Contents
Introduction
Management accounting mainly deals with
preparing reports and accounts which provide timely and accurate information
for the managers to take appropriate decisions at the right time. This report
will mainly try to focus on different types of cost a company can go through.
Moreover, this report will also try to highlight different efficient techniques
which will help an organization to minimize its cost and maximize the profit.
It will also describe different issues relates to budgeting and an effective
budgets can be granted.
LO1: Be able to
analyze the cost information within the organization
1.1 Explain
the different types cost classification
Costs can be divided in
several different ways of its kind and a
specific purpose. There are several sorts of costs allocated into relevant
groupings. These groups are such that each and every part of cost can be
distributed. These classes of costs make the cost information meaningful. It is
of highest relevance to the management of a manufacturing concern.
Based on elements: Based on elements, cost is
classified into two types
a. Direct cost
b. Indirect cost
1. Direct Material
It is that material
which can be incorporated in the goods and conveniently reached and entrusted
to the product. Direct materials from
major elements of the final outcome. Direct material cost connects the cost of
raw materials.
2. Direct Labor
The word labor concerns
to the human labor needed to perform an activity. Labor costs or wages is the compensation paid
for the human application. Direct labor
is the labor which can be conveniently identified with or assigned completely
to a demanding job, product or process.
It is the labor directly applied on production. Payment adjusted to direct labor is
acknowledged as direct labor cost or direct wages.
3. Direct Expenses
Expenses other than
direct material or direct labor which have definitely happened for a different
product or process are known as direct expenses or responsible expenses. They can be known with and allocated to cost
units or cost centers.
4. Indirect
Materials: Materials which do not form
an element of a goods are indirect materials.
Grease, oil, lubricants, cotton waste, sand paper, chemicals added in
production processes, stores needed for service and preservation departments
are instances of indirect materials. The materials of very little value are
also interpreted as indirect materials.
5. Indirect Labor: All
human application which is not instantly consumed in the production of a product
or output appears under this category.
Wages paid to forms who promote or support the direct labor in the
production method are known as indirect labor cost. Indirect labor cannot be identified with a
job, means or operation. Salary settled to a clerk who works in the office of a
production concern is an indirect labor.
6. Indirect
Expenses: Expenses which are not
immediately related to product / service are identified as indirect
expenses. These cannot be designated
conveniently and completely to any product or means but are only apportioned to
or incorporated by cost units or cost centers.
Based on function:
Production Cost: All
the costs associating to the composition of goods or services, whether direct
or indirect, are incorporated in the production cost.
Administration Costs:
These costs are incurred in consolidation with the general administration of
the business. These are commonly indirect costs and are also known as
regulatory expenses.
Selling Costs: Selling
costs involves all kinds of costs acquired in achieving sales of the products
and services. These are also supposed indirect expenses are known as selling
overheads.
Distribution Costs: A
Distribution cost includes all kinds of expenses are incurred in distributing
the products from its point of production to its customers.
Based on behavior:
Fixed Costs: Fixed
costs are those which do not fluctuate with the level of action within the
relevant series. These costs will incur even if no units are produced. For
example, rent expense, straight-line depreciation expense, etc.
Variable Costs:
Variable costs change in direct proportion to the level of production. This
means that total variable cost increase when more units are produced and
decreases when fewer units are produced. Although variable in total, these
costs are constant per unit.
Semi-variable Cost:
Semi-variable costs contain both fixed and variable costs. The fixed part of a
semi-variable cost usually denotes a minimum fee for making an appropriate item
or service accessible. The variable portion is the cost assessments for truly
using the service. For example, most telephone service charges are made up of
two elements: a fixed charge for being allowed to receive or make a phone call,
plus an additional or variable charge for each phone call made.
1.2 Use
different costing method
Job costing is used to store costs at a small-unit level. For
instance, job costing is suitable for driving the cost of creating a custom
machine, devising a software program, constructing a building, or manufacturing
few products.
1.3 Calculate
the cost using the appropriate techniques
1.4 Analyze
the cost using the appropriate techniques
Comment:
if we look at the two graphs, we see there are
some tangible differences among them. if the company follows the absorption
method the unit cost are slightly less than the oar based on the direct
labour.so, it can be suggested that if Jeffry and sons wants to minimize the cost they can follow the second
method to calculate the unit cost.
LO: 2 Be able to
propose methods to reduce cost and enhance value within the organization
2.1 Prepare and
analyze routine cost report
Note 1:
Electricity
Cost:
Variable
cost per unit = (Difference in Total Cost / Difference in Units) = £3000/800 =
£3.75
Fixed
Cost = (£8000 - £3.75 × 2000) = £500
Comment
Though
the actual units are lower than the budgeted units, the labor variance is still
negative. Thus the labor cost is out of control. This may be happen because of:
2.2 Use
performance indicators to identify potential improvements
Performance indicators are frequently seen as
mathematical standards of appearance that are complete to collect and practice.
In theory they can only be purchased for things over which you have authority,
however in usage people don't have comprehensive command over anything and so
'having authority' is really a matter of whether there is the sufficient
control for your persistence. Samples of performance indicators for estimating
the performance of business method:
Efficiency:
Compliance:
“Sum of deviation in
money of planned budget of production” (Horngren, 1990)
2.3 Suggest ways
to reduce cost, enhance value and quality
The following tools and
techniques are normally used for cost reduction, value and quality enhancement.
A. Value analysis or
value engineering.
B. Setting standards
for all elements of costs and constant comparison of actual with standard and
analysis of variances.
C. Work study
D. Job evaluation and
merit rating
E. Quality control
F. Use of techniques
like Economic Order Quantity
G. Classification and
coordination
H. Standardization and
simplification
I. Inventory
management
J. Benchmarking
K. Standardization
L. Business Process
Re-engineering.
LO3: Be able to
prepare forecasts and budgeted for a company
For all retailers, a
hurdle in the current recession is how to preserve profitability by decreasing
costs in the face of diminishing overall sales and price pressures — all
without cutting the customer encounter. Although challenging, compelling cost
reductions can be accomplished.
3.1 Explain the
nature and purposes of budgeting process
The
budgeting process is the method by which an organization or individual designs
and manages a financial strategy. Within a larger business, the budget process
is typically operated by managers who often receive predicted spending
requirements and suggestions from their staff. [businessdictionary.com, 2015]
The
main features of budgeting processes are as follow as:
1. Rated the financial environment on the
evidence of the last budget
2. Approved the feasible amount of cash will
be produced from sales or other activities
3. Defined the claimed investment such as raw
materials, labors, production overheads, and advertisements.
4. Then decreasing estimated expenses from
predicted earnings. Whether the budget is residue or shortage is determined.
5. After examination and updated then the
final budget is tendered.
6. After the budget period closing, then
calculated results are associated with the actual issue. Actually, budgeting
means may turn from budget to budget, company to company.
The main objectives of budgeting
methods are as follow as:
1. Controlling: Once a budget is
achieved, it is the policy for the operations of the organization. Managers
have an authority to spend within the budget and responsibility to achieve
revenues specified within the budget. Budgets and actual taxes and payments are
observed continually for variations and to determine whether the organization
is on target. If the review does not satisfy the budget, action can be taken
directly to adjust activities. Without continuous monitoring, an organization
does not realize it is not on target until it is too late to make adjustments.
2. Evaluating: One
way to estimate a manager is to examine the budget with actual production.
Other factors, such as market and general economic conditions, affect a
manager’s performance. Whether a manager achieves targeted goals is an
important part of the managerial efficiency.
3. Allocating resources. Some companies practice
the budgeting method as a mechanism for deciding where to designate supplies to
various projects, such as fixed asset investments. Though a legitimate
objective, it should be combined with capacity restriction analysis (which is
more of an industrial engineering capacity than a financial function) to decide
where resources should actually be allocated.
4. Communication: Budgets have an
essential part to play in the presentation of objectives, targets, and competencies throughout the
organization. Carried out accurately, this can have noteworthy advantages in
developing co-operation at all levels.
3.2
Select the appropriate budgeting method
and its needs
Sales Budget
A Sales Budget shows
the estimate of anticipated sales in the future period [the period is well- defi
ned] and expressed in quantity of the product to be sold as well as the
commercial value of the same. A Sales Budget may be developed product wise,
regions/area/country wise, customer group wise, salesmen wise as well as time
wise like portion wise, month wise, weekly etc.
Production Budget
This budget dispenses
the production objective to be accomplished in the next year or the future
period. The production budget is provided in volume as well as in monetary
terms. Before the development of this budget it is important to study the
principal budget administrator or the key factor.
Material Purchase
Budget
This budget dispenses
the amount of materials to be purchased during the coming year. For the
development of this budget, production budget is the opening point if it is the
key factor. If the raw material availability is the principal factor, it
becomes the offset point.
Direct Labor Budget
The labor budget
measures the labor wanted for smooth and continuous production. The labor
budget shows the number of each type or classification of workers required in
each period to deliver the budgeted output, estimated cost of such labor,
period wise and period of preparation necessary for different classes of labor.
Factory Overhead Budget
This budget is planned
for planning of the factory overheads to be incurred during the budget period.
In this budget the expenses should be shown department wise so that
responsibility can be fi xed on proper persons. Classification of factory
overheads into fixed and variable components should also be shown in this
budget.
Administrative Overhead
Budget
This budget covers the
administrative costs for non-manufacturing business activities. The
administrative overheads include expenses like office expenses, office salaries,
directors’ remuneration, legal expenses, audit fees, rent, interest, property
taxes, postage, telephone, telegraph etc
Cash Budget
A cash budget is an
estimate of cash receipts and cash payments prepared for each month. In this
budget, all expected payments, revenue as well as capital and all receipts,
revenue and capital are taken into consideration. The main purpose of cash
budget is to predict the receipts and payments in cash so that the firm will be
able to find out the cash balance at the end of the budget period..
Master Budget
All the budgets
outlined above are called as ‘Functional Budgets’ that are provided for
outlining of the individual function of the company. For example, budgets are
prepared for Purchase, Sales, Production, Manpower Planning, and so on.
3.3
Prepare budget according to the chosen budget method
3.4
Prepare a cash budget
Cash
budget is a financial budget prepared to calculate the budgeted cash inflows
and outflows during a period and the budgeted cash balance at the end of the
period. Cash budget helps the managers to determine any excessive idle cash or
cash shortage that is expected during the period.
LO: 4 be able to
monitor performance against budget within a business
4.1Calculate variance, identify
possible causes and recommend corrective action
Possible
causes: The
price variance is favorable with the actual selling price is 0.1 less than
standard price. It may come from the fluctuation from the market price or the
discount policy of the company to attract more customers as mentioned above.
The quantity variance is favorable too may due to the efficiency of workers has
changed in a positive way or the strict control of managers.
The total variable
overhead variance is favorable; this result may indicate the tight relationship
between the nature of direct labor efficiency and variable overhead efficiency.
Because of the strict supervision lead to the increase in labor efficiency then
the overhead incurred is less than the standard.
4.2Prepare
the operating statement reconciling budgeted and actual results
Operating statement reconciling
Budgeted profit
|
300000
|
Sale volume variance
|
23000
|
Budgeted profit from
actual sales
|
50000
|
Selling price
variance
|
2000
|
Actual sales minus
standard cost of sale
|
56000
|
|
|
4.3 Report the
findings to the management in accordance with identified responsibilities
centers
Report
To: Managing Director,
Jeffrey and sons ltd
From: wader chartered accountant group.
Date: 30st December
2015
In General, The actual
profits of Jeffrey and sons ltd is less than that of flexible budget. The
reason which lead to this reduce is the selling price in actual is 190 which
$10 less than that of flexible budget. This may come from the competition from
others company or it is just the policy of company when they want to attract
more customers by reducing the price.
Possible reasons are as
follow as:
1.
The quantity variance is favorable too
may due to the efficiency of workers has changed in a positive way or the
strict control of managers
2.
The production managers may have strict
supervision which decreases the idle time of employees.
3.
Because of the strict supervision lead
to the increase in labor efficiency then the overhead incurred is less than the
standard
Recommendations: The
cost variance in total is 111,116 which is favorable. This number demonstrates
excellent management capabilities of Jeffrey and sons ltd managers. Although
the actual selling price is less than that of standard but managers of Jeffrey
and sons ltd had offset this by increase
the labor efficiency; variable production overhead efficiency and reduced
others fixed overhead. The final result is clear, the actual profits of Jeffrey
and sons ltd reaching the number of $753,850.
Conclusions
Throughout the report
we have seen how much important it is to control the budgetary processes of an
organization. If we look at the Jeffrey and sons limited we can easily notice
they lag behind from other competitor for not just controlling the cost and
budget efficiently. So it is important to plan the future profit and cost to
maintain the firm efficiently.
References
1. Hernan, C.G.
1986. Evaluation of agricultural research in Colombia. In the proceedings of a
workshop held in Singapore, 7-9 July 1986
2. Cummings, L.L., & Schwaf, D.P. 1975. Performance in Organizations:
Determinants and Appraisals. Glenview:
Scott, Foresman.
3. A framework for organizational assessment. Academy of Management Review, 1(1): 64-78.
4. http://www.minnesotanonprofits.org/nonprofit-resources/financialmanagement/budgeting/strategies-for-reducing-operating-costs. Accssed at 18.01.2016
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