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

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∗200Units=6000 Hours
Overhead
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