was unfavorable as there was not much benefit for the company to manufacture the extra unit.
Sales revenue- There was neutral effect as the revenue per unit was 10 in the budget and actual.
Direct material- There was favorable variance as there was reduction in the per unit cost in comparison to set budget.
Direct labour- Direct labour cost was unfavorable as there was much increase in the cost from the set budget which reduces the revenue of the budget.
Maintenance cost- The variance in the maintenance cost is favorable as there is not much increase from the planned budget.
Depreciation- The variance in the depreciation cost was also favorable as there was not much changes from the planned budget (Ray & Jenamani, 2015).
Rent and rates – there was not much changes in the rent and rates from the planned budget so it is favorable variance.
Insurance- There was unfavorable variance in the insurance cost as the actual cost was much higher from the set budget.
Added value – The added value is defined as the difference between the particular product selling price and the direct and indirect input used in making that particular product. The budgeted profit of the ABC ltd. was 1900 and the actual profit was 6800 so the company is earning the higher profit in comparison to those which was set in the budget. To reduce the cost of manufacturing the company needs to make the effort to reduce the labour cost and the cost which is incurred on the insurance (Jena, 2016).
Total quality management- Total quality management requires use of strategy, data and communication to improve the quality of outcome. In TQM all the members of the organization participate in improving the existing process of the company to improve the quality of outcome. The key principle of TQM are
From the data given in the question following variances can be calculated
672000-660000 = £12000 (favorable)
(11200-12000) X 60= £48000 (unfavorable)
Causes and recommendation:Favorable material variance shows that the material is used efficiently in the organization. It is shown that the material can be more efficiently used by reducing wastage.
288000-303360 = £15360 (unfavorable)
284400-303360 = 18960 (unfavorable)
288000-270000= 18000 (favorable)
284400-270000= 14400 (unfavorable)
Causes and recommendation:Labor variance is unfavorable which can be because of costly labor availability it can be resolved by proper training and efficient use of labor (Roper & Ruckes, 2012).
Variable overhead variance
15800 X (30-30.38) = 6000 (unfavorable)
30 X (16000-15800) = 6000 (favorable)
Causes and recommendation:Variable expenses can be controlled by efficiently using the resources.
210000-200000= 10000 (favorable)
207375-210000= 2625 (unfavorable)
Causes and recommendation
As fixed overhead variance is favorable it can be said that overhead are incurred efficiently
1800000- (8000X240) = 120000 (unfavorable)
1920000- (8400X240) =96000 (unfavorable)
Causes and recommendation:Unfavorable variance of sales volume depicts that sales target are not achieved from the budgeted sales. It can be improved by proper training of the sales persons and by proper marketing schemes (Jamaludin, Shariffah, Mohammad & Ahmad, 2014).
Sales margin variance:
448000-504000= 56000 (unfavorable)
Causes and recommendation:Company is not able to cover its margin so it is recommended that the company should try to reduce its direct cost so that margin can be improved.
Budgeted variable overhead
Budgeted fixed overhead
Material Price variance
Material usage variance
labor efficiency variance
labor rate variance
labor idle time variance
variable overhead efficiency variance
labor overhead expenditure variance
fixed overhead expenditure variance
Fixed overhead volume variance
Sales margin price variance
sales margin volume variance
From the above calculation it can be concluded that the company is not able to match the budgeted figure with the actual results so it is recommended that they should employ efficient methods to improve their cost structure. Company should employ methods such as efficient labor utilization, efficient material usage by improved machinery for production, removing wastage of time, training of sales personnel (Archibald, Jacobs, Saad, Jevsevar & Shea, 2015).
So it may be concluded from the above study that the cost analyze helps the management accounting to build control over various cost. The budget used by the company help the management to build control over the various cost. It may also be concluded from the above study that the variance analyze helps in identifying the problem and helps in framing the budget for the future year.
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