Management Accounting: Cost Classification, Job Costing, Absorption Costing, and Cost Analysis

This report focuses on cost classification, job costing, absorption costing, and cost analysis. It includes calculation of unit and total job cost for Job 444 using job costing method, calculation of the cost of Exquisite by using absorption costing technique, and analysis of the cost data of Exquisite by using appropriate techniques. The report also covers areas for potential improvements, ways to reduce costs and enhance value and quality, and preparation of budgets and cost reports.

Management Accounting

TABLE OF CONTENTS
introduction......................................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Explaining different types of cost classification....................................................................1
1.2 Calculation of unit cost and total job cost for Job 444 using job costing method.................3
1.3 Calculation of the cost of Exquisite by using absorption costing technique.........................4
a. Allocation and apportion overheads to the three production departments..........................4
b. Reapportion the service or support department costs to the production departments.........5
c. Deducing overhead absorption rates for each of the production department X, Y and
Assembly using the using machine hours................................................................................5
d. Using the absorption rate to calculate overhead charge to the product...............................6
1.4 Analyses of the cost data of Exquisite by using appropriate techniques...............................6
TASK 2............................................................................................................................................7
2.1 Preparing and analyzing the cost report and commenting variances.....................................7
2.2 Areas for potential improvements on the basis of performance indicators...........................8
2.3 Ways to reduce costs and enhance value and quality............................................................9
TASK 3..........................................................................................................................................10
3.1 Stating the purpose and nature of the budgeting process to the budget holders of Jeffery &
Son's...........................................................................................................................................10
3.2 Opt the suitable budgeting method for the company along with its needs..........................10
3.3 Preparation of the production and material purchase budget..............................................11
3.4 Preparation of cash budget...................................................................................................12
TASK 4..........................................................................................................................................13
4.1 Calculating variances, assessment of causes and recommending the corrective measures.13
4.2 Preparing the operating statement which reconcile both the budgeted and actual results...15
4.3 Responsibility centers..........................................................................................................16
conclusion......................................................................................................................................16
references.......................................................................................................................................17

LIST OF TABLES
Table 1: Cost classification..............................................................................................................1
Table 2: Job cost sheet.....................................................................................................................3
Table 3: Production budget............................................................................................................11
Table 4: Material budget................................................................................................................12
Table 5: Cash budget.....................................................................................................................12
Table 6: Calculation of sales variance...........................................................................................13
Table 7: Calculation of material variance......................................................................................13
Table 8: Calculation of labor variance...........................................................................................14
Table 9: Calculation of fixed overhead variance...........................................................................14
Table 10: Operating statement for the month of May...................................................................15

INTRODUCTION
Management accounting is a provision of financial data and information which helps
organization’s managers in non-financial decision making of the company. It comprises of cost
accounting, performance evaluation and analysis, planning and decisions support, etc (Gibassier
and Schaltegger, 2015). All these aspects play a significant role in attaining financial and non-
financial goals of the company. The current research project is based on management
accounting. It focuses on business of Jeffery and Son’s which a manufacturing company that
manufactures various popular is and brand products called Exquisite. Now, company wants to
reduce its operating cost for attaining competitive business environment. The current study
focuses on analysis of cost information for analyzing business performance. Along with this, it
also includes different methods to reduce costs and enhance value within business. Further, study
will forecast and prepare budget for different business operations. Including this, monitoring and
comparing process of actual and budgeted performance of the business are also describing in the
following paragraphs of the report.
TASK 1
1.1 Explaining different types of cost classification
Cost classification process is based on different attributes and this procedure helps in
categorizing total cost of Jeffery and Son’s in different groups such as element, nature, behavior,
function, etc (McLean, McGovern and Davie, 2015). All these types of cost classification as
described as under:
Table 1: Cost classification
Types of cost classification
Function  Production cost: For Jeffery and Son’s
total manufacturing cost of Exquisite
is considered as production cost.
 Commercial cost: Other operational
expenditures such as administration
cost, selling and distribution cost are
involved in this type of cost.
Nature  Labor cost: It means cost of wages,
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salary paid to employees of Jeffery
and Son’s. Along with this, it also
comprises cost of benefits, payrolls,
etc (Kaimenaki and Cohen, 2011).
 Material Cost: It includes the cost of
company to purchase and maintain
raw materials for production of
Exquisite.
 Overhead costs: It is also known as
operating cost of the organization
which incurs due to the business
function and activities.
Behavior (Activity or Volume)  Fixed Cost: It can be defined as a cost
which remains same even when
changes take place in volume of
production and manufacturing of
Exquisite. For example: salary, wages,
rent of building, etc (Wahlen and et.al,
2011).
 Variable Cost: This type of cost may
change in case of changing production
volume. For example: cost of raw
material, etc.
 Semi Variable cost: In this type, cost
remain same at some level of
production but it can change when
level of output exceeds (Kate-Riin
Kont, 2012).
Element  Direct Cost: It can be defined as a cost
which can be easily outlined to a cost
object. Product, department and
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project are considered as cost object.
 Indirect Cost: This type of cost cannot
easily attributed to specific cost
object. For example, depreciation cost,
insurance, etc (Hughes and Bartlett,
2002).
1.2 Calculation of unit cost and total job cost for Job 444 using job costing method
Job costing is a specific technique to calculate unit and total job cost. It is used by
organizations in a situation where every job is different from other and helps in satisfying needs
and requirements of particular customer. These jobs are performed on the basis of customer’s
specifications. It comprises direct material and labor cost and manufacturing overheads assigned
to each and every job (Birnberg and Sisaye, 2010). As per the given information, calculation of
unit and total job cost is as follows:
Table 2: Job cost sheet
Job cost sheet for Job no. 444
Particulars Total cost
Direct material 40000
Direct Labor 54000
Fixed production overhead 24000
variable production overhead 36000
Total cost 154000
Unit cost 770
Working note:
Direct material cost
Material cost=Quantity∗price per kg .
¿ 50 kg∗4 £ per kg .∗200 units=£ 400000
Direct labor cost
Labor cost=Total working hours∗rate per hour
Labor hours=30 hours per unit∗200 Units=6000 Hours
Overhead
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¿ overhead =Total ¿ productionov erhead /Total budgeted labor hours∗Labor hours for job
¿ overhead =£ 80000/20000 hours∗6000 hours
¿ £ 24000
Variable productionoverhead =Total hours∗rate per hour
Variable overhead =£ 6 per hour∗6000 hours
¿ £ 36000
Unit cost =Total cost /number of units
¿ £ 154000/200 Units=£ 770 cost per unit
1.3 Calculation of the cost of Exquisite by using absorption costing technique
a. Allocation and apportion overheads to the three production departments
Production department Service department
Particulars Basis of
allocation Total in (£) Machine
X (£)
Machine
Y (£)
Assembly
1 (£)
Stores
(£)
Maintenance
(£)
Indirect
wages and
supervision
362000.00 100000.00 99500.00 92500.00
Indirect
material 253000.00 100000.00 100000.00 40000.00
light and
heating
Machine
hours 50000.00 26666.67 20000.00 3333.33
rent Area
occupied 100000.00 20000.00 10000.00 30000.00 30000.00 10000.00
insurance
and
machinery
Book
value of
machinery
15000.00 3529.40 2205.90 4411.80 2205.90 2647.06
depreciation
Book
value of
machinery
150000.00 35294.12 22058.80 44117.65 22058.80 26470.59
Insurance of Area 25000.00 5000.00 2500.00 7500.00 7500.00 2500.00
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building occupied
salaries of
work
management
No. of
employees 80000.00 24000.00 16000.00 24000.00 8000.00 8000.00
Total cost 1035000.00 314490.19 272264.70 245862.78 69764.70 49617.65
b. Reapportion the service or support department costs to the production departments
Particulars Production
Basis of
allocation Total in (£) Machine X Machine Y (£) Assembly 1 (£)
Primary
distribution
(Earlier table)
1035000.00 314490.19 272264.70 245862.78
Stores Direct material 34882.35 26161.76 8720.59
Maintenance Machine hours 23816.47 15877.65 9923.53
Total 373189.01 314304.11 264506.9
c. Deducing overhead absorption rates for each of the production department X, Y and Assembly
using the using machine hours
Rate of overhead absorption=¿ overhead /machine hours
Machine shop X=314490.19+26161.76+ 15877.65/80000
¿ 373189/80000
¿ £ 4.66
Machine shop Y =272264.70+26161.76+15877.65 /60000
¿ 314304.11/60000
¿ £ 5.24
Assembly=245862.78+8720.59+9923.53/10000
¿ 264506.90/10000
¿ £ 4.41
As per the above calculation overhead absorption rate for machine shop X is £4.66; for
machine shop Y is £5.24 and for Assembly is £4.41.
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d. Using the absorption rate to calculate overhead charge to the product.
Total overhead cost =4.66+5.24 +4.41=14.31
Product cost means sum of material, labor and overhead expenses and calculation of the
total cost of product is as follows:
Total cost of the product =Material+ Labor +Overhead
¿ 8+15+14.31
¿ £ 37.31
1.4 Analyses of the cost data of Exquisite by using appropriate techniques
Particulars Production
Basis of
allocation Total in (£) Machine X Machine Y (£) Assembly 1 (£)
Primary
distribution
(Earlier table)
1035000.00 314490.19 272264.70 245862.78
Stores Direct material 34882.35 26161.76 8720.59
Maintenance Labor hours 2:1.5:1 22052.29 16539.22 11026.14
Total Cost 371424.83 314965.68 265609.51
Calculation of overhead absorption rate according to the labor hours:
Production department Overhead absorption rate as per the labor hours
Machine X = 371424.83/200000 Labor hours = £1.86
Machine Y = 314965.68/150000 labor hours = £2.10
Assembly = 265609.51/100000 labor hours = £2.66
Analysis of the cost calculation has reflected that maintenance cost of machine Y and
assembly has increased due to the consideration of labor hours. In contrast, calculation has also
shown that maintenance cost is very low for Machine X as per the labor hours. Analysis of
maintenance cost has reflected that there are huge difference between calculation of cost in case
of consideration of machine and labor hours. As per the calculation, maintenance cost of
Machine X, Y and Assembly is £23816.47, £15877.65 and £9923.53 respectively. But, on the
other hand, consideration of labor hours make changes in the maintenance cost such as
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maintenance cost for X, Y and assembly is £22052.29, £16539.22 and £11026.14. Change in the
maintenance cost affect per unit cost of finished goods and services (VanDerbeck, 2012).
TASK 2
2.1 Preparing and analyzing the cost report and commenting variances
As per the given business scenario, company is producing 1900 units but material, labor
and overhead cost have given for 200 units (Wildavsky, 2006). So, calculation of material, labor
and overhead for per unit is as follows:
Particulars Formula Calculation
Material cost Total number of units *
material cost per unit = 1900 units* £12 = £22800
Labor cost Total number of units * Piece
rate = 1900 units * £10 = £19000
As per the cost classification, electricity cost is semi variable cost for the organization so,
it is fixed for certain level of production but it may vary if production level exceeds (Barnes,
2013). So, variable and fixed cost of electricity is as follows:
Variable cost of electricity=(£ 8000−£ 5000)/( 2000 – 1200units)
¿( £ 3000)/(800 units)
¿ £ 3.75 per unit
Variable electricity charges for 1900 units
¿ £ 3.75∗1900units=£ 7125
¿ charges=Total cost – variable cost
¿ £ 8000−(3.75∗2000)
¿ £ 500
Total electricity charges=¿+ variable
¿ £ 500+ £ 7125=£ 7625
Calculation of maintenance cost:
Maintenance cost=£ 5000−( £ 1000/500∗100)=£ 4800
Total cost=Material+ Labor + Electricity +¿ overhead + Maintenance
¿ 22800+19000+15000+7625+4800=£ 69225
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Per unit cost=Total cost /total number of units
¿ £ 69225/1900 units=£ 36.43
Analysis of the variances is as follows:
Particular Budgeted cost Actual cost Variance
Material 24000 22800 1200
Labor 18000 19000 -1000
Fixed Overhead 15000 15000 0
Electricity 8000 7625 375
Maintenance 5000 4800 200
Total 70000 69225 775
As per the given information actual production of units is 1900 and budgeted unit was
2000. So, decline of actual production decrease the actual cost of material which shows positive
variance in material. But, on the other hand, negative variance of labor cost increases the total
maintenance cost of the organization. For reducing the actual labor cost Jeffery and Sons needs
to focus on reducing the labor cost as well as needs to motivate all employees to give their best
outcomes. In addition, actual production is low as compare to budgeted production so, positive
variance occurs in cost of electricity and maintenance (Bland and et.al, 2015). Total variance in
actual and budgeted cost is also positive. It is reflected that number of units affect the total cost.
2.2 Areas for potential improvements on the basis of performance indicators
Appropriate monitoring and assessment of financial performance help in identifying the
major areas of potential improvements. Though using these methods Jeffery and Son’s
determining different areas which require necessary improvement for increasing actual
performance of the company. Sales revenue, variance and profitability of the organization are
considered as major indicators of financial performance. Analysis of the variance has reflected
that company has got negative variance in labor cost. So, for improving the performance, Jeffery
and son’s needs to improve the performance of employees that will help in reducing the total
actual cost of labor. So, labor cost is one of the major area which require potential improvement.
Including this, sales revenue is also one of the important performance indicators (Kont, 2013). If
sales revenue declines from the previous years due to the high cost then it shows that company
needs to reduce the total cost of the organization for importing the sales and profitability.
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Similarly, if net profit of the company has declined due to the high operating costs so,
organization needs to reduce the total operating cost because it will help in increasing the net
profitability of the Jeffery and Son’s. Therefore, using all these performance indicators
organization can determine the different areas of improvement (Ahrens and Ferry, 2015).
2.3 Ways to reduce costs and enhance value and quality
There are different techniques which help in reducing cost and improving quality and
value of the organization. These include Value chain analysis, Total quality management and
Added value system. Value chain analysis focuses on the increasing the satisfaction level of
customers by reducing the total cost. It also helps in allocation of the resources in effective
manner which leads to increment in resources and capabilities of the company. Therefore, it
helps in reducing the total cost of the organization as well as optimum utilization of resources.
Jeffery and Son’s needs to use value chain analysis method for improving the use of labors
which will play significant role in reducing the labor cost. Further, Organization should use total
quality management model for improving quality of products and services (Anderson, 2011). It
will be appropriate for Jeffry and Son’s because it focuses on the customer’s needs and
requirements, planning, management and total participation of the employees. Further, it also
assures about the low defects and wastage which will help Jeffery and Sons in reducing
unnecessary cost and improving quality of the products and services. Along with this added
value system is also most appropriate method for improving quality and adding value in products
and services. So, Jeffery and Sons can use this method also. Major objective of this system is to
give highest value to the customers of their purchase money as well as it also assure about the
appropriate profitability of the company. So, it will help in improving value as well as financial
performance of Jeffry and Son’s (Reid, 2002).
TASK 3
3.1 Stating the purpose and nature of the budgeting process to the budget holders of Jeffery &
Son's
A budget can be defined as a key management tool which helps organization in planning,
organizing, maintaining and controlling all financial information in effective manner. Budget is
also very important for forecasting income and expenses of the organization for a financial year.
It follows a very systematic process of managing income and expenditure which is known as
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budgetary process. This process includes different stages such as formulation of budget,
implementation, monitoring and evaluation of budget information in effective manner (Wahlen
and et.al, 2011). Major purpose and nature of budgetary process for Jeffery and Sons are
described as under:
 Monitoring income and expenses of the whole information year is the major purpose of
the budget.
 Budgetary process is also beneficial in doing any modifications and changes in the pre-
defined financial goals and objectives of the firm.
 For determining areas which required necessary improvement for augmenting the total
financial performance of the firm.
 Purpose of budgetary process is forecasting profit and expenses of the company.
 Budgetary process plays important role in allocation of roles and responsibilities to
different personnel.
 Developing a financial plan for whole financial year is also one of the major objective of
budget.
 Budget is also beneficial for allocating resources such as raw material, human resources
and machinery on various business operations in effective manner (Birnberg and Sisaye,
2010).
3.2 Opt the suitable budgeting method for the company along with its needs
As per the given information, Jeffery and Son’s has used incremental budgeting method
for developing a budget for organization. In this method past budget is one of the major budget
for developing budget for the current financial year. This types of budgeting method is suitable
for the dynamic business environment. But, company is not operating its business in dynamic
business environment. So, Jeffery and Son’s needs to undertake Zero Based budgeting method
for formulating budget for whole financial year. At the time of using this method organization
needs to take a base of zero for its income and expenses. As per this budgeting method, every
department needs to use resources as per the actual needs and requirements (Wildavsky, 2006). It
reduces the wastage of the resources as well as also helps in maintaining optimum allocation of
resources. It will provide a realistic view to Jeffery and Son’s for making a new budget for the
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whole financial year. Therefore, it will help in reducing the negative variance of the company
and plays important role in getting desired objectives and goals.
3.3 Preparation of the production and material purchase budget
Production budget of Jeffery & Sons are as follows:
This type of budget include information of production unit which are required to product
in the different sections of the financial year (Kate-Riin Kont, 2012). It plays important role in
managing operation and production department of Jeffery and Son’s.
Table 3: Production budget
Particulars July August September October
Sales 105000 90000 105000 110000
Op. Stock 11000 13500 15750 16500
Total 94000 76500 89250 93500
Closing stock 13500 15750 16500 15000
Production 107500 92250 105750 108500
Working note:
Calculation of closing stock is as follows :
July=90000Units∗15 %=13500Units
August=105000Units∗15 %=15750Units
September=110000 Units∗15 %=16500 Units
October=100000∗15 %=15000 Units
Material purchase budget of Jeffery & Sons are enumerated below:
Material budget includes information about the total required raw material for producing
specific amount of products and services (Hughes and Bartlett, 2002). It helps in reducing the
material cost as well as also help in improving the total financial performance of the company.
Table 4: Material budget
July August September October
Material Require (2 per kg) 215000 184500 211500 217000
Less- Opening stock 52000 46125 52875
Total 163000 138375 158625
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Add- Closing stock 46125 52875 54250
Purchase 209125 191250 212875
Calculation ODF closing stock =¿ isequal ¿ the 25 % of the production of following month .
Opening stock for themonth of July is given which are 52000
Closing stock (July)=184500∗25 %=46125
3.4 Preparation of cash budget
Cash Budget can be defined as financial plan which include all estimated information
about the income and expenses of the company which will generate in the coming financial year
(Bland and et.al, 2015). As per the current financial position and future requirements cash budget
of Jeffery and son’s is as follows:
Table 5: Cash budget
Particulars July August September
Cash Inflows £ £ £
Sales receipts 900000 731250 864000
Cash outflows
Purchase 365969 334688 372531
Labor 322500 276750 317250
Variable overhead 108500 98350 100350
Fixed overhead 75000 87500 87500
Net cash flow 28031 -66038 13631
Opening balance 16000 44031 -22007
Closing balance 44031 -22007 -35638
As per the above cash budget cash outflow of the company is higher as compare to the
cash inflow in month of august and September. Major reasons behind this performance is decline
in sales revenue of the firm. Along with this, increment in the labor cost also increase the
expenses in the month of September which affects the total cash flow of Jeffery and Son’s. In
addition, increment in overhead costs also decline the cash flow of the company (VanDerbeck,
2012). So, for managing cash outflow and inflow Jeffery and Son’s needs to focus on reducing
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labor cost, overhead cost and other expenses of the organization. So, it will help in managing
cash flow of the firm.
TASK 4
4.1 Calculating variances, assessment of causes and recommending the corrective measures
Variance can be defined as difference between actual and expected performance of the
company (Reid, 2002). It helps in analyzing that whether company is able to attain all financial
objectives or not.
Particular Budgeted Fixed Actual
Sales 16000 14000 13820
Material 3840 3360 3420
Labor 3200 2800 2690
Fixed overhead 4800 4800 4900
Profit 4160 3040 2810
Sales variance
Table 6: Calculation of sales variance
Particulars Variance
Sales volume variance ( 4160 - 3040) 1120 (A)
Sales price variance ( 14000 - 13820) 180 (A)
The material price variance
Table 7: Calculation of material variance
Particulars Variance Net variance
Material price variance (1425 * 2040 ) 3420 (A)
Material usage
variance [( 3500 * .4) * (2.40)] 3360 (A)
60 (A)
The labor variance
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Table 8: Calculation of labor variance
Particulars Variance Net variance
Actual hours * Actual
rate
345 *7.8 2690
70 (f)
Labor rate variance 345 * 8 2760
40 (f)
Labor efficiency
variance
350 hrs. * 2.40 2800
Fixed overhead variance
Table 9: Calculation of fixed overhead variance
Particulars Variance Net variance
Actual fixed overhead 4900
Fixed overhead
expenditure variance
100 (A)
Budgeted fixed
production overhead
4800
A per the above calculation, there is positive variance in material cost which is 420.
Major reason behind this positive variance is reduction in total production. Budgeted units of
production was 4000 and actual produced units is 3500 so, reduction in production leads positive
variance in material. But, on the other hand, overhead variance for the organization is negative
due to the actual cost of overheads i9s high as compare to the budgeted overhead costs. So, for
improving financial performance company needs to focus on reducing overhead costs. Along
with this, Jeffery and son’s needs to increase the total production of the organization of
improving total sales which will help in augmenting profitability of the firm (Ahrens and Ferry,
2015).
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4.2 Preparing the operating statement which reconcile both the budgeted and actual results
Table 10: Operating statement for the month of May
£ £ £
Favorable Adverse Net
Sales volume variance 1120
Sales price variance 180
Material price variance 0
Material usage
variance 60
Labor rate variance 70
Labor efficiency
variance 40
Fixed overhead
expenditure variance 100
Total variances 110 F 1460 A
Total net variance 1350
Budgeted operating
profit 4160
(-) Total net variance -1350
Actual operating profit 2810
As per the above operating budget, total net variance of the organization is negative due
to the high sales volume variance. As per the budget company needs to produce 4000 units but in
actual company has produced only 3500 units which leads adverse variance in sales volume.
Including this, Sales price variance, Material usage variance, fixed overhead expenditure
variance and Total variances were also in negative form. So, for improving the total performance
and attaining decided goals and objectives Jeffery and Son’s needs to reduce the cost of material
and overheads (Kont, 2013).
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4.3 Responsibility centers
`Responsibility cost and profit are the major responsibility center for Jeffery and Son’s.
These centers plays very important role in attaining all objectives and goals of the financial
budget. Responsibility cost centers is accountable for all the expenses and cost which have
incurred in the whole financial years. So, it helps in managing expenses and total cost of the
organization. Along with this, profit centers is responsible for sales revenue and profitability of
the firm. It focuses on the increasing sales revue and total profit of the company. Overall, both
responsibility centers are significant for attaining the budgeted performance of the organization
(Anderson, 2011).
CONCLUSION
The current research report has concluded that Jeffery and son’s needs to focus on
appropriate management of cost and expenses for developing appropriate pricing of products and
services. It will help in attaining all objectives and goals of the company. Along with this, for
reducing the negative variance organization needs to focus on reducing the actual material cost
of the organization. Organization should use Zero based budgeting method for estimating the
future budget for financial years. It will helps in making realistic assumption and developing
realistic financial goals for the organization.
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