Budgetary Control and Decision-Making in Jeffery & Sons

Jeffery & Sons, with the help of a budgeting company, can easily assess cost discrepancies and make changes to their existing strategies and policies. Additionally, gross sales, profit, etc. provide assistance in evaluating their financial position. Thus, management accounting plays a vital role in effectual financial and non-financial decision making, helping the company achieve its desired outcome or success.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Classifying different types of cost.........................................................................................1
1.2 Calculating unit cost and total job cost for Job 444..............................................................2
1.3 Computing the cost of Exquisite by using absorption technique..........................................4
1.4 Analyzing cost data of Exquisite for Jeffery & Sons..........................................................10
TASK 2..........................................................................................................................................11
2.1 Preparing and analyzing the cost report..............................................................................11
2.2 Stating the performance indicators which help in assessing the areas for potential
improvements............................................................................................................................12
2.3 Ways through which Jeffery & Sons can reduce cost and thereby enhance value or quality
...................................................................................................................................................12
TASK 3..........................................................................................................................................13
3.1 Purpose and nature of budgeting process ...........................................................................13
3.2 Selecting the appropriate budgeting method for Jeffery & Sons........................................14
3.3 Setting up production and material purchase budget for the month of July, August and
September..................................................................................................................................14
3.4 Preparing cash budget.........................................................................................................16
TASK 4..........................................................................................................................................18
4.1 Calculating variances, identifying causes and recommending actions...............................18
4.2 Preparing operating statement reconciling budget..............................................................20
4.3 Reporting the findings to management...............................................................................21
CONCLUSION..............................................................................................................................22
REFERENCES..............................................................................................................................23

INTRODUCTION
Management accounting is the most effective financial tool or technique which helps
organization in evaluating monetary activities which are performed by the firm during the
financial year (Management accounting, 2014). For this purpose, manager makes use of the
provisions of accounting information to derive the best result of their decision. This field of
accounting provides assistance to the manager in making the most effectual short term decision
by taking into consideration both financial and statistical performance. It also provides deeper
insight into firm about the areas on which organization needs to make control namely cost,
expenditure etc. All these aspects of management accounting aid in the sales and gross margin of
the firm.
This report will examine the different types of cost which organization has to incur to
produce the product or services. Besides this, this report will also helps in understanding the
ways through which Jeffery & Sons can reduce cost and thereby enhance the quality or value of
the product which are offered by them. In this report, importance of budgeting process to the
business organization will also be analyzed. Further, this report will help in understanding the
significance of different responsibility centres in the cost and performance control.
TASK 1
1.1 Classifying different types of cost
Cost includes all the expenditures which are incurred by Jeffery & Sons in manufacturing
and selling & distribution of Exquisite. For instance: material labor, overhead, manufacturing
etc.
Different types of cost are enumerated below:
Type of cost Features
On the basis of elements and nature
Material It refers to the cost of raw material or semi-finished goods which are
incurred by the firm to manufacture finished foods.
Labor Cost of labor is sum of all the wages and salaries which are paid by the
business organization to their employees.
Overhead It consists of all the costs except material and labor cost. Overhead
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expenses include insurance, advertisement, legal and other office expenses
which organization has to incur for smooth functioning of the business
activities and operations (Kaplan and Atkinson, 2015).
On the basis of functions
Production cost It is the cost which is paid by firm during the production of product or
services such as material, labor etc. It provides assistance to the firm in
calculating per unit cost of the product and price as well.
Selling and
distribution cost
This cost entails the amount which are incurred by Jeffery & Sons in the
selling and distribution of Exquisite product
Research and
development
In the strategic business environment, company has to conduct research to
evaluate the taste and preferences of the customers. It also imposes
financial cost in front of the firm.
On the basis of behavior
Fixed cost This is a cost which has to pay by the organization irrespective of the
business activities. Fixed costs include salary of the employees, rent of the
building etc. which does not change when changes take place in unit of
output produced.
Variable cost This cost is highly associated with the volume produced by Jeffery & Sons.
It varies with an increase or decrease in the level of output produced (Otley
and Emmanuel, 2013). It increases as volume of production increases or
vice versa.
Semi-variable cost It is the summation of fixed and variable expenditures which are paid by
the corporation for the manufacturing of product or services (Cost
Accounting - Classification of Cost, 2016). Wages, electricity expenses, etc
are fixed to some extent and become variable as level of production
exceeds.
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1.2 Calculating unit cost and total job cost for Job 444
Unit cost may be defined as expenditure which is paid by the firm in the manufacturing
of per unit of product or service (Fullerton, Kennedy and Widener, 2014). One can easily assess
the unit cost by dividing the total cost of production from number of units which are produced by
the firm.
Unit and total cost which are incurred by Jeffery & Sons in the manufacturing of product are as
follows:
On the basis of the above mentioned calculation, it has been identified that Jeffery &
Sons has to incur £770 to manufacture per unit of exquisite.
1.3 Computing the cost of Exquisite by using absorption technique
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a.) Allocation and apportion of overhead to the production department of machine X. Y
and assembly
b. Reapportion of the cost of service and support department to the production department
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Working note:
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
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Assembly: 100/1510 x £150,000 = £9,934
Stores: 50/1510 x £150,000 — £497
Maintenance: 60/1510 x £150,000 = £596
Insurance of Building
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 :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
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Overhead absorption rate
Machinery X £ 434,906/ 80,000 = £5.44
Machinery Y £349,960/ 60,000 = £5.83
Assembly £250,134/ 10,000 = £25.01
c. Deducing the overhead absorption rate for Machine X, Y and assembly by using the machine
hours
Rate of overhead absorption = Total production department overhead/ machine hours
Calculation of the overhead absorption rate for each of the production department is as follows:
Machinery Shop X 346417 + 39982 + 48506.88/80000
= 434905.88/80000
= £5.44
Machinery Shop Y 287636+29987+32337.92/ 60000
= 349960.92/60000
= £5.83
Assembly 219927 + 9995+ 20211.2/10000
= 250133.2/10000
= £25.01
d. Calculating the overhead charge to the product by using the absorption rate
Computation of absorption rate
£ £
Materials 8
Labour 15
Overheads
X (0.8*5.44) 4.34
Y (.6*5.83) 3.5
Assembly (.1*25.01) 2.5
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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
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£ £
Materials 8
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
1.4 Analyzing cost data of Exquisite for Jeffery & Sons
By using both labor and machine hour it has been analyzing by the firm that profitability
aspect of Jeffery & Sons is negatively affects if firm make use of machine hours to absorb their
overhead expenses. Thus, company needs to absorb their overhead expenditure on the basis of
labor hours which aid in the profitability aspect of the firm.
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TASK 2
2.1 Preparing and analyzing the cost report
Calculation of variable cost – electricity = change in total cost / change in no of units to be
produced
= (8000-5000) (2000-1200)
= £3.75
On the basis of above cost sheet it has been identifying that company have product 1900
whereas it needs to manufacture 2000 units according to the budget. Due to this aspect positive
variance is occurred in the performance of the firm. Thus, company needs to undertake
promotional campaign to push up the sales of firm. Further, variance of £1000 is recorded in
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labor variances. Thus, business organization needs to encourage their workforce to produce large
number of units in a day. Through this, company can reduce the labor variance and thereby
enhance the gross revenue of the firm. In addition to this, Jeffrey & Sons had produced only 500
units rather than 1000. Due to this, actual variable expenses which are paid by the firm is lower
than the budgeted figures.
2.2 Stating the performance indicators which help in assessing the areas for potential
improvements
Key performance indicators are the most effectual quantitative measures which Jeffery &
Sons can use to measure its performance. Sales, profitability, expenditures, customer’s
satisfaction and loyalty as well as use of financial resources are the main aspects which enable
business organization to evaluate their performance to the great extent (Fullerton, Kennedy and
Widener, 2013). In the competitive business arena, it is essential for the firm to make assessment
of their business performance on regular basis by taking into consideration the performance
indicators which are as follows: Sales: Jeffery& Sons can evaluate their performance by making comparison of the sales
with the previous years. Through this, business organization can easily identify the
growth or downsizing of the sales aspect of the firm. For instance: sales of the firm are
declining from previous period, and then it has to make efforts to assess the reasons
behind the low level of sales (Parker, 2012). Through this, improvements will be made
the business organization in the right direction.
 Gross profitability: Performance of the firm can also be evaluated by comparing the gross
profit generated by the firm in comparison to before years. Profit is one of the main
factors which indicate the financial health and performance (Bebbington and Thomson,
2013). If profit of the firm decreases then they requires to analyze the area of expenses
on which they needs to make control.
By taking into consideration all these performance indicators Jeffery & Sons can easily
assess the area in the which they needs to make control. Through this,
2.3 Ways through which Jeffery & Sons can reduce cost and thereby enhance value or quality
Cost of the Exquisite can be reduced by Jeffery & Sons through making control upon the
expenses. In order to reduce the cost per unit of the product organization needs to make
continuous ironmonger of the manufacturing and other expenses which are incurred by them. In
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addition to this, company needs to approach the supplier who make delivery of the quality raw
material at reasonable prices. Through this, organization is able to cut down the per unit cost of
product. Further, company needs to adopt updated version of technology which helps then in
producing or delivering the quality product or services (Figge and Hahn, 2013). Quality is one of
the main factor which helps organization in attracting the number of customers towards the
product which is offered by them. Along with it, business enterprise needs to make focus upon
the recruitment and selection of talented people. It enables firm to perform their operations and
activities. By undertaking all these aspects corporation is able to reduce the per unit cost of
product and thereby aid in the profitability aspect of firm.
TASK 3
3.1 Purpose and nature of budgeting process
Budgeting may be defined as a financial tool which reflects income which organization
will generate over the period of time. Besides this, it also entails the expenditure which firm will
incur over the period of time.
Purpose
 Jeffery & Sons can make optimum utilization of fund by allocating the it to the each
activity of the firm.
 It is the financial framework which helps organization in making further investment or
expansion decision (Lukka, 2007). Manager of the firm can monitor financial performance of the firm through budgeting. It
helps organization in reducing the discrepancies which occurred in performance of the
firm. Through this, manager can make contribution in the growth and development of
firm.
Nature
 In the process of budgeting manager make assessment of the financial environment on
the basis of past budget. It helps finance manager in identifying the revenue which firm
will generate over the period of time through sales related activities.
 Thereafter, manager make estimation of the expenditure which they needs to incur over
the period of time for manufacturing purpose.
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 Once expenditure and income is determined, then financial authority can determine the
cash deficit or surplus by subtracting inflow from outflow.
 This budget helps organization in comparing actual performance with the budgeted
amount. Through this, company can easily identify the deviation which will occur in the
financial performance of the firm (Malmi and Granlund, 2009). It enables firm to
undertake effectual measures within the suitable time frame which aid in the productivity
and profitability of the firm.
3.2 Selecting the appropriate budgeting method for Jeffery & Sons
There are several budgeting methods which are available to Jeffery & Sons namely zero
base, incremental, rolling budget etc. In the present time, company undertakes incremental
budgeting to prepare budget for the manufacturing of Exquisite product. In incremental
budgeting, past year budget is undertaken by the firm for accounting year. Company add some %
in the profit and expenditure on the basis of their estimation of the business scenario. Now, there
is little importance of incremental budgeting due to highly dynamic nature of the environment.
Therefore, Jeffery & Sons needs to adopt zero base budgeting which provides assistance to the
firm in preparing appropriate budget for the year.
Moreover, in zero base budgeting company take zero as a basis for the expenditure and
income. Besides this, finance manager of the firm also makes assessment of the each activity
which they needs to perform during the accounting year. Further, manager of the firm also makes
efforts to identify the alternative ways through which organization can perform their activities in
an efficient manner within the less cost. In addition to this, budgeting manager also identify the
inflow which they will generate over the period of time (Otley and Emmanuel, 2013). Thus, zero
base budgeting is highly associated with the reality rather than estimation. On the basis of all the
above mentioned aspect it can be stated that Jeffery & Sons needs to prepare zero base budget
which proves to more fruitful for them.
3.3 Setting up production and material purchase budget for the month of July, August and
September
Production budget: It is the financial plan which refers to the number of units which needs to be
manufactured by the business organization during the accounting year (Kattan and et. al., 2007).
It provides assistance the manager in preparing the sales and other budgets for the financial year.
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Working note:
Computation of closing stock: On the basis of cited case scenario closing stock of the firm is
equal to 15% of next year sales.
Month Units
July 90000Units*15% = 13500 Units
August 105000Units*15% = 15750 Units
September 105000Units*15% = 15750 Units
October 100000 * 15% = 15000 Units
Material purchase budget: This budget reflects the units of the raw material which organization
requires to purchase for the production of finished goods. Through this, company is able to
manage their cash related activities in an effectual manner (Ward, 2012). Besides this, material
purchase budget also facilitates smooth functioning and operation of the production department.
Material purchase budget of Jeffery & Sons are as follows:
July August September October
Material Require (2 per kg) 215000 184500 211500 217000
Less: Op. stock 52000 46125 52875
Total 163000 138375 158625
Add: Closing inventory 46125 52875 54250
Purchase 209125 191250 212875
Computation of closing inventory: It is given in the scenario that closing stock of the firm is
equal to the 25% production of the upcoming month.
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Given: Opening stock for the month of July = 52000
Closing stock (July) = 184500 * 25% = 46125
Opening Inventory (July) = 52000 kg and closing = 25%* 184500 = 46125
3.4 Preparing cash budget
Cash budget of Jeffery & Sons is enumerated below:
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Cash purchase of material for Jeffrey & Son's
July August September
Calculations (209125 * 1.75) (191250*1.750 (212875*1.75)
Answer 365969 334688 372531
Direct cash wages paid to Jeffrey & son's labour
July August September
Calculations (107500*3) (92250*3) (105750*3)
Answer 322500 276750 317250
Variable business overhead for Jeffrey & son's
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Months 60% of the current month
overheads
40% of the previous month
overheads
Total
July (107500*1)*60% = 64500 (110000*1)*40% = 44000 108500
August (92250*1)*60% = 55350 (107500*1)*40% = 43000 98350
September (105750*1)*60% = 63450 (92250*1)*40% = 36900 100350
TASK 4
4.1 Calculating variances, identifying causes and recommending actions
Variances reflect the gap which occurred in the actual and budgeted performance of the
firm. Every organization prefers to assess deviations with the help of budget which helps them in
undertaking effectual measure in an appropriate time (Zimmerman and Yahya-Zadeh, 2011).
Identification of causes: the above mentioned calculation shows that Jeffery & Sons have failed
in making optimum utilization of assets. It may cause of deviation which occurred in the usage
of material in terms of £60. Besides this, actual material cost is lower than the budget amount
due to the reduction in production units. Further, labor variance of Jeffery 7 Sons is favorable
which is good sign for the firm. One of the main cause behind such positive deviation is the
reduction in labor rate per hour from £8 to £7.5. On the contrary to this, enterprise had made
high expenditure on overhead in terms of £100 as compared to the budgeted figures. It may
17

occur due to the hike in the prices of selling and distribution as well as administration
expenditure.
Recommending actions: It is recommended to Jeffery & Sons that they needs to make
assessment of manufacturing aspect on a regular basis. Through this, they can exert control over
the wastage of material and thereby become able to make use of their financial resources in an
effective manner. Besides this, company also needs to frame cost effective strategies which helps
them in making control upon the expenditure of overhead. Further, manager of the firm should
motivate their workforce to perform their work with the high level of efforts.
Working note:
Sales variance
Particulars Variance
Sales volume variance ( 4160 - 3040) 1120 (A)
Sales price variance ( 14000 - 13820) 180 (A)
(Budgeted: 35000*£4- Actual sales)
The material price variance
Particulars Variance Net variance
Material price variance AQ (1425Kg) X AR
(£2.40)
3420
O (A)
The material prices
variances
AQ (1425Kg) X SR
(£2.40) = £3420
3420
Material usage
variance
[( 3500 * .4) * (2.40)] 3360 (A)
60 (A)
The labor variance
Particulars Variance Net variance
Actual hours * Actual AH(345Hrs) X AR 2690
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rate (£7.8 )
70 (f)
Labor rate variance AH(345Hrs) X SR
(£8.0 )
2760
40 (f)
Labor efficiency
variance
SH (3500 Units
x0.1)350hrs X SR
(£2.40)
2800
Fixed overhead variance
Particulars Variance Net variance
Actual fixed overhead 4900
Fixed overhead
expenditure variance
100 (A)
Budgeted fixed
production overhead
4800
Budget
Original Fixed Actual
Output (Production
and sales units )
4000 3500 3500
£ £ £
Sales revenue 16000 14000 13820
Raw materials -(3840) (3360) (1400)Kg (3420) (1425Kg)
Labor -3200 (2800)(350Hrs) (2690)(345Hrs)
Fixed overheads -4800 -4800 -4900
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Operating profit 4160 3040 2810
4.2 Preparing operating statement reconciling budget
Reconciling budget reflects the variances which are occurred in the cost performance f
the firm. This statement provides assistance to the manager in identifying the reasons due to
which deficiencies are happened in the material, labor and overhead expenditure of firm (Jack
and Mundy, 2013). By assessing such causes manager is able make modification in their existing
strategies and policies.
Reconciliation statement of Jeffery & Sons
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
20

This operating statement clearly shows that company fails to make effective use of its
material which may one of the main cause behind the sales volume variance. Besides this, fixed
overhead expenditure are also get increased due to which adverse variance of £100 is occurred.
Fixed budgeted expenses are £4800 whereas actual expenditure of the firm is £4900. Due to this,
cost per unit of the product of Jeffery & Sons is increased. Due to this, profitability aspect of the
firm in also reduced. All theses aspect have have high level of influence upon thev financial
health and performance of the firm.
4.3 Reporting the findings to management
To: Managing Director
From: Finance manager
Subject: Reporting findings to the identified responsibility centers
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Date: 25th February, 2016
On the basis of the reconciliation statement it has found that management of Jeffry & Sons
needs to make review of their existing strategic framework.
Production department: On the basis of budgeted analysis it has been identifying that there is
high wastage of material. Thus, organization needs top employ advanced technology which
helps them in making use of material in an effectual manner without any wastage.
Sales department: manger of this department needs to make proper estimation of the selling
price. Moreover, sales price is highly associated with the profit of the firm. In addition to this,
sales department also needs to make efforts to push up the gross revenue of firm to the large
extent.
Human resources department: Adverse labor variance have high level of influence upon the
growth and financial aspects of the firm. Thus, HR department of the firm needs to place more
emphasis on employee motivation and satisfaction. By this, Jeffery & Sons is able to mitigate
the deviation of labor variance.
CONCLUSION
From the above report it can be inferred that different types of cost have varied impact
upon the pricing decision of firm. It can be seen in the report that budgeting plays an important
to the budget holders of Jeffery & Sons. With the help of budgeting company can easily assess
cost discrepancies and thereby become able to make changes in their existing strategies and
policies. Besides this, it can be articulated that gross sales, profit etc. provides assistance to
Jeffery & Sons in evaluating their financial position. Thus, management accounting plays a vital
role in effectual financial and non-financial decision making and there by helps company in
getting the desired outcome or success.
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