Cost Accounting and Budgetary Analysis

This assignment explores the concepts of cost accounting and budgetary analysis within the context of a PVC sheet manufacturing company. It analyzes production costs, identifies areas for improvement like minimizing waste, and proposes activity-based budgeting as an effective approach for resource allocation and cost control.

MANAGEMENT
ACCOUNTING
1.

Table of Contents
INTRODUCTION 4
TASK 1 4
P1 Explaining the concept of management accounting & the essential requirement of different
MAS 4
P2 Evaluating different methods for the managerial accounting reporting 5
TASK 2 6
P3 Computation of costs per unit under marginal and absorption costing and explaining their
difference 6
TASK 3 8
P4 Explaining the advantages and disadvantages of different types of budgetary planning tools
8
A. Computing the standard costs of PVC sheets required to manufacture 4,000 keyboards
9
B. Computing the material price and quantity variance 10
TASK 4 10
P5 Comparing dell with HP in order to adapt MAS to respond financial problems 10
CONCLUSION 12
REFERENCES 13
1.

2. Table of figures
Table 1 Calculation of unit cost under absorption & marginal costing 6
Table 2 Calculation of cost of production & sale under absorption costing 6
Table 3 Calculation of gross profit and net profit under absorption costing 7
Table 4 Calculation of cost of production & sale under marginal costing 7
Table 5 Calculation of contribution and net margin under marginal/variable costing 7

INTRODUCTION
Managerial accounting is a process of reporting and communication business performance to
the mangers and top executives which aids in right strategy formulation and smarter business
decisions. It is totally different from the financial accounting because in this, firm’s top directors
not only look after the preparation of annual accounts but their main target is to gather essential or
important information for bringing out efficiency into the operations and ensure sustainable success.
The present assignment here emphasizes on the managerial accounting operations and reporting for
a leading information technology & cloud computing service provider firm, named Dell. In the
report, various techniques like cost calculation, standard costing and different kinds of managerial
accounting system will be analysed.
1. TASK 1
1. P1 Explaining the concept of management accounting & the essential requirement of
different MAS
Management accounting is a process of furnishing accounting information by the managers
in order to make viable and feasible business decisions. It serves vital information to the managers
for making right planning through modifying, analysing and interpreting the financial information.
It plays a significant role in Dell to streamline their daily operations, effective and efficient
functionality and appropriate business planning. At the same time, it also helps firm to put better
control by comparison of the actual performance with the targets and co-ordinate various functions.
Management accounting system can be deployed by the Dell to deliver required information to the
managers on time for making better decisions. It helps to generate reports that allow managers to
make plans, policies and strategies for the smooth functionality. With reference to Dell, its
managers can take assistance of the following system, described here as under:
Cost accounting system: Dell is a profit-oriented business which aims at maximizing their
net profitability by effective control over their cost. Thus, CAS furnishes cost related data and
provides it to the managers i.e. cost of material purchase, labour’s wages and others which helps in
valuation of closing stock (Banerjee and Das, 2017). By analysing the cost reports, top managers
and personnel can create innovative planning and decisions to minimize expenditures and thereby
drive better return. Here, two types of cost accounting system can be used by the Dell that are
presented here as under:

Job order costing: This system accumulates all the costs incurred i.e. material, labour etc.
for each job work and enables Dell’s managerial team to find out the total cost of the order placed
by the customer. By identifying the cost, manager can make good pricing decisions at where they
will be ready to offer their goods to the consumer and meet their return requirement (Romano,
2015).
Process costing: Unlike the above, this system accumulates or incorporates cost of
manufacturing for each of the process. It is helpful for those companies where goods are
manufactured in different divisions and accumulation of costs of all the departments helps to find
out the total cost.
Batch costing: This system is useful for determining the cost for a group of items and
services produced by the Dell. It helps to identify and determine total batch costs comprising fixed
and variable costs (Bhimani and et.al., 2013). Here, per unit batch cost can be founded out by
dividing the total costs with the number of units produced in batch.
Price optimization: This system is very useful in distributing the market into various sub-
sets and thereby defines the target market to receive maximum yield. Dell’s managerial team can
use it to find out the extent to which consumers are price-sensitive (Price optimization, 2015). With
the help of this, top managers can track that how change in their offering prices will bring
fluctuations in the market demand, which helps to set a right price for the target market to earn
maximum return.
1. P2 Evaluating different methods for the managerial accounting reporting
In the business, managers acquire various set of operational data from different reports and
analyse the information for making viable & informed decisions to ensure sustainable progress. The
main reports which Dell’s higher authority can use for designing the best strategies and decisions
are enumerated here as under:
Job cost reports: As discussed earlier, that job costing system accumulates the expenditures
made by the firm for manufacturing a given number of units (Yigitbasioglu, 2017). Thus, this
system generates costing reports for every job work, which assist decision-makers in cost evaluation
and right selling pricing decisions.
Accounts receivable/debtors reports: This reports indicates the amount of outstanding
debtors, their bills, amount and maturity dates as well. It facilitates credit collection division of Dell
to make better plans for taking out money promptly from the debtors to maintain adequate cash

resources in the business (Choi, Kulick and Mayer, 2009).
Budgeted reports: Every departmental manager set standard target for their divisional
revenues and payments made for the continual of operations. Thus, this reports delivers information
to the policy makers about targets which is compared with the actual results to detect deviations
whether favourable or unfavourable and thereby make remedial actions to combat negative
variances.
Inventory management reports: Stock management is an essential part of the operational
management so as to maintain stock at sufficient level for safeguarding against sudden increase in
the consumer demand (Fullerton, Kennedy and Widener, 2013). Such reports delivers information
regarding hourly wages rate, closing stock & others which managers analyse for the right inventory
planning & its management.
1. TASK 2
2. P3 Computation of costs per unit under marginal and absorption costing and explaining their
difference
The main difference marginal & absorption costing methods, is that, former uses only the
variable cost for measuring cost of production whereas later gives consideration to both the fixed &
variable costs for valuation of closing inventory (Banerjee and Das, 2017).
Table 1 Calculation of unit cost under absorption & marginal costing
Particulars Full/Absorption costingVariable/Marginal costing
Direct Material purchase 20 20
Direct labour 8 8
Variable manufacturing overheads 4 4
Fixed manufacturing overheads 10 -
Costs/unit 42 32
Table 2 Calculation of cost of production & sale under absorption costing
Items

Material
Labor
Variable manufacturing overheads
Fixed manufacturing overheads
Total cost of production
Add: Beginning inventory
Less: Closing stock (10000)
Cost of goods sold (COGS)
Table 3 Calculation of gross profit and net profit under absorption costing
Items
Sales
Less: cost of goods sold
Gross margin (sales - cost of goods sold)
Fixed selling and administrative expenses
Variable selling & administrative expense
Net profit
Table 4 Calculation of cost of production & sale under marginal costing
Items
Material
Labor
Variable manufacturing overheads
Total cost of production
Add: Beginning inventory
Less: Closing stock (10000)
Cost of goods sold (COGS)
Table 5 Calculation of contribution and net margin under marginal/variable costing
Items

Sales
Less: cost of goods sold
Gross margin (sales - cost of goods sold)
Variable selling & administrative expense
Contribution
Fixed selling and administrative expenses
Fixed manufacturing expenses
Net profit
Interpretations:
The outcome of the results measured that unit cost under full as well as marginal costing
have been derived to 42 & 32 GBP. It is comparatively lower in the marginal costing because fixed
manufacturing overheads worth 10GBP per unit has been ignored by it. Moreover, cost of
production & cost of goods sold under absorption costing computed to 2,100,000 & 1,680,000,
however, in contrast, under full costing, it has been derived to 1,600,000 & 1,280,000 which is
comparatively less because of ignorance of fixed production overheads (Kaplan and Atkinson,
2015). The net profitability margin under both the costing methods has been founded out to 180,000
& 80,000. It is greater in full costing because stock valuation considering the fixed costs bring
proportionate decrease in the cost of goods sold which is not so with the marginal costing as a
result, net profit has been dropped down to 80,000GBP.
1. TASK 3
2. P4 Explaining the advantages and disadvantages of different types of budgetary planning
tools
Budgeting procedure is an essential or vital component of managerial control which is a
system of planning, coordinating, supervising and controlling the day to day functions. It can be
defined as a plan to predict or forecast possible results of future period’s operational activities so as
to make better plan in the current period for deriving desired results. Different types of budgetary
tools that are available to Dell’s managers are presented here as under:
Incremental budgeting: Traditionally, managers use a simplified approach, in which, they
either consider previous year’s budget or actual performance as a base and some incremental
amount is added into this to arrive the budget for the future period (Mauro, Cinquini and Grossi,
2016). Here, a slightly adjustments can be made by the Dell’s manager for inflation, increasing

selling price, high cost and others.
Advantages:
a. 1. It is very easy to prepare and can be prepared promptly because it requires a little bit
changes in the previous period’s budget or actual results.
b. 2. Less time in the budget preparation leads to less costs of preparation.
c. 3. It prevents possible conflicts among all the departmental managers of the Dell
because it follows consistent approach for the resource allocation.
Limitations:
• • It favour the execution of all the activities which believe that current running costs
will be incur in future period’s also thus it give rises to the unnecessarily spending in the
unproductive functions.
• • Managers and workers are not motivated or incentivised to reduce their costs
because they are not rewarded with any incentive for the same (Renz, 2016).
• • It decides unchallenging performance targets which do not encourage employees or
managers to accept tough challenges for maximizing operational efficiency, minimizing cost
and others.
Zero-based budgeting: This method overcome the drawback of incremental budgeting
which tries to make optimal resource allocation by forcing every managers of all the Dell’s division
to fully justify every activity and cost properly which leads to optimum resource utilization.
Benefits:
• • It helps to motivate staff by setting challenging performance targets and also
encourage them to take initiatives to control cost (Sehgal, 2017).
• • It helps to respond changing conditions by considering the underlying trends in the
industry and market.
• • Another advantage of ZBB methods is that it helps in an efficient and optimum
resource allocation.
Drawbacks:
• • It may be possible that Dell’s departmental manager may not have required skills to
create the budget, which in turn, training may be required which takes time and cost as well.
• • Many-times, decisions are made at the time of budget creation which is not accepted
by some managers which may leads to have a detrimental effect on the firm.

Activity based budgeting:
Under this method, budget is prepared by the managers, in which, spending proposition is
totally based upon past period’s production activities (Saladrigues and Tena, 2017). They examine
the cost of various activities and every activity is allocated with the fund derived from the related
activity.
Benefit:
• • It draws managerial attention towards overheads which may be incur in the large
proportion of total costs of the Dell.
• • It helps firm to control the cause of the cost for the better cost management.
• • ABB method helps to provide an important insight to the management for total
quality management by presenting a link between costs with the service delivery system.
Drawback:
• • High level of understanding is the first and foremost requirement of ABB, thus, in
case of lack of expertise knowledge and speciality, the technique cannot be applied.
• • Training requirement also leads to drive excessive costs to the Dell and results in
lesser yield.
1. A. Computing the standard costs of PVC sheets required to manufacture 4,000 keyboards
Standard costs refers to the costs that Dell’s production manager has expected to incur for
producing 4000 keyboards. In other words, it refers to the target cost that has been decided to be
incur in the production of target number of units (Schaltegger, Gibassier and Zvezdov, 2013). With
the stated scenario, Dell has been decided to produce 4000 keyboards which standard costs has been
computed here as under:
PVC sheets/per unit – 2.5 feet
Price per sheet – 3.60 GBP
Total sheets required to produce 4,000 keyboards = 4,000*2.5 = 10,000 feet
Costs of 100,000 PVC sheets = 10,000*3.60 = 36,000 GBP
Thus, standard costs of 4,000 key boards = 36,000 GBP
Actual costs = 37,400GBP
Difference: standard cost – actual cost
= 36,000 GBP – 37,400 GBP
= 1,400 GBP (Adverse/Unfavorable)

As per the founded results, Dell has incurred a negative variance of 1,400 GBP on the
production of 4,000 keyboards because targeted cost has been decided to 36,000 GBP whilst the
actual costs has been set to 37,400 GBP.
1. B. Computing the material price and quantity variance
Material price variance (MPV): Actual quantity (standard price – actual price)
= 10,000 feet (3.60 GBP – 3.40 GBP)
= 10,000 feet (0.20 GBP)
= 2,000 (favourable)
Material quantity variance (MQV): Actual price (standard quantity – actual quantity)
= 3.4GBP (10,000 feet – 11,000 feet)
= 3.4GBP (-1,000 feet)
= 3,400 GBP (adverse)
From the results, it can be seen that MPV is founded positive to 2,000GBP because Dell has
decided that per sheet, it would have to pay 3.60GBP whilst, in the actual market, there is a cheaper
availability of sheets at a price of 3.40GBP reduced the targeted cost by 2,000 which is good. On
the contrary side, MQV reported negative results to 3,400 GBP. It is because, firm has decided to
use 10,000 feet of PVC sheet for producing 4,000 keyboards while the actual consumption of PVC
sheets reported to 11,000 feet higher by 1,000. Inefficient and unoptimal use of PVC sheets, theft
activities and wastage of the sheets may be the reason behind high use of material, as a result, it
leads to cause a negative variance of 3,400 GBP.
1. TASK 4
2. P5 Comparing dell with HP in order to adapt MAS to respond financial problems
In the stated case, it has been given that Dell is suffering profitability issues in comparison
to the competitors which impact its operational results and competitive position in an adverse
manner. In order to overcome such financial difficulties, Dell’s management can be suggested with
the following ways that are presented underneath:
Ratio analysis: It is the best technique, under this, Dell’s managerial team can compare their
own profitability ratios like gross margin, operational margin and net margin with the HP’s
profitability performance. With the comparative evaluation, company can find out their sales as well
as cost performance and come up with the right strategy for minimizing costs and maximizing total

sales in order to drive greater return (Schipper, Francis and Weil, 2017). Besides this, Dell can also
compare its own financial position with the Dell’s financial health through the evaluation of their
liquidity position and solvency performance. With the evaluation of it, company can devise right
strategies and create right plans for the effective working capital decisions, designing a right capital
structure, cash management strategies, negotiating plan with the suppliers and prompt receipts from
the debtors as well, as a result, firm can achieve success and overcome financial consequences.
Particulars Dell
Revenues 56940
Gross profit 12186
Net profit 2372
Gross profit margin 21.40%
Net profit margin 4.17%
From the table, it can be seen that Dell’s GPM as well as net profit margin came down from
21.40% to 20.16% and 4.17% to 2.36%. Decreased sales performance by 0.56% and higher cost of
sale by 1.78% resulted downward movement in its gross profit performance which indicates that
Dell generated less return on their sales. In contrast, HP’s GP ratio goes up from 23.08% to 23.88%
by 3.47%. Although, currently, its revenues came down by 0.75% still, controlled cost of goods sold
drive favourable improvement in its gross profit by 2.69%. In comparison, HP’s profit ratio is
higher which indicates that it has performed better in relation to the Dell. Further, Dell Inc’s net
profit ratio dropped from 4.17% to 2.36% by 43.23% due to overspending on sales, general and
administration expenditures & R&D operations. However, in contrast, HP’s ratio shows a slightly
decline from 4.55% to 4.50% by 1.21%. It is due to the tighten supervision and monitoring by the
manager over the daily functions and formal course of activities (Simons, 2013). The ratios clearly
demonstrates that HP has performed well in comparison to the Dell Inc. From the analysis, it is
considered advisable to Dell to make strategies in relation with bringing significant improvement in
their sales performance & curtail costs to maximize profitability (Banerjee and Das, 2017).
Moreover, strong supervision by the managerial team will facilitates firm to enhance their net return
and maximize operational performance for driving competitive success.
1. CONCLUSION

The above project report summarized that Dell’s managers can integrate the management
accounting system i.e. cost accounting system, inventory management system, job costing system
and business decisions. With the help of generating such reports, they can streamline their regular
functionality and attain targets easily. Besides this, a clear differentiation has been presented in
marginal & absorption costing, under which, it has been discussed that marginal costing use only
the variable costs whereas absorption gives value to both the fixed & variable costs. This is the
reason why inventory has been valued differently under both the methods and drive distinguish
amount of net return. Further, variance analysis reported favourable MPV and adverse MQV which
may be caused due to ineffective utilization of PVC sheets and wastage as well upon which,
production division manager needs to put better monitoring & control. Apart from this, from the
budgetary analysis, activity based budgeting has been considered as the best way because it
allocates revenue generated from an activity to its related item of expenditures.
1.

2. REFERENCES
Books and Journals
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https://www.manthan.com/cpg-solutions/insights/505-key-factors-to-consider-in-price-
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