HND Assignment on Management accounting

Contents

Introduction. 1

LO1: Be able to analyze the cost information within the organization. 1

1.1      Explain the different types cost classification. 1

1.2      Use different costing method. 3

1.3      Calculate the cost using the appropriate techniques. 4

1.4      Analyze the cost using the appropriate techniques. 5

LO: 2 Be able to propose methods to reduce cost and enhance value within the organization. 6

2.1 Prepare and analyze routine cost report 6

2.2 Use performance indicators to identify potential improvements. 7

2.3 Suggest ways to reduce cost, enhance value and quality. 8

LO3: Be able to prepare forecasts and budgeted for a company. 9

3.1 Explain the nature and purposes of budgeting process. 10

3.2      Select the appropriate budgeting method and its needs. 11

3.3 Prepare budget according to the chosen budget method. 13

3.4      Prepare a cash budget 14

LO: 4 be able to monitor performance against budget within a business. 15

4.1Calculate variance, identify possible causes and recommend corrective action. 15

4.2Prepare the operating statement reconciling budgeted and actual results. 16

4.3 Report the findings to the management in accordance with identified responsibilities centers. 16

Conclusions. 17

References. 17

 

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:

Budget:

“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

                                             Production Budget in Units

                                                 Material Purchase Budget

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

5. http://www.businessdictionary.com/definition/budget-process.html  Accssed at 18.01.2016