Analysis of Financial Statements for XYZ Manufacturing Limited

Summary of the provided assignment content: The content presents a financial summary for a company's operations in July, August, and September. It includes information on receipts, labor costs, variable overheads, and budgeted profit and loss accounts. The summaries show the company's income from sales, material costs, direct labor costs, and variable overheads. The total budgeted profit is £15,000.

MANAGEMENT ACCOUNTING
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Table of Contents
INTRODUCTION ..........................................................................................................................3
TASK 1............................................................................................................................................3
P1.1 Classification of different types of cost ............................................................................3
P 1.2 Computation of unit cost by using unit costing method....................................................4
P 1.3 Cost of exquisite using absorption cost..............................................................................5
P 1.4 Cost data of exquisite using appropriate techniques..........................................................6
TASK 2............................................................................................................................................7
P 2.1 Preparation and analysis of cost report for the month of September and variance analysis
.....................................................................................................................................................7
P 2.2 Various areas of potential improvements using performance indicators ..........................8
P 2.3 Ways to reduce cost and enhancing value and quality ......................................................9
TASK 3............................................................................................................................................9
P3.1 Purpose and nature of the budgeting process to the budget holders of Jeffery and Son’s
Ltd...............................................................................................................................................9
P 3.2 Use of appropriate budgeting technique..........................................................................11
P 3.3 Preparation of production and material budgets .............................................................11
P 3.4 Preparation of cash Budget .............................................................................................12
TASK 4..........................................................................................................................................14
P 4.1 Calculation of variances, identify possible causes and recommend corrective actions...14
P 4.2 Operating statements includes both budgeted and actual results.....................................16
P4.3 Responsibility centers.......................................................................................................17
CONCLUSION ............................................................................................................................17
REFERENCES .............................................................................................................................18
Appendix ......................................................................................................................................20
Working notes for task 1.3........................................................................................................20
Working notes for task 3.1........................................................................................................23
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INTRODUCTION
Management accounting, in general words, is referred to as the provision of financial
data which is further used to make decision, on behalf of an organization and its business
development. Accounting information is used by the managers for deciding the financial matters
of company as well as to manage and control business functions (Drury, 2008). From a long run,
this tool is considered to be the important for solving the financial matters of a business entity.
The present report is going to explain about the different types of cost classification as well as
calculations of unit cost. This report is focused towards the case of Jeffrey and Son’s
manufacturing company. Furthermore, calculation of cost is done exquisitely while using
absorption costing technique. The other sections show the cost report which is prepared with
respect of manufacturing unit. Along with this, a specific consideration is given to performance
indicators for recommending the ways to improve financial positions. This unit also aims to find
the areas of improvements within the accounting systems. However, the major purpose of
budgeting as well as its process is explained in context to Jeffery and Son’s Ltd. At last, the
causes of negative variance are identified while recommending the ways to improve the
budgetary position of company.
TASK 1
P1.1 Classification of different types of cost
There are various kinds of expenses that are incurred by manufacturing unit when
producing goods and services. These all operating cost is generally refereed as “Cost”. It is
further classified into range of categories that are based upon functions, behaviors, nature of
expenses etc (Backer, 2004. ). This section is going to describe the nature of expenses as well as
the classification of various kinds of cost:
Different elements of cost: There are three major elements of cost i.e. material, labor
and expenses. Use of material is essential for the purpose of manufacturing finished goods. On
the other hand, labor cost is associated with the expense made on human resource which is
involved in production process. However, all other expenses incurred during the production of
goods and services are known as elements of cost. All such expenses are further divided into two
categories such as direct and indirect variety i.e. direct labor and indirect material, etc
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Nature of Expense: Material, labor and expenses are the three major categories of cost
which are involved in a production process. Manufacturing companies are witnessed with
paying remuneration to workforce. For successful completion of manufacturing process, the
company is required to have skilled human resources or labors. Thus, salaries and wages that are
paid to such workforce are known as “Labor cost”. The specific cost which is paid against the
purchasing of raw material is considered to be “Material cost”. The other category of
expenditure is further known as expenses for a production unit (Griffith, Stephenson and
Watson, 2014).
Functions/Activities: Within manufacturing organizations, one can find different
departments which pay consideration to certain functions. Hence, all the departments incur their
individual cost. It is incurred by different departments as per their functions that are generally
known as expenses to respective departments (Drury, 2008). As per the functions of various
departments, the cost is classified into Manufacturing cost, Selling cost, Administration and
Distribution cost, Marketing cost and Research and development cost.
Behavior of Cost: The behavior of cost is to be decided as per the volume of
production. In other words, the cost which is based on the volume/units of production is
generally known as behavioral cost. The production volume of company depends upon the
market demand as well as other factors. There are three major types of cost that are classified as
per behavior i.e. Fixed cost, Variable cost and Semi variable cost. The cost which does not
change at any level of production is called as fixed cost (Mistry, Sharma and Low,2014. ).
However, the cost remains same at every level of production, else whatever the production is at
any point. The fixed cost includes: rent, transportation. Variable cost, on the other hand, includes
expenses that changes as per the production level. The single alteration is production units that
lead to change in cost of production. Semi-variable cost is the combination of both kinds of costs
including fixed as well as variable (Backer, 2004). In other words, it is the cost which remains
same at a specific level of production. However, it changes after certain limit and hence is called
as semi variable cost.
P 1.2 Computation of unit cost by using unit costing method
Job costing method is the most famous method of calculating cost for a job that is of
unique nature. This method is applied to the business manufactures specific types of goods and
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services and where the job is performed as per specific requirements of consumers/clients. Job
costing method allows manufactures make consideration towards direct and indirect cost of a job
(Method of costing. 2014). The following points represents the calculation of per unit cost of job
444 for Jeffrey and Son’s manufacturing Ltd:
Calculation of cost and unit cost of Job 444
Particulars Amount (£)
Direct cost
Direct material 200
Direct labour 270
Indirect cost
Variable production overhead 180
Fixed production overhead 120
Cost per unit 770
Units to be produced 200
Total cost 770*200 154000
Working note
Fixed production overhead= (Budgeted overhead / total direct labor hours) * Direct labor hours
for Job 444
=(£80000 / 20000 hours) * 30 hours
=£120
The above calculation represents that total cost of job 444 is £770, to the flip side, per
unit cost of job 444 is identified to be £3.85.
P 1.3 Cost of exquisite using absorption cost
Production Departments Service Department
Basis of Total Machine Machine Assembly Stores Maintenan
ceApportioning Shop X Shop Y
000’s
Indirect
Wages
Allocated 362 100,000 99,500 92,500 10,000 60,000
Indirect
Materials
Area
occupied
253 100,000 100,000 40,000 4,000 9,000
Lighting
Heating
& Area
Occupied
50 10,000 5,000 15,000 15,000 5,000
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Rent Area
Occupied
100 20,000 10,000 30,000 30,000 10,000
Insurance &
Machinery
Book value
of Machinery
15 7,947 4,967 993 497 596
Depreciation
of Machinery
Book value
of Machinery
150 79,470 49,669 9,934 4,967 5,960
Insurance of
Building
Area
Occupied
25 5,000 2,500 7,500
7,500
2,500
Salaries
Works
of No.
employees
of 80 24,000 16,000 24,000 8,000 8,000
Sub Totals 1,035 346,417 287,636 219,927 79,964 101,056
Re-
of service
Stores Dept. 39,982 29,987 9,995 (79,964)
Maintenance 48,507 32,338 20,211 (101,056)
Totals 434,906 349,961 250,133 0 0
P 1.4 Cost data of exquisite using appropriate techniques
Calculation of absorption rate on the basis of labor hours
Machinery X 434908/200000= 2.17
Machinery Y 349960/150000= 2.33
Assembly 250134/20000= 2.15
Calculation of Exquisite
£ £
Materials 8
Labour 15
Overheads
X (2*2.17) 4.34
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Y (1.5*2.33) 3.5
Assembly (1*1.25) 1.25
Total cost 32.09
Fort calculating the cost of Exquisite. The changes held in absorption rate from machine
hour to labour hour are being considered. This was noticed that, it puts significant changes in
actual cost of exquisite. From the calculation, it can be said that labour hours method is the best
for assessing final cost of Exquisite. The total cost identified is £32.09.
TASK 2
P 2.1 Preparation and analysis of cost report for the month of September and variance analysis
Cost report for the month of September
Budgeted cost Actual cost Variances
Particulars
Units 2000 units 1900 units
Material cost 24000 22800 -1200
Labor cost 18000 19000 1000
Fixed overhead 15000 15000 -
Prime cost 57000 56800 -
Electricity
Fixed portion 500 500 -
Variable portion 7500 7125 375
Maintenance 5000 5000 -
Total production cost 70000 69425
Calculation of standard budget at 1900 units
Budgeted cost Budgeted cost
Particulars
Units 2000 units 1900 units
Material cost 24000 22800
Labor cost 18000 17100
Fixed overhead 15000 15000
Prime cost 57000 54900
Electricity
Fixed portion 500 500
Variable portion 7500 7125
Maintenance 5000 5000
Total production cost 70000 67525
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Calculation of variable cost – electricity = change in total cost / change in no of units to
be produced
= (8000-5000) (2000-1200)
= £3.75
This was found that cost of production is not changed as after occurrence of slot of 500
and the increase of production units up to 100 will not make huge change.
Variance analysis
Material variance - The material variance represents a favourable change in material use.
This is all because due to variable nature of material in production process. It could be said that
decrease in material use lead to material cost.
Labour variance- In respect with the labour variance, an increase of £1000 is seen .
nonetheless, £1900 was the found as labour variance as per unit cost was £9 and in actuality, it
comes at £10. To overcome the difference of labour cost was compensated against computing
cost for actual 18000 units at £10 (Smith and Jacobs, 2011).
Fixed overhead- There was no single change in fixed expenses as these expenses are fixed in
nature
Electricity- The expenses made on electricity are semi variable as these were fixed to a
certain level of production. In such expenses, there was no change in fixed proportion but a
slight change was seen in variable portion.
Maintenance- The maintenance charges are rendered to be stepped cost which increases
with a level of production. There were no single changes were found in maintenance cost as
production of 100 units was reduced (Zikmund, 2012).
P 2.2 Various areas of potential improvements using performance indicators
On the basis of various performance indicators, Jeffrey and Son's is able is
recommended to make potential improvements:
 The financial analysis of company is used as the performance indicator which is used to
assess the improvements. A significant decline in sale and profitability is witnessed for
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company representing hence, it has to take some steps for improving such position
(Adler, 2013).
 The customers comments over the product and services quality is that way of identifying
improvements in such areas. By assessing product quality and defective products allow
company to make improvement in manufacturing process. The operations of business
are to be monitored for identify improvements. In addition, the feedbacks and complaints
of customer’s are to be accessed for making improvements in areas of business (Key
Performance Indicators., 2014).
P 2.3 Ways to reduce cost and enhancing value and quality
In order to enhance the values and quality of product that Jeffrey and Son's can move
towards in different areas.
 The company can make use of TQM approach which will insures the quality of goods
and better use of improved and innovative techniques. This is the most effective method
of enhancing the quality of products and making improvements in product quality and
value (Burns and Scapens, 2000).
 Furthermore , the company has to identify the major areas of business in which
improvements are to be made and the ways to reduce the cost of production.
 Reduction into operational cost is must to improve value of products .
 In addition to that management audit is an another task of monitoring internal operations
at the workplace and bringing out changes wherever possible (Zikmund, 2012).
 The staff members are to be influenced for carrying out standard performance and
accomplishing goals
TASK 3
P3.1 Purpose and nature of the budgeting process to the budget holders of Jeffery and Son’s Ltd.
` The budgeting process is referred to as a systematic plan of deciding on future incomes
and expenses. To a general phenomenon, it is a process of preparing a financial plan that can be
used by managers so as to determine the anticipated expenses and incomes (Pandey, 2009.). The
major purpose of budgeting is to make estimations for possible incomes and expenses to a
company for a specific time span. In respect to given case of Jeffrey & Son’s manufacturing Ltd,
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budgeting purpose is are used to find out incomes and expenditures for the company for a
specific time span. However, the main purposes of budgeting are defined in following points:
 The budgeting process purposes at estimating future financial gains and financial losses
 To find out the profitability of business for a specific time of span
 The major purpose of budgeting is to provide framework to the managers for effective
decision making (Fitzpatrick, 2005)
 To make comparison between approximated output and actual figures
Nature of budgeting process
In the above description, budgeting process is explained as a financial plan used for
preparing estimations for future incomes and expenses. Further, this is to be ensured that
budgeting process is adopted for the purpose of identifying availability of cash within the
company (McGowan, 2010). Now a days, budgeting become the most important process which
is used for controlling overall business expenses and reducing deficit. The use of effective
budgeting plan allows company to overcome negative variance that can harm future financial
positions. The nature of budgeting process is that it helps in assessing the financial situation of
company for future time period. With the help of budgeting process, the managers can identify
the future amount of cash made from the sales activities. Along with this, the cash generated
from other activities can also be identified through making use of budgeting process. In addition
to that , the necessary future expenditure made on business can be figure out with the help of
such process. While preparing the budgets, the organization can easily define surplus through
deducting calculated expenses from forecasting revenues. Furthermore, reviewing and revising
budget is the next step pf budgeting. At last, the actual outcome are compared with budgeted
figures that is called as variance analysis (Holtzman, 2013).
For given case scenario, it is essential for Jeffrey & Son's through forecasting expected
incomes and expenditure for near future. The budgeting process allows managers of
manufacturing department to put attention towards sales and preparing policies to enhance the
sales. The mentioned company can take major steps towards reduction of costs so as to earn
higher profits (Loo, Verstegen and Swagerman, 2011). However, business has to make
coordination between different activities of budgeting process. While investigating budget for
Jeffrey & Son's , it is noticed that incremental budgeting technique is used to prepare budgets.
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With the help of above mentioned budgeting process, company anticipates future incomes and
expenditures while comparing actual results with budgeted figures while determining variance
and taking corrective actions to overcome negative variance.
P 3.2 Use of appropriate budgeting technique
With an in-depth investigation in to the variance represents that Jeffrey & Son's
manufacturing company is recently using incremental budgeting system. However, the major
problem associated with such budgeting process is that the company is neglecting volatility of
the market. It puts significant affects in budgetary process as well as the figures of budgets. This
is the major reason for with company is not accessing favorable variance. Hence, a huge
difference is found in budgeted and actual figures. Now for getting better results, it is
recommend to use “Zero base budgeting” (Zero-Base Budgeting. 2016).
The positive impacts of using Zero base budgeting are as follows :
 It will allow company to overcome the limitations of incremental budgeting
 The market volatility can be considered at the time of preparing budgets
 The business entity can have positive variance between budgeted and actual figures.
 It allows actual estimation of operational cost and anticipate revenues
P 3.3 Preparation of production and material budgets
Production budget
Particulars July August September October
Sales 105000 90000 105000 110000
Less: opening stock 11000 13500 15750 16500
Add: Opening stock 13500 15750 16500 15000
Units to be produced 107500 92250 105750 108500
Closing Stock:
July = 15% * August sales = 15%*90000 = 13500
August = 15% * Sept. sales = 15%*105000 = 15750
September = 15% * Oct. sales = 15%*110000 = 16500
October = 15%*Nov. sales = 15%*100000 = 15000
Material purchase budget
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July August September October
Material usage 215000 184500 211500 217000
Less: Opening stock 52000 46125 52875
Add: Closing stock 46125 52875 54250
Purchases 209125 191250 212875
July opening stock = 52000 kg and closing = 25%* 184500 = 46125
Material purchase budget of Jeffrey and Son's smake
Particulars July August September
Units to be produced 107500 92250 104250
Material cost £3.50 £3.50 £3.50
Material to be purchased £376,250.00 £322,875.00 £364,875.00
Add: cost of material in ending inventory £80,718.75 £91,218.75 £91,218.75
Total cost of material needed £456,968.75 £414,093.75 £456,093.75
Less: Cost of material in beginning
inventory -£166,400.00 -£80,718.75 -£166,400.00
Cost of material to be purchased £290,568.75 £333,375.00 £289,693.75
Material usage budget
July material usage= 107500 units * 2 kg = 215000 kg
August material usage= 92250 units * 2 kg = 184500 kg
September material usage= 105570 units * 2 kg= 211,500 kg
October material usage= 108500 units * 2 kg = 217,000 kg
P 3.4 Preparation of cash Budget
Cash budget of Jeffrey and Son's smake
Particulars July August September
Opening balance of cash £16,000.00 £204,431.25 £192,306.25
Received from debtors £333,000.00 £335,250.00 £330,750.00
Cash sales £567,000.00 £486,000.00 £567,000.00
Total receivable £916,000.00 £1,025,681.25 £1,090,056.25
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Expenses
Payment to creditors £290,568.75 £333,375.00 £289,693.75
Direct wages £300,000.00 £300,000.00 £300,000.00
Variable overhead £46,000.00 £100,000.00 £100,000.00
Fixed overhead £75,000.00 £100,000.00 £100,000.00
Total payable £711,568.75 £833,375.00 £789,693.75
Closing balance of cash £204,431.25 £192,306.25 £300,362.50
Working notes
Computation of amount receivable from debtors
July August September
Amount received for sales before a month 247500 236250 236250
Amount received for sales before two months 85500 99000 94500
Sum 333000 335250 330750
Computation of amount of overhead payment
Overhead payment July August September
Variable overhead 46000 100000 100000
Fixed overhead 75000 100000 100000
Computation of production cost
July August September
Material cost £3.50 £3.50 £3.50
Wages £3.00 £3.00 £3.00
Variable overhead £1.00 £1.00 £1.00
Total variable cost £7.50 £7.50 £7.50
Fixed overhead £100,000.00 £100,000.00 £100,000.00
Units to be produced 107500 92250 104250
Total variable cost £806,250.00 £691,875.00 £781,875.00
Total production cost £906,250.00 £791,875.00 £881,875.00
Sales budget
July August September
Units to be sold 105000 90000 105000
Sale price 9 9 9
Sales 945000 810000 945000
Cash budget of Jeffrey and Son's
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Particulars July (£) August (£) September (£)
Cash inflow
Sales receipts (w.n.1) 900000 731250 864000
Cash outflow
Purchase 365969 334688 372531
Labour (w.n.2) 322500 276750 317250
Variable O/H (w.n.3) 108500 98350 100350
Fixed O/H 75000 87500 87500
Net cash flow 28031 -66038 -13631
Opening balance 16000 44031 22007
Closing balance 44031 -22007 -35638
TASK 4
P 4.1 Calculation of variances, identify possible causes and recommend corrective actions
Computation of variances of Jeffrey and Son's smake
Particulars Budgeted Actual Variance
Nature of
variance
Per unit Total Per unit Total
Sales revenue (A) 4 per unit 14000
3.95 per
unit 13820 -180 Adverse
Material Cost (a) 2.4 per kg 3360 2.4 per kg 3420 60 Adverse
Labor charges (b) 8 per hour 2800
7.80 per
hour 2690 -110 Favorable
Fixed overheads (c) 4800 4900 100 Adverse
Total Cost (a + b + c) 10960 11010 50 Adverse
Actual profit (A-Total cost) 3040 2810 -230 Adverse
Sales volume variance (4160- 3040) = (1120) (A)
Sales prices variance (14000- 13820) = (180) (A)
(Budgeted: 35000*£4- Actual sales)
 The material prices variances
AQ (1425Kg) X AR (£2.40) = £3420
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The material prices variances 0(A)
AQ (1425Kg) X SR (£2.40) = £3420
The material usage variance 60(A)
SQ (3500 Units x 0.4) X SR (£2.40) = £3420
 The labor variances
AH(345Hrs) X AR (£7.8 ) =£2690
The labor variance rate 70 (F)
AH(345Hrs) X SR (£8.0 ) =£2760
the labour efficiency variance
SH (3500 Units x0.1)350hrs X SR (£2.40) = £2800
 Fixed overhead sending
Actual fixed overheard = £4900
The fixed overhead expenditure variances 100(A)
Budgeted fixed production overhead = £4800
Budget
Original Flexed Actual
Output (Production
and sales units )
4000 3500 3500
£ £ £
Sales revenue 16000 14000 13820
Raw materials -(3840) (3360) (1400)Kg (3420) (1425Kg)
Labour -3200 (2800)(350Hrs) (2690)(345Hrs)
Fixed overheads -4800 -4800 -4900
Operating profit 4160 3040 2810
From the represented calculation, it was accessed that the current sales performance of
company is not good as the prices are too low. This can also be said that the organization is
15

making wrong estimation for sales price. The materiel cast was increased and the production
manager had not estimated such huge cost. The labour variance was seen somewhat favorable.
This is the reason for which profitability of mentioned company came down and to improve the
financial position, it is required to reduce consumption of material.
P 4.2 Operating statements includes both budgeted and actual results
Reconciliation operating statement of Jeffrey and Son's
Particulars Amount (in £)
Budgeted profit 3040
Less: Variance of sales -180
Less: Variance of cost -60
Add: Labor 110
Less: Overhead -100
Actual profit 2810
The above reconciliation operating statement Jeffrey and Son's representing that that
actual profit made by the mentioned entity is less than £230. However, decrease in per unit sales
price is seen as the major reason behind this reduction. To some extant material and overhead
cost were increased.
Operating statement for May
£ £ £
Favorable Adverse
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
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Total variance 110 F 1460A
Total net variance -1350
Budgeted operating
profit
4160
Less: Net variance -1350
Actual operating profit 2810
P4.3 Responsibility centers
The responsibility centre for production department is that the manager of department
has to reduce the excess material consumption in manufacturing process. For this, the respective
department has to employ advanced tools and tactics. Furthermore, production manager is
responsible for reducing wastage for which utilizing of proper resources in the most effective
manner (Smith and Jacobs, 2011). The human resources are seen effective in the whole process
as labour variance was favourable for attain the profitability the company is recommended for
indulging into forecasting variance and maintaining favourable labour charges.
CONCLUSION
In this report, classifications of costs and calculation of the unit costing are shown while
using Job Costing method. It was mentioned that financial analysis and customers comments are
to be used as the performance indicator which define improvements in business practices. It was
found that Jeffrey & Son's manufacturing company was using incremental budgeting but the
company is advised to use “Zero base budgeting” for gaining positive outcomes. Some of the
cost controlling tactics are to be used by the company to improve existing position.
17

REFERENCES
Books and Journals
Adler, R., 2013. Management Accounting. Routledge.
Backer, S., 2004. Introduction: Marginal Costing as a Management Accounting
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Banks, A., 2008. Budgeting. 3rd ed. McGraw-Hill Australia
Burns, J. and Scapens, R.W., 2000. Conceptualizing management accounting change: an
institutional framework. Management accounting research, 11(1), pp.3-25.
Drury, C., 2008. Management and cost accounting. Routledge.
Fitzpatrick, T., 2005. Management and cost accounting .U.S. Patent Application
McGowan, A., 2010. Managerial accounting. Issues in Accounting Education, 25(4), pp.792-
793.
Griffith, A., Stephenson, P. and Watson, P. , 2014. Management systems for construction.
Routledge
Holtzman, P. M., 2013. Managerial Accounting For Dummies. John Wiley & Sons.
Loo, D. I., Verstegen, B. and Swagerman, D., 2011. "Understanding the roles of management
accountants". European Business Review. 23(3). pp.287–313.
Mistry, V., Sharma, U. and Low, M., 2014. "Management accountants' perception of their role in
accounting for sustainable development: An exploratory study". Pacific Accounting
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Pandey, M. I., 2009. Management Accounting, 3E. Vikas Publishing House Pvt Ltd.
Smith, D. and Jacobs, K., 2011. “Breaking up the sky”: The characterisation of accounting and
accountants in popular music. Accounting, Auditing & Accountability Journal. 24(7)
pp.904-931.
Zikmund, W., 2012. Business research methods. John Wiley & Sons.
Online
Method of costing. 2014. [Online]. Available at: <http://www.svtuition.org/2012/09/method-of-
costing.html>. [Accessed on 28th January 2016].
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Key Performance Indicators., 2014. [Online]. Available at:
<http://blog.claytonmckervey.com/blog/2011/01/24/key-performance-indicators/>
[Accessed on 28th January 2016].
Zero-Base Budgeting. 2016. [Online]. Available at: <http://www.accountingtools.com/zero-
based-budgeting>. [Accessed on 28th January 2016].
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Appendix
Working notes for task 1.3
Lighting & Heating: Machinery X 10/50 x £50,000 — f10,000
Machinery Y 5/50 x £50,000 — £5,000
Assembly 15/50 x £50,000 — f 15,000
Stores 15/50 x £50,000 = £15,000
Maintenance 5/50 x £50,000 = £15,000
Rent Machinery X 10/50 x £100,000 = f20,000
Machinery Y 5/50 x £100,000 = £10,000
Assembly 15/50 x £100,000 = £30,000 Stores
15/50 x £100,000= £30,000 Maintenance
5/50 x £100,000 = £10,000
Insurance & Machinery Machinery X 800/1510 x £15,000 = £7,964
Machinery Y 500/1510 x £15,000 — £4,966
Assembly 100/1510 x :E15,000 — £994 Stores
50/1510 x £15,000= f 497
Maintenance 5/1510 x f15,000= £596
Depreciation of Machinery Machinery X 800/1510 x £150,000 = £79,470
Machinery Y 500/1510 x £150,000 = £49,669
Assembly 100/1510 x £150,000 = £9,934
Stores 50/1510 x £150,000 — £497
Maintenance 60/1510 x £150,000 = £596
Insurance of Buildings Machinery X 15/50 x £25,000 — £5,000
20

Machinery Y 5/50 x £25,000 = £2,500
Assembly 15/50 x £25,000 = f7,500 Stores
15/50 x £25,000 — £7,500
Maintenance 5/50 x £25,000 = £2,500
Salaries of works mgmt. Machinery X 3/10 x £80,000 = £24,000
Machinery Y 2/10 x :E80,000 = £16,000
Assembly 3/10 x £80,000 = £24,000
Stores 1/10 x £80,000 — £8,000
Maintenance 1/10 x £80,000 = £8,000
Reappointing workings: based on material issues
Machinery X 400/800* £79,964 = £39,982
Machinery Y 300/800 * £79,964 = £29,987
Assembly 100/800 * £79,964 = £9,9995
Based on time spent
Machinery x 12/25 * £101,056 = £48,507
Machinery y 8/25 * £101,056 = £32,338
Assembly 5/25 * £101,056 = £20,211
Overhead absorption rate workings
Departments = Total / actual machine hours per dept
Machinery X = £ 434,906/ 80,000 = £5.44
Machinery Y = £349,960/ 60,000 = £5.83
Assembly = £250,134/ 10,000 = £25.01
Overhead absorption rate
Machinery X= 434906/80000=5.44
Machinery Y= 349960/60000= 5.83
Assembly=250134/10000=25.01
Computation of absorption rate
£ £
Materials 8
Labour 15
Overheads
21

X (0.8*5.44) 4.34
Y (.6*5.83) 3.5
Assembly (.1*25.01) 2.5
Total cost 33.35
Allocation of cost of support departments on the basis of machine hours
Machine shop X Machine shop Y Assembly Total
Store £39,982.00 £29,987.00 £9,995.00 £79,964.00
Maintenance £45,807.00 £32,338.00 £20,211.75 £101,056.00
Total £434,906.00 £349,961.00 £250,133.00
Allocation of criteria of cost
Particulars Description
Indirect wages and supervision As per the provided amount.
Indirect materials As per the provided amount.
Light and heating On the basis of area occupied
Rent On the basis of area occupied
Insurance and machinery On the basis of book value of machine
Depreciation of machinery On the basis of book value of machine
Insurance of building On the basis of area occupied
Salaries of works management On the basis of number of employees.
Units to be produced
Material cost £400,000.00 £300,000.00 £100,000.00
per unit material 8 8 8
A/B no. of units 50000 37500 12500
Overhead absorption rate
Machinery X 434906/80000=5.44
Machinery Y 349960/60000= 5.83
Assembly 250134/10000=25.01
Computation of absorption rate
Exquisite calculation
£ £
Materials 8
22

Labour 15
Overheads
X (0.8*5.44) 4.34
Y (.6*5.83) 3.5
Assembly (.1*25.01) 2.5
Total cost 33.35
Working notes for task 3.1
Working Note-1
Sales (£) July (£) August (£) September (£)
May 855000 85500
June 990000 247500 99000
July 945000 567000 236250 94500
August 810000 486000 202500
September 945000 567000
July: 105000*9 = 945000
August: 90000*9 = 810000
September = 105000*9 = 945000
July receipts August receipts September receipts
10%*855000 May 10%*990000 June 10%*945000 July
25%*990000 June 25%*945000 July 25%*810000 Aug.
60%*945000 July 60%*810000 Aug. 60%*945000 Sept.
Working Note-2
Labour
July 1075000*3 = 322500
August 92250*3 = 276750
September 105750*3 = 317250
23

Working Note-3
Variable overhead
July (£) August (£) September (£)
June 44000
July 64500 43000
August 55350 36900
September 63450
Total 108500 98350 100350
Based on Junes Sales = 40% * 110000 and it should be based on production of June and the
difference is in immaterial.
40%*110000 units = 44000*1 = £44000 from June and payable in July
60%*107500 units = 64500*1 = £64500 from July and payable in July
40%*107500 units = 43000*1 = £43000 from June and payable in Aug.
60%*92250 units = 55350*1 = £55350 from June and payable in Aug.
40%*92250 units = 36900*1 = £36900 from July and payable in Sept.
60%*105750 units = 55350*1 = £63450 from June payable in Sept.
(d) Budgeted profit and loss account
July (£) August (£) September (£) Total (£)
Sales 945000 810000 945000 2700000
Less: bad debts 47250 40500 47250 135000
897750 769500 879750 2565000
Total MC of
production
806250 691875 793125 2291250
Add: opening
stock
82500
Less: closing 123750
24