Different Approaches of Budget Setting and Costing Techniques
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This report discusses different approaches of budget setting and costing techniques. It covers incremental budgeting, activity based budgeting, value proposition budgeting, and zero based budgeting. It also explores costing techniques such as process costing, job costing, inventory costing, and activity based costing.
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Table of Contents INTRODUCTION.................................................................................................................................3 Question 1.............................................................................................................................................3 A.1) Approaches of budget setting....................................................................................................3 A.2) Revised budget..........................................................................................................................5 Part B.....................................................................................................................................................5 B.1) Different approach of costing....................................................................................................5 B.2) Traditional business wide rate....................................................................................................6 B.3) Activity based approach.............................................................................................................7 CONCLUSION.....................................................................................................................................7 REFERENCES......................................................................................................................................8
INTRODUCTION Cost accounting is a process that involves identifying and measuring the total cost incurred to make the product or service ready to sale in the respective target market. This report will discuss about different costing techniques. Henceforth, report will emphasis over budgeting technique. Furthermore, project will discuss about the method to develop the total cost. Question 1 A.1) Approaches of budget setting Budget setting is a process in which different cost is identified by the enterprises related to the upcoming financial year. These costs will be related to different functional areasanddirectionrelatedtothebusinessentity.Therearecertaintechniqueslike incremental budgeting, activity based budgeting, value proposition budgeting and zero based budgeting techniques that are used and explored by the organisations in order to prepare the best suitable budget practices. Incremental budgeting Incremental budgeting technique is a process in which the last or previous year financial records bring out and make increment based on needs and requirements to prepare the latest and modified budget out of it. This is very common technique of budgeting as it is simple and understanding to prepare budget in this fashion. This technique is favourable only f the cost drivers do not get influenced with any of the element or factor. Incremental budgeting is a fast forward method to prepare the best suitable budget in favour of the entity (Galvin and Power, 2020). This analysis and assume the expected cost to be incurred in the coming financial year and prepare the best suitable budget. This budget technique completely focuses over the internal driver but external cost drivers are completely ignored under this practice. Activity based budgeting Activity based budgeting technique is a method of budgeting in which a top down budgeting approach is used. Under this practice on the basis of the output target set by the company budget is prepared by assuming the overall expected cost to be incurred over operations. For example if a business entity set a target of$100 in revenue is has a set a target
first determining the activities that needed to incorporate in order to achieve the target. Based on the activities identified overall cost is measured that is further resulted into setting up the best suitable budget for the organisation (Hanly and et.al., 2017). This technique is also preferable in many cases for the organisations to explore in order to make up the best suitable budget for the business enterprises. Value proposition budgeting Value proposition budgeting is a technique involve analysing and assessing the cost that is expected to be incurred by the business entity. Under this budget only such values are involved that create some kind of value to the business entity. Only such cost or items that are included that create some kind of value for the potential customers associated with respective business entity. The basic aim of this budget is to avoid the unnecessary expenses from the business and develop the budget that suit with the business requirements of the organisation. This budget requires clearly understanding of the cost that needed to include in the budget and the cost that can be eliminated from the budgetary cost. Value proposition budget allow the business entity to achieve the best suitable balance in the budgetary direction to meet up different business objectives. Zero based budgeting Zero based budgeting is a most commonly used budgeting technique that is used by majority of the business entities. This budget assume that all department cost is zero and they need to work from the scratch. There is not any singe cost that get approved without any clear judgement and understanding (Kianian, Kurdve and Andersson, 2019). This budget is a very tight to deliver or involve any cost in the whole budgetary situation. This can also be stated as the bottom line budget technique. This technique is effective only if there is urgent need or requirementsrelatedtothecostcontainmentforexampleatatimeofthebusiness organisation are experiencing some serious financial reinforcement this technique is effective enough to use. This technique is best suitable to address the discretionary cost rather than overcome the operating cost in the business. Arnold Company is doing its business operations from many years. Company in currently using the incremental based approach to set the budget. This technique allow the organisation to effectively analysis the cost that incurred in the company in past and based on the market situation or needs and requirements company add some value to the budgetary
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cost so that total estimated cost related to every single expenditure company can identify. This technique is effective in context to the business entity as it allow the organisation to evaluate the expected cost to be incurred by the organisation in next financial year. A.2) Revised budget Revenue10736 (9760 + 10%) Suppliers4026 (3660 + 10%) Direct wages1342 (1220 + 10%) Direct utilities536.8 (488 + 10%) Total variable cost5904.8 Line management wages17.6 (16 + 10%) Production line manager770.4 (856 - 10%) Selling and distribution1815 (1650 + 10%) Apportioned Headquarter overhead2310 (2100 + 10%) Total indirect cost4913 Total profit-81.8 (10736 – 5904.8 - 4913) Budget monitoring process is an approach that is used by the business entity to monitor and measure the budget of the company. Arnold Company follow steps like establish the actual position, compare the actual position with the budget, calculate the variance, establish the causes of variance and based on the entire evaluation taking up the best suitable action. All this are the steps that needed to be taken in order to achieve the best level of budgetary monitoring process (Narsaiah and Chary, 2017). Variance analysis allows the company to measure the best suitable areas that seek improvement. The above projected cost analysis indicate that if the 10% changes in the budget are conducted it will meet up all the needs and requirements of the company and will also minimise the variance. Part B B.1) Different approach of costing Costing is a process involves measuring the overall estimated cost to deliver the final product or unit. This involve reporting total cost incurred in making the product or service ready to sale in the target market. This involve various methods and techniques like job costing,processcosting,inventorycosting,activitybasedcostinganddifferentother
techniques. The aim of all these costing method is to identify the total cost require for making the product or service ready to sale in front of the potential customers in the respective market. Process costing This is a technique that is used to report the overall cost of the product that could go through different process before making it ready for sale to the final customers. Every single process provides some level of output that also consumes cost that needed to measure under this (Potasheva, 2021). Under this cost of each stage of production is measured in process to monitor the total cost require to make the product ready to sale in respective target market. Job costing This is a costing technique that is used related to a specific manufacturing situation. To cost the overall process of the specific manufacturing situation this costing technique is used. When the individual product is unique and requires a whole process or the state of activities of costing this technique or method is utilised. Inventory costing This is a technique used to measure the cost of holding inventory in stock. This involves techniques like FIFO, LIFO and many such techniques. Under this method cost of inventory is identified. Activity based costing This is a technique used to monitor the total cost based on activity. Every cost of activity is measure to identify the total cost of delivering the product or service under this technique. B.2) Traditional business wide rate ParticularSeries 1Series 2 Direct material11700000 (13000 * 900)6600000 (11000 * 600) Direct labour97200 (108 * 900)129600 (216 * 600) Overhead cost (108 : 216)1053333 (3160000 / 324 *2106667 (3160000 / 324 *
108)216) Total cost128505338836267 Add:40% mark up51402133534507 Total selling price1799074612370774 B.3) Activity based approach ParticularBasisof segregation overhead cost Series 1Series 2 Direct material11700000(13000* 900) 6600000(11000* 600) Direct labour97200 (108 * 900)129600 (216 * 600) Overhead cost Machining1800 : 10001157143642857 Finishing5400 : 7200257143342857 Material ordering16 : 10184615115385 Material issue35 : 2215350996491 Scheduling cost20 : 1014000070000 Total cost136896107997190 Add: 40% mark up54758443198876 Total selling price1916545411196066 CONCLUSION Cost accounting is a process involves measuring the overall cost of the product or service. This is a process involve methods like budgeting, activity based costing, batch costing, job costing and many such costing technique or methods. Overhead can be absorbed with support of single rate or the multiple bases behind the reason certain overhead incurred.
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REFERENCES Books and Journals Galvin, D. and Power, C., 2020. A micro-costing study: comparing a standard intravenous patient-controlledanalgesiasystemwithanovelsublingualpatient-controlled analgesia system.Irish Journal of Medical Science (1971-). pp.1-5. Hanly, P. and et.al., 2017. Making implicit assumptions explicit in the costing of informal care: The case of head and neck cancer in Ireland.PharmacoEconomics.35(5). pp.591-601. Kianian, B., Kurdve, M. and Andersson, C., 2019. Comparing life cycle costing and performance part costing in assessing acquisition and operational cost of new manufacturing technologies.Procedia CIRP.80. pp.428-433. Narsaiah, N. and Chary, T. S., 2017. Activity Based Costing and Profitability of IT Companies-ACaseStudy.JIMS8M:TheJournalofIndianManagement& Strategy.22(1). pp.4-11. Potasheva,O.,2021.AutomationproblemsofABCcostinginRussia.InCurrent Achievements, Challenges and Digital Chances of Knowledge Based Economy(pp. 331-339). Springer, Cham.