Management Accounting Research and Practice

This assignment delves into the field of management accounting, examining its key concepts, contemporary research trends, and practical implementations within businesses. It analyzes diverse perspectives on management accounting, including its role in decision-making, performance evaluation, and organizational strategy. The assignment also explores the evolving boundaries between intrafirm and interfirm management accounting, highlighting the increasing interconnectedness of these domains.

Management
Accounting
1

TABLE OF CONTENTS
Table of Contents.............................................................................................................................2
Index of Tables................................................................................................................................3
Introduction......................................................................................................................................4
Task 1...............................................................................................................................................4
1.1 Description of cost classification...........................................................................................4
1.2 Computation of job cost by considering method of job costing............................................5
1.3 Computation of exquisite cost by using absorption costing technique..................................6
1.4 Analysis of cost data of exquisite..........................................................................................9
Task 2.............................................................................................................................................10
2.1 Preparation and analysis of cost report of September month..............................................10
2.2 Use of performance indicators in order to identify potential areas of improvement...........11
2.3 Recommendations for cost reduction and enhancement is quality and value.....................12
Task 3.............................................................................................................................................13
3.1 Nature and purpose of budgetary procedure........................................................................13
3.2 Selection of suitable method for the preparation of budgetary statements..........................13
3.3 Purchase and production budget..........................................................................................13
3.4 Cash budget..........................................................................................................................14
Task 4.............................................................................................................................................17
4.1 Variance analysis.................................................................................................................17
4.2 Operational reconciliation statement...................................................................................18
4.3 Report of variance analysis..................................................................................................19
CONCLUSION..............................................................................................................................19
REFERENCES..............................................................................................................................20
2

INDEX OF TABLES
Table 1: Statement showing total and unit cost of Job 444.............................................................4
Table 2: Allocation Criteria of cost ...............................................................................................5
Table 3: Allocation of cost of support departments on the basis of machine hours........................7
Table 4: Statement showing computation of exquisite....................................................................7
Table 5: Statement showing computation of exquisite....................................................................8
Table 6: Cost report of September...................................................................................................9
Table 7: Production budget (in units)...........................................................................................12
Table 8: Material purchase budget in amount................................................................................12
Table 9: Cash budget.....................................................................................................................12
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INTRODUCTION
Management accounting is a procedure used for the analysis and interpretation of
information collected through cost and financial accounting. Objective of this subject is to assist
managerial person in making viable decisions in order to attain aims and objectives of business
in an effective manner (Dekker, 2015). Present project report is focused on evaluation of various
cost concepts by considering information of Jeffrey & Son’s Ltd. In this report, theoretical
description and practical application will be provided regarding cost computation, budget and
variance analysis.
TASK 1
1.1 Description of cost classification
Cost is an amount paid or payable by business in order to obtain product or service.
Classification of cost can be done of the basis of following factors:
Basis Description Example
Element This classification is based on cost
objective. On this basis, cost is classified
into direct and indirect cost. Direct cost
is incurred for the production activities
which are necessary for business
(Fullerton, Kennedy and Widener,
2014). Further, indirect is incurred to
attain economic benefit in order to
enhance efficiency and profitability of
business.
Example of direct cost is purchase of raw
material and indirect cost is amount
incurred on selling and distribution
expenses.
Nature By considering nature of expenses, cost
is classified into material, labour and
overhead.
Material cost includes amount incurred
on variables required for production such
as raw material (Suomala, Lyly-
Yrjänäinen and Lukka, 2014). Labour
cost includes wages and overhead
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consists of other related expenses.
Function Cost is also classified on the basis of
different functional activities of a
business.
Examples of functional cost are
production cost, administration cost and
distribution cost.
Behaviour By considering factor of behaviour cost
is bifurcated into variable, fixed and
semi variable cost. Fixed cost does not
alter with change in production units
while variable cost is incurred in direct
proportion with production units
(Kaplanski and Levy, 2015). In semi-
variable cost, there are characteristics of
both fixed and variable cost.
Example of variable cost is per unit
material cost, fixed cost is rental charges
and semi-variable cost is electricity
expenses.
1.2 Computation of job cost by considering method of job costing
Job costing is a procedure used to assign cost incurred by business on a particular job. In
this costing method, both direct and indirect expenses are included. Computation of cost of Job
444 is as follows:
Table 1: Statement showing total and unit cost of Job 444
Particulars Amount in (£)
Direct cost
 Material 200
 Labour 270
Indirect cost
 Variable production overhead 80
 Fixed production overhead 120
Per unit cost (A) 770
Units to be produced (B) 200
Total cost (A*B) (770*200) 154000
Working note
Fixed production overhead
(Budgeted overhead / total labour hours) * Labour hours allocated to Job 444
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=(£80,000.00 / 20000 hours) * 30 hours
=£120.00
1.3 Computation of exquisite cost by using absorption costing technique
Allocation and apportionment of overhead to the three production departments
Machine
shop X
Machine shop
Y Assembly
Stores Maintenanc
e Total
Indirect
wages and
supervision £100,000.00 £99,500.00 £92,500.00 £10,000.00 £60,000.00 £362,000.00
Indirect
materials £100,000.00 £100,000.00 £40,000.00 £4,000.00 £9,000.00 £253,000.00
Light and
heating £10,000.00 £5,000.00 £15,000.00 £15,000.00 £5,000.00 £50,000.00
Rent £20,000.00 £10,000.00 £30,000.00 £30,000.00 £10,000.00 £100,000.00
Insurance
and
machinery £7,947.02 £4,966.89 £993.38 £496.69 £596.03 £15,000.00
Depreciation
of machinery £79,470.20 £49,668.87 £9,933.77 £4,966.89 £5,960.26 £150,000.00
Insurance of
building £5,000.00 £2,500.00 £7,500.00 £7,500.00 £2,500.00 £25,000.00
Salaries of
works
management £24,000.00 £16,000.00 £24,000.00 £8,000.00 £8,000.00 £80,000.00
Total cost of
overhead £346,147.00 £287,636.00 £219,927.00 £79,964.00 £101,056.00
Working note of allocation and apportioning
Table 2: Allocation 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.
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Lighting & Heating
Machinery X 10/50 x £50,000 = £10,000
Machinery Y 5/50 x £50,000= £5,000
Assembly 15/50 x £50,000= £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 = £20,000
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 and machinery
Machinery X 15/50*£25000= £5000
Machinery Y 5/50*£25000= £2500
Assembly 15/50*£25000= £7500
Stores 15/50*£25000= £7500
Maintenance 5/50*£25000= £2500
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 = £596.00
Insurance of buildings
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Machinery X 15/50 x £25,000 — £5,000
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 management
Machinery X 3/10 x £80,000 = £24,000
Machinery Y 2/10 x £80,000 = £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
Reapportionment of overhead to the production department
Table 3: 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
Working notes
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
Deduction of overhead absorption rates
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Machinery X= 434906/80000=5.44
Machinery Y= 349960/60000= 5.83
Assembly=250134/10000=25.01
Overhead charge on the basis of absorption rate
Table 4: Statement showing computation of exquisite
Particulars Calculations Amount
Materials £8.00
Labour £15.00
Overheads
X (0.8*5.44) £4.34
Y (.6*5.83) £3.50
Assembly (.1*25.01) £2.50
Total cost £33.35
1.4 Analysis of cost data of exquisite
Overhead absorption rate on the basis of labour hours
Machinery X= 434908/200000= 2.17
Machinery Y= 349960/150000= 2.33
Assembly=250134/20000= 2.15
Table 5: Statement showing computation of exquisite
Particulars Calculations Amount
Materials £8.00
Labour £15.00
Overheads
X (2*2.17) £4.34
Y (1.5*2.33) £3.50
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Assembly (1*1.25) £1.25
Total cost £32.09
With the change in absorption rate, there is reduction in per unit cost of Jeffrey &
Sons Ltd. It is because; absorption is made on the basis of labor hours instead of machine hours.
As per costing principles, labor hours is more suitable of absorption because it is directly
associated with the operational activities (Kitzing, 2014). By considering this aspect,
management of organization is required to make decision on the basis of altered absorption rate.
TASK 2
2.1 Preparation and analysis of cost report of September month
Table 6: Cost report of September
Particulars Budgeted cost Actual cost Variances
Units 2000 units 1900 units
Material cost £24,000.00 £22,800.00 1200 (F)
Labour cost £18,000.00 £19,000.00 1000 (A)
Fixed overhead £15,000.00 £15,000.00 -
Prime cost £57,000.00 £56,800.00 -
Electricity
Fixed portion £500.00 £500.00 -
Variable portion £7,500.00 £7,125.00 375 (F)
Maintenance £5,000.00 £5,000.00 -
Total production cost £70,000.00 £69,425.00
Calculation of standard budget at 1900 units
Particulars Standard cost
Units 1900 units
Material cost £22,800.00
Labour cost £17,100.00
Fixed overhead £15,000.00
Prime cost £54,900.00
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Electricity
Fixed portion £500.00
Variable portion £7,125.00
Maintenance £5,000.00
Total production cost £67,525.00
Calculation of variable cost: electricity =
Change in total cost / change in number of production units
= (8000-5000) / (2000-1200)
= £3.75
Calculation of stepped cost
There is no change in maintenance cost because it has nature of step cost. In such
expenses, increase and decrease occurs with the start of new batch or with the reduction of one
complete batch (Management accounting, 2014).
Variance analysis
In accordance with the computed variances, it can be noticed that material variances are
favourable in nature because company has to pay lower than the expected amount. However, this
difference has been occurred due to reduction in production units. Labor cost should have
adverse variance of 1000 but in actual, it is 1900. This difference has been raised due to increase
in labour hours and rate as well. Further, variance is variable production overhead due to
increase in per unit rate.
2.2 Use of performance indicators in order to identify potential areas of improvement
Performance assessment is essential for all business organizations because it provides
information of current efficiency. Along with this, performance assessment also discovers area in
which improvement can be made for the betterment of current position (Youseef, 2013). These
objectives can be attained by assessment of following indicators:
Quantitative indicators
Management of Jeffrey & Sons Ltd can make comparison of their financial facts such as
sales and profitability in order to assess performance of their business. Similar assessment can be
done for various expenses for reduction of cost. By considering these facts, management can
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identify the costs which are continuously increasing and areas which are providing declining
revenue.
Qualitative indicators
Qualitative indicators comprises of customer feedback and satisfaction level. For this,
management of company can make policy of consideration for customer reviews on provided
product and services (Wildavsky, 2006). In this manner, organization can determine areas where
customers are facing maximum issues.
2.3 Recommendations for cost reduction and enhancement is quality and value
In order to make cost reduction and value enhancement, management of Jeffrey & Sons
Ltd can make use of following recommendations: Kaizen costing: This costing approach assists in reduction of wastage in production
process. Kaizen costing is focused on reduction of expenses which are not able to provide
economic advantage to the business (Keown, 2005). Total quality management (TQM): This method integrates entire operational activities in
order to enhance its quality for covering loopholes of the operational process. By the
applicability of this method, management of company can solve their quality issue in
order to provide better product and services to the customers. Stock management: In order to reduce storage and order cost, company can make use of
techniques such as just in time purchase and EOQ. With these methods, they will place
optimum order to reduce wastage of material and prevention of issues of stock out
(Kastantin, 2005).
 Other: In addition to above described factors, management audit can be conducted to
monitor and control the performance of subordinates.
TASK 3
3.1 Nature and purpose of budgetary procedure
Budget is a statement showing revenues and costs of future period. It provides financial
framework on the basis of which decisions are taken by managerial parties. In addition to this, it
also assists in monitoring of performance by making comparison of actual values with the
budgeted figures (Budget, Budgeting Process, and Variances, 2016). Budgets are prepared on the
basis of estimation. It determines forecasted revenues and expenditures by considering market
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trends and previous figures. This budget is reviewed and revised by senior financial manager
prior to its submission.
3.2 Selection of suitable method for the preparation of budgetary statements
Budgets can be prepared by making use of following methods: Traditional budget: In this method, single budget is prepared by considering previous
financial values and current market position. By considering decisions are taken by the
entire department in order to attain their objectives. Zero based budget: In this method, budgets are prepared on the basis of future
expectation and estimation because there is no strong base. This method is suitable for
new venture of which organization does not have past experience (Burns and et.al, 2004).
 Operating budget: As per this method, budget is divided into various functional activities
of a business. Each department prepares their own budget and by considering it, decisions
are taken by them. This method is more suitable because each department is free to take
decision as per their convenience and analysis.
In accordance with the above described methods, it is suitable for Jeffrey & Sons Ltd to
prepare budget by using operating method (Prahlad, 2015). It is because; there will be separate
budget for each activity and management of the company will be able to make better decisions.
3.3 Purchase and production budget
Production budget
Table 7: Production budget (in units)
Particulars July August September October
Units to be sold 105000 90000 105000 110000
Less: opening
inventory 11000 13500 15750
16500
Add: closing inventory 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
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Material purchase budget
Table 8: Material purchase budget in amount
Particulars July August September
Units to be producted 107500 92250 104250
Cost of material per unit £3.50 £3.50 £3.50
Material to be purchased £376,250.00 £322,875.00 £364,875.00
Add: closing stock of raw material £80,718.75 £91,218.75 £91,218.75
Total cost of material consumed £456,968.75 £414,093.75 £456,093.75
Less: opening stock of raw material -£166,400.00 -£80,718.75 -£166,400.00
Cost of material to be purchased £290,568.75 £333,375.00 £289,693.75
3.4 Cash budget
Table 9: Cash budget
Particulars July August September
Cash inflow
Sales revenue (w.n.1) £900000 £731250 £864000
Cash outflow
Purchase cost £365969 £334688 £372531
Labour charges (w.n.
2)
£322500 £276750 £317250
Variable overhead
(w.n. 3)
£108500 £98350 £100350
Fixed overhead £75000 £87500 £87500
Net cash flow (cash
inflow – cash
outflow)
£28031 -£66038 -£13631
Opening balance £16000 £44031 £22007
Closing balance £44031 -£22007 -£35638
Working notes
Working Note-1
Sales (£) July (£) August (£) September (£)
May 855000 85500
June 990000 247500 99000
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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
Working Note-3
Variable overhead
July (£) August (£) September (£)
June 44000
July 64500 43000
August 55350 36900
September 63450
Total 108500 98350 100350
Based on June 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.
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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
stock
123750
Cost of sales 2250000
Contribution 315000
Fixed overheads 300000
Profits 15000
July (£) August (£) September (£) Total (£)
Material 376250 322875 370125 1060500
Direct labour 322500 276750 317250 916500
Variable O/H 107500 92250 105750 305500
Total MC of
production
806250 691875 943125 2582500
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TASK 4
4.1 Variance analysis
 Sales variances
Sales volume variance (4160- 3040) = (1120) (A)
Sales prices variance (14000- 13820) = (180) (A)
(Budgeted: 35000*£4- Actual sales)
 Material variance
The material prices variances
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
Variance analysis
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)
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Fixed overheads -4800 -4800 -4900
Operating profit 4160 3040 2810
In accordance with the variance analysis, it can be said that performance of company is
not up to the mark. There is difference in actual and budgeted values due to inaccuracy in
estimations and reduction in employee efficiency (Fleisher and Bensoussan, 2015).
4.2 Operational reconciliation statement
Operating statement
Favorable variance (£) Adverse
variance (£)
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 variance 110 F 1460A
Total net variance -1350
Budgeted operating profit 4160
Less: Net variance -1350
Actual operating profit 2810
Operating statement of Jeffrey and Sons Ltd shows that net adverse variance is 1360 due
to which actual profit is less than budgeted profit. Main variances have been occurred due to
difference in actual and expected sales units (Keown, 2005). Further, performance of employees
was below in comparison to standard performance.
4.3 Report of variance analysis
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To
Managing director
Jeffrey and Son's Ltd
Subject: Reporting of variances with identified responsibility centres
In accordance with the variance analysis, it can be said that management of Jeffrey &
Sons Ltd is required to make modification in their operational activities in order to prevent
variances. Store manager is required to purchase quantity at proper quotation to prevent adverse
variances. Sales department must analyze market demand and then make strategies for the
enhancement of revenues. Efficiency variances can be prevented by using updated techniques
and reducing idle time of labour.
Finance manager
Name: ____________
Signature: ___________
Date: ____________
CONCLUSION
Present study depicts various tools and approaches of costing by considering business
information of Jeffrey & Sons Ltd. As per the present study, it can be concluded that
management is required to optimize their cost for maximization of revenue and profitability. For
this aspect, they can make use of cost report and budgetary statements. Further, they are required
to monitor the performance of employees in order to assure standard performance. Management
of company should compute variances to find differences between actual and expected outcome
in order to necessary steps for further improvement.
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REFERENCES
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Fleisher, C. S. and Bensoussan, B. E., 2015. Business and competitive analysis: effective
application of new and classic methods. FT Press.
Fullerton, R. R., Kennedy, F. A. and Widener, S. K., 2014. Lean manufacturing and firm
performance: The incremental contribution of lean management accounting
practices. Journal of Operations Management. 32(7). pp.414-428.
Kaplanski, G. and Levy, H., 2015. Value-at-risk capital requirement regulation, risk taking and
asset allocation: a mean–variance analysis. The European Journal of Finance. 21(3).
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Kastantin, T. J., 2005. Beyond earnings management: Using ratios to predict Enron's collapse.
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Keown, A., 2005. Financial management. Upper Saddle River, N.J.: Pearson/Prentice Hall.
Kitzing, L., 2014. Risk implications of renewable support instruments: Comparative analysis of
feed-in tariffs and premiums using a mean–variance approach. Energy. 64. pp.495-505.
Prahlad, A., 2015. Systems and methods for storage modeling and costing. 9. 111,220.
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Management Accounting Research. 25(4). pp.304-314.
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Online
Budget, Budgeting Process, and Variances. 2016. [Online]. Available at: <
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