Management Accounting: Income Statement, Activity-Based Costing, Variances, and Budgeting

This report covers various aspects of management accounting, including income statement preparation, activity-based costing, variance calculation, and budgeting. It includes a case study of Barbeque and Balloons, and discusses issues related to profit distribution and subjective performance evaluation.

Management accounting

1
Table of Contents
Introduction......................................................................................................................................2
Question 1........................................................................................................................................2
Question 2........................................................................................................................................2
a)...................................................................................................................................................2
b)..................................................................................................................................................3
c)...................................................................................................................................................3
Question 3........................................................................................................................................3
a)...................................................................................................................................................3
b)..................................................................................................................................................4
Question 4........................................................................................................................................4
a)...................................................................................................................................................4
b)..................................................................................................................................................5
c)...................................................................................................................................................5
Question 5........................................................................................................................................5
a)...................................................................................................................................................5
b)..................................................................................................................................................6
c)...................................................................................................................................................6
Question 6........................................................................................................................................7
a)...................................................................................................................................................7
b)..................................................................................................................................................7
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

2
Introduction
The business is required to be managed in an effective manner and for that, there is the need to
perform various tasks by which the profits can be maximized. There are various policies and
strategies which are used in this respect and for that evaluation are to be made. In this report
several such aspects will be undertaken with reference to the BBQ and balloons. In this the
income statement will be prepared and after that activity-based techniques will be taken into
consideration. There will also be the calculation of the variances by which the evaluation will be
made in an effective manner. The performance of the business will be evaluated with the help of
this and it will be helpful in managing the business in the coming period.
Question 1
Income Statement of Barbeque and Balloons
Particulars Amount
Revenue from Barbecue $ 4,000.00
Revenue from Balloon $ 1,000.00
Total Revenue $ 5,000.00
Cost of Barbecue $ 500.00
Cost of Balloon $ 30.00
Total Cost of Goods sold $ 530.00
Gross Profit $ 4,470.00
Expenses:
Salary $ 1,600.00
Production expenses $ 250.00
Sales and administration
expenses
$ 300.00
Total Expenses $ 2,150.00
Net Profit $ 2,320.00
Question 2
a)
Operating
BBQ
Inflating
Balloons
Cashier Greetin
g
Custom
ers
Total

3
John 300 40 20 40 400
Paul 100 300 0 0 400
Ringo 40 120 200 40 400
George 0 80 20 300 400
Total 440 540 240 380 1600
b)
Person of Activity Cost Pool Total Cost Total Activities Activity Rate
Operating BBQ 440 2000 0.22
Inflating Balloons 540 1000 0.54
Cashier 240 3000 0.08
Greeting Customers 380 3000 0.13
The inflating of balloons is the most expensive activity as the per-unit charge is coming to be
0.54 for each balloon sold (Mahama and Cheng, 2012). It is most expensive as all of the four
members are involved in this activity in some of the other aspects and the payments are to be
made to all of them for the activity which is performed by them.
c)
Production Margin -Activity Based Costing
Particulars Barbeque Balloon
Sales 4000 1000
Material cost $500 30
Operating BBQ $440
Inflating Balloons 540
Cashier 160 80
Greeting Customers 253.3333333 126.6666667
Total cost $1,353 $777
Net profit $2,647 $223
Total profit $2,870
Question 3
a)
Barbeque
Particulars Amount
Sales 4000

4
Material cost 500
Operating BBQ 440
Inflating Balloons 0
Cashier 160
Greeting Customers 253.33
leasing a BBQ 200
Sales and administration expense 150
Total cost 1703.33
Net profit 2296.67
b)
Balloons
Particulars Balloon
Sales 1000
Material cost 30
Operating BBQ 0
Inflating Balloons 540
Cashier 80
Greeting Customers 126.67
Balloon pump 50
Sales and administration expense 150
Total cost 976.67
Net profit 23.33
Question 4
a)
According to the statement that has been provided by Paul the complete income shall be
distributed among him and John as others have not contributed to the business. He said that all of
the hard work is done by them and so they are eligible for the earnings of the business. However,
the statement does not match with the facts as all have made the efforts and the income which is
earned is the combined effort of all. Ringo and George have taken the responsibility of managing
the customers and cash which is also a big task as of the customers will not be attracted then the
sale will not be there in the business (Nguyen and Aiello, 2013). If the customers were not
satisfied then they will not be retained by the business and it will be the loss of business in long
run. The cash management is the essential task which needs to be considered as it is required to
be managed in a way that no error or fraud is made in the recording of the transactions. If there is

5
any error then the correct income will not be traced. Due to all of these facts it can be said that
statement made by Paul shall not be taken into consideration.
b)
The statement has been made by Ringo that selling of balloons was a bad idea and it should not
have been taken into account. The aspect which is kept by him is true to a certain extent as the
profits are made with the inclusion of the same but they are very low and if the same efficiency
would have been used in some other place then it would have provided with the better results.
They could have used the time and resources in barbeque only which would have provided them
with better results. In spite of all these arguments such statement shall not be made as the
carrying out of the business in relation to both the products was a joint decision which was taken
by the consideration of all. All were agreeing with the same in the beginning so now the blaming
should not be made whether the same turn out to be profitable or not.
c)
The subjective performance evaluation is avoided in business as there is no basis on which the
comparison can be made and the performance can be evaluated. There is no quantifiable data
which is present in them and all the analyzation is made on the basis of subjective factors
(Schulze, Seuring and Ewering, 2012). The employee’s performance is identified on the basis of
the contribution they have made to the business in terms of the value addition and for that proper
objectives shall be set in advance.
This is required to be avoided and for that, the allocation of all the activities shall be made in
such manner that all can be measured on same grounds and no further questions are raised in the
business. There shall be equal distribution which shall be made by which all will be equally
liable for all the tasks. They all should have the proper communication regarding this by which
there will be no misunderstand and clear understanding will be present among all.
Question 5
a)
Planned budget
Particulars Amount

6
Revenue from Barbecue $ 4,000.00
Revenue from Balloon $ 2,000.00
Total Revenue $ 6,000.00
Cost of Barbecue $ 500.00
Cost of Balloon $ 60.00
Total Cost of Goods sold $ 560.00
Gross Profit $ 5,440.00
Expenses:
Salary $ 1,600.00
Production expenses $ 250.00
Sales and administration
expenses
$ 300.00
Total Expenses $ 2,150.00
Net Profit $ 3,290.00
b)
Particulars Amount Actual Variance
Revenue from Barbecue $ 4,000.00
Revenue from Balloon $ 2,000.00
Total Revenue $ 6,000.00 4950 $ (1,050.00)
Cost of Barbecue $ 500.00
Cost of Balloon $ 60.00
Total Cost of Goods sold $ 560.00 475 $ 85.00
Gross Profit $ 5,440.00
Expenses:
Salary $ 1,600.00 1600 $ -
Production expenses $ 250.00 240 $ 10.00
Sales and administration
expenses
$ 300.00 300 $ -
Total Expenses $ 2,150.00
Net Profit $ 3,290.00 2335 $ (955.00)
c)
The comparison among the actual and the budget has been made and it is identified that there are
several variances which exist among them. The level of activity in the budget and actual are
different and the main reason for the difference is that. After that, the expected profits have not
raised in the balloons business and that lead to the overall decline in the profitability of the
business (Sani and Allahverdizadeh, 2012). With the change in the level of activity all of the

7
costs and income which are there in relation to them also gets affected. Due to those deviations
the variances are identified and the business is to bear the impact of the same. The efforts which
were made for the balloon business are much more than that of the planned ones. There is lot of
time which is consumed in the same but the results for that have not been achieved to that level
(Beynon, Jones and Pickernell, 2016). In order to eliminate the deviations which are identified
there is the need to consider all of the reasons which are involved for the variances and then the
changes in the system shall be incorporated accordingly by which the further position and
performance of the business will be improved.
Question 6
a)
Calculation of variance for barbeque
Particulars Amounts
Actual quantity 2075
Standard quantity 2000
Actual price 450
Standard price 0.25 per unit
Standard price 518.75
Material price variance 68.75 Favorable
Quantity variance -75 Adverse
Total material variance -6.25
b)
Calculation of variance for balloons
Particulars Amounts
Actual quantity 1050
Standard quantity 1000
Actual price 25
Standard price 0.03
Standard price 31.5
Material price variance 6.5 Favorable
Quantity variance -50 Adverse
Total material variance -43.5

8
Conclusion
The report has been made on the new business which has been started and the proper analyzation
of all the aspects in this respect has been made. There is a calculation of the profits which will be
made with the business. The activities which will be involved have been determined and with the
help of appropriate cost drivers there is the calculation of the rate of all the activities. Various
issues have been raised by the partners in relation to the profit distribution and they have been
considered in an appropriate manner. The profitability of both the products has been calculated
and also the comparison has been made between the planned and budgeted amounts. The
variances have been determined for better evaluation.

9
References
Beynon, M.J., Jones, P. and Pickernell, D. (2016) Country-based comparison analysis using
fsQCA investigating entrepreneurial attitudes and activity. Journal of Business Research, 69(4),
pp.1271-1276.
Mahama, H. and Cheng, M.M. (2012) The effect of managers' enabling perceptions on costing
system use, psychological empowerment, and task performance. Behavioral Research in
Accounting, 25(1), pp.89-114.
Nguyen, T.A. and Aiello, M. (2013) Energy intelligent buildings based on user activity: A
survey. Energy and buildings, 56, pp.244-257.
Sani, A.A. and Allahverdizadeh, M. (2012) Target and Kaizen costing. World academy of
science, engineering and Technology, 6(2), pp.40-46.
Schulze, M., Seuring, S. and Ewering, C. (2012) Applying activity-based costing in a supply
chain environment. International Journal of Production Economics, 135(2), pp.716-725.