Management Accounting & Budgeting

This assignment delves into the concepts of management accounting and budgeting. It examines key performance indicators (KPIs) used in construction and sustainability reporting, highlighting the convergence of emerging approaches. The assignment also discusses the importance of collaboration and communication in effective budgeting processes and the potential pitfalls of traditional budgetary methods.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Classifying the different types of cost..............................................................................1
1.2 Calculating the unit cost and total job cost for job 444....................................................3
1.3 Calculating the cost of Exquisite by using absorption costing technique........................4
1.4 Analyzing the cost data of Exquisite by using appropriate techniques............................6
TASK 2............................................................................................................................................7
2.1 Preparation of the cost report by analyzing the variances................................................7
2.2 Using performance indicator to assess the areas for potential improvements..................8
2.3 Recommending ways to reduce costs, enhance value and quality...................................9
TASK 3............................................................................................................................................9
3.1 Stating the purpose and nature of the budgeting process to the budget holders of Jeffery &
Son's........................................................................................................................................9
3.2 Opt the suitable budgeting method for the company along with its needs.....................10
3.3 Preparation of the production and material purchase budget.........................................10
3.4 Preparation of cash budget.............................................................................................12
TASK 4..........................................................................................................................................12
4.1 Calculating variances, assessment of causes and recommending the corrective measures
..............................................................................................................................................12
4.2 Preparing the operating statement which reconcile both the budgeted and actual results14
4.3 Responsibility centers.....................................................................................................14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting may be defined as a systematic record of business transactions
and activities which are made during the accounting year. Management accounting helps finance
manager in making effective decisions (Mongiello, 2015). It provides an idea to an organization
about their financial and statistical performance. Through this, company is able to undertake
effective measures which facilitate control over the costs that are incurred by an organization. It
helps organization in enhancing the productivity and profitability of an organization.
This project report is based upon the case scenario of Jeffery & Sons. It is most popular
manufacturing company who produces popular and branded products which are termed as
Exquisite. The present report will develop understanding about the different types of costs as
well as the use of different types of costing methods. Besides this, it will shed light on the ways
through which one can prepare or analyze the cost reports. Further, it depicts the nature and
purpose of budgeting process in the business organization.
TASK 1
1.1 Classifying the different types of cost
Cost refers to the summation of several expenses which are incurred by an organization
in order to manufacture the products or services (Alaa-Aldin, 2007).
Classification of the cost: Jeffery & Son's can classify on the different basis which are
enumerated blow:
On the basis of nature
Costs Features
Material
It consists of the cost which organization
incurs to access raw material for the production
of finished goods.
Labor
Labor cost refers to those which are highly
associated with the human resources of an
organization (Gibassier and Schaltegger,
2015). It includes the wages of worker, tax
benefits and their insurance.
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Overhead
These costs are also termed as operating cost
which is incurred by an organization to run
business activities and functions.
On the basis of changes take place in activity or volume
Costs Features
Fixed cost
It may defined as those which remain
unchanged as changes take place in the number
of unit produced. For instance: factory rent,
salary of the workers.
Semi-variable cost
In this, cost of the output remains fixed to the
certain level of production. Besides this, such
cost becomes variable when predetermined
level of output exceeds (Chan and Chan,
2004). For instance: Wages of workers,
advertisement expenses etc.
Variable cost
It refers to those which increase or decrease as
changes take place in the level of output
produced. It includes electricity expenses etc.
On the basis of functions
Costs Features
Production cost
It represents the cost which is incurred by
Jeffery & Son's in manufacturing of product.
Commercial cost Commercial cost includes administration as
well as selling and distribution cost. Such cost
refers to the operational expenses which firm
has to incur in order to run business operations
and functions in an effective manner (McLean,
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McGovern and Davie, 2015).
1.2 Calculating the unit cost and total job cost for job 444
Cost sheet and unit cost: Cost sheet is the document which provides deeper insight to the
manager about the cost which they require to incur on the different types of projects. Along with
it, job costing may be defined as a process in which producer assigns manufacturing cost to an an
individual product. Besides this, unit cost refers to the cost which is incurred by Jeffery & Son's
in order to produce one unit of product or service.
Job cost sheet for Job no. 444
Particulars Total cost
Direct material 40000
Direct Labor 54000
Fixed production overhead 24000
variable production overhead 36000
Total cost 154000
Unit cost 770
Working note:
Direct material cost
Material cost = Quantity * price per kg.
= 50kg* 4£ per kg.*200 units= 400000£
Direct labor cost
Labor cost = Total working hours * rate per hour
Labor hours = 30 hours per unit*200 Units = 6000 Hours
Overhead
Fixed overhead = Total fixed production overhead/Total budgeted labor hours*Labor hours for
job
Fixed overhead = = 80000£/20000 hours* 6000 hours
= 24000£
Variable production overhead = Total hours* rate per hour
Variable overhead = = 6£ per hour * 6000 hours
= 36000£
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Unit cost = Total cost/ number of units
= = 154000£/200 Units = 770£ cost per unit
Thus, Jeffery & Son's has to incur 770£ in order to produce per unit of product or service.
1.3 Calculating the cost of Exquisite by using absorption costing technique
a.) Allocation and apportion of overhead to the production department of machine X. Y and
assembly
Production department
Service
department
Particulars
Basis of
allocation
Total
in (£)
Machine
X (£)
Machi
ne Y
(£)
Assembly
1 (£)
Stores
(£)
Mainte
nance
(£)
Indirect wages and
supervision
362000.
00 100000.00
99500.0
0 92500.00
Indirect material
253000.
00 100000.00
100000.
00 40000.00
light and heating
Machine
hours
50000.0
0 50000.00 10000 5000 15000 15000
rent
Area
occupied
100000.
00 20000.00
10000.0
0 30000.00
30000.0
0
10000.0
0
insurance and
machinery
Book value
of
machinery
15000.0
0 3529.40 2205.90 4411.80 2205.90 2647.06
depreciation
Book value
of
machinery 15000 7947.02 4966.89 993.38 496.69 596.03
Insurance of building
Area
occupied
25000.0
0 5000.00 2500.00 7500.00 7500.00 2500.00
salaries of work
management
No. of
employees
80000.0
0 24000.00
16000.0
0 24000.00 8000.00 8000.00
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Total cost
103500
0.00 346417 287636 219927 79964 101056
b. Reapportion of the cost of service and support department to the production department
Particulars Production
Basis of
allocation
Total in
(£) Machine X Machine Y (£) Assembly 1 (£)
Primary
distribution
(Earlier table)
103500
0.00 346417 287636 219927
Stores Direct material 79964 39982 29987 9995
Maintenance Machine hours 101056 48506.88 32337.92 20211.2
Total
121602
0 434905.88 349960.92 250133.2
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
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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 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
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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
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:
Machine shop X = 346417 + 39982 + 48506.88/80000
= 434905.88/80000
= £5.44
Machine 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
Total cost 33.35
Allocation of cost of support departments on the basis of machine hours
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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
Labour 15
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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 the cost data of Exquisite by using appropriate techniques
Inculcation 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
Y (1.5*2.33) 3.5
Assembly (1*1.25) 1.25
Total cost 32.09
On the basis of the above mentioned calculation it has been analyzing that absorption rate
of overhead is high if organization undertakes machine hours rather than labor hours. According
to the costing method company needs to undertake absorption from labor hours which proves to
be more profitable for an organization in near future.
TASK 2
2.1 Preparation of the cost report by analyzing the variances
Cost report for the month of September
Budgeted cost Actual cost Variances
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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 Actual 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
Calculation of variable cost – electricity = change in total cost / change in no of units to be
produced
= (8000-5000) (2000-1200)
= £3.75
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As per the above figures it has been assessed that there is reduction in the units which are
produced by an organization from 2000 to 1900. It causes the positive variance which occurs in
the cost of the material. On other hand, labor variance shows negative variance which adversely
impacts the cost of the product or services. Thus, Jeffery & Son's is required to encourage their
workforce to give their best efforts within an organization. Positive deviation had occurred in the
electricity and maintenance cost due to the less production. Company produced 500 units instead
of 1000 units which is main cause behind the positive variances in such expenses. Organization
needs to frame competent policies and strategies which help them in mitigating the labor
variance.
2.2 Using performance indicator to assess the areas for potential improvements
In the present era, it is vital for an organization to assess their financial performance and
aspects on a daily basis. Through this, Jeffery & Son's is able to undertake the effective measure
at appropriate time. There are several key indicators are available to the company which they can
use to evaluate their financial performance. Sales revenue is one of the main key indicator which
helps organization in assessing the effectiveness of their performance (Jensen, 2003). If the sales
revenue of an organization shows decreasing trend then manager of an organization is required to
make efforts to identify the causes behind the declining sales. It enables organization to make
exert control upon their expenses. Through this, Jeffery & Son’s are able to serve the customer at
the cost effective rates and there by maximizes their sales revenue. In addition to this,
profitability is also the effective measure which helps organization in evaluating their
performance. By assessing the income and expenses company is able to undertake the possible
improvement in their performance.
2.3 Recommending ways to reduce costs, enhance value and quality
There are several ways through which Jeffery & Son's can reduce cost as well enhance
their value and quality of the product. By prepare the budget and thereby making continuous
monitoring company can control their expenses. It provides assistance to an organization
reducing the cost of the product and services. In addition this, by employing the latest technology
company is able to improve the quality of the product or services which are offered by them
(Kaplan and Atkinson, 2015). Along with it, company can increase their value by hiring the
skilled and talented personnel. Through this, company is able increase their gross margin and
there enhancing high value in the strategic business environment.
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TASK 3
3.1 Stating the purpose and nature of the budgeting process to the budget holders of Jeffery &
Son's
Budget may be defined as a forecasting statement which entails the expenses and income
which organization will get or incur over a period of time. It provides assistance to assess the
financial performance of organization and there by helps in identifying the variances which
occurs in the performance of an organization (Parker and Kyj, 2006). Process of budgeting
provides assistance to organization to take corrective action within the suitable time frame.
Purpose of budgeting: there are several purposes or objectives due to which Jeffery & Son's
prepare budget which are as follows:
 One of the main purposes of budgeting to coordinate the activities of the different
department such as productions, sales, marketing etc.
 In addition to this, budgeting provides financial framework to the manager of an
organization. Through this, they are able to make effective financial decisions which
contribution in the growth and development of an organization.
 Further, it also provides assistance to the manger to monitor their financial performance
in against to the set standards.
 Along with it, budgeting also helps organization in mitigating the dependencies which
may occur in the near future.
Nature of the budgeting process:
 In the process of budgeting finance manager of an organization make assessment of their
financial aspect by making use of the previous budget.
 Thereafter, manager who act as a budget holder make estimation of the income and
expenses of Jeffery & Son's. By identification expenses which organization will incur
during the accounting period such as material, labor and overhead manager is able to
form the structure of expenses.
 In addition to this, by making estimation of income which organization will get over the
period of time manager is able to form the appropriate budget (VanDerbeck, 2012).
Thereafter, manager subtracts expenditure from the income manager to assess the cash
surplus which Jeffery & Son's will get over the period of time.
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 At last manager make review of the budget which are formed by them and there by
submit such budget to the higher authority (Purpose and nature of budgeting, 2016).
3.2 Opt the suitable budgeting method for the company along with its needs
Jeffery & Son's had undertaken the incremental budgeting method to form the budget for
the organization. In incremental budgeting manager of an organization considers the previous
budget in order to prepare the budget for the present year. Incremental budgeting method has
little importance in the dynamic business environment. Therefore, organization is required to
undertake zero base budgeting which helps them in setting up the more realistic budget. In this
method of budgeting, manager or budget holder of an organization take zero as base for their
income and expenditure.
Manager makes real assessment of the income or expenditures which they have to incur
over the period of time. In addition to this, manager also makes each possible effort in order to
identify the alternatives for the income and expenditures (Waddock, Bodwell and Graves, 2002).
Zero base budgets undertake realistic views or aspects which helps them in forming the
appropriate budget. Thus, zero based budget provides assistance to Jeffery & Son's in reducing
the variance and there by helps in getting the desired results.
3.3 Preparation of the production and material purchase budget
Production budget: This budget contains the units which organization needs to produce
during the financial or accounting year (Weygandt, Kimmel and Kieso, 2015).
Production budget of Jeffery & Sons are as follows:
Particulars July August September October
Sales 105000 90000 105000 110000
Op. Stock 11000 13500 15750 16500
Total 94000 76500 89250 93500
Closing stock 13500 15750 16500 15000
Production units 107500 92250 105750 108500
Working note:
Calculation of closing stock is as follows:
July = 90000Units*15% = 13500 Units
August = 105000Units*15% = 15750 Units
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September = 110000Units *15% = 16500 Units
October = 100000 * 15% = 15000 Units
Amount of closing stock is calculated by taking consideration the aspect that it is equal to
15% of the next year sales.
Material purchase budget: It represents the quantity which Jeffery & Son's requires to
produce the finished goods during the predetermined time period. With the help of this budget
company is able to perform their business operations and functions without facing any
difficulties (Bland and et.al, 2015).
Material purchase budget of Jeffery & Son's are enumerated below:
July August September October
Material Require (2 per kg) 215000 184500 211500 217000
Less- Opening stock 52000 46125 52875
Total 163000 138375 158625
Add- Closing stock 46125 52875 54250
Purchase 209125 191250 212875
Calculation of closing stock = it is equal to the 25% of the production of following month.
Opening stock for the month of July is given which are 52000
Closing stock (July) = 184500 * 25% = 46125
Opening stock for the month of July = 52000 kg and closing = 25%* 184500 = 46125
Material purchase budget of Jeffrey and Son's s
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
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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
3.4 Preparation of cash budget
Cash budget: Cash budget may be defined as an estimation of the income and expenses
which Jeffery & Son's will incur or generate during the predetermined time period.
Cash budget of Jeffrey and Son's
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
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
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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
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
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Net cash flow 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
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
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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
stock
123750
Cost of sales 2250000
Contribution 315000
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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
TASK 4
4.1 Calculating variances, assessment of causes and recommending the corrective measures
Variance may be defined as a difference between the budgeted and actual performance of
an organization. Each and every organization frame budget with the aim to assess the deviations
which occur in the performance of an organization (Ahrens and Ferry, 2015). It provides
opportunity to Jeffery & Son's to undertake effective measures within the suitable time frame.
Calculation of variances of Jeffery & Son's
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
Causes of the deviations: On the basis of above figures, it has been assessed actual cost which
are incurred by an organization is higher than the budgeted cost the material. One of the main
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cause behind the negative variance of £180 is that company fails to make optimum utilization of
the material. In addition to this, labor variance of an organization also shows positive variance in
terms of 110. The reason behind the positive deviation is reduction in the labor rate per hour. As
per the budgeted figure, per hour labor rate is £8 whereas the rate at which Jeffery & Son's
makes payment to their labor is £7.8. In contrary to this, overhead expenses show negative
deviation of £100. It reflects that Jeffery & Son's has incurred high level of expenses on
administration as well as selling and distribution of product and services.
Recommending actions:
 It is recommended to Jeffery & Son's that they need to frame competent strategies and
policies which ensures less wastage of material. Through this, business unit is able to
produce large number of units with the available resources.
 Along with it, Jeffery & Son's also needs to encourage their workforce which enables
them to perform their work more effectively and efficiently.
 In addition to this, company needs to frame effective strategies and policies which can
help them in reducing the selling and distribution cost of products or services.
By undertaking such effective measures, company is able to achieve success in the
competitive business arena.
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)
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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
rate
AH(345Hrs) X AR
(£7.8 )
2690
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
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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
4.2 Preparing the operating statement which reconcile both the budgeted and actual results
Reconciliation statements consists of the record of the variances which helps organization
in assessing the causes of the variances. It enables organization to undertake corrective measures
within the suitable time frame. Through this, company become able to perform business
functions and activities according to the budgeted figures.
Reconciliation statement of Jeffery &v Son's on the basis of the above calculated variances are
enumerated below:
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
Operating statement for the month of May
£ £ £
Favorable Adverse Net
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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 variances 110 F 1460 A
Total net variance -1350
Budgeted operating
profit
4160
(-) Total net variance -1350
Actual operating profit 2810
As per the operating statement it has been analyzed that cost per unit of the product
increased which is the cause behind the negative variance of material. In contrary to this labor
hour rate had decreased which proves to be more fruitful for an organization. In addition to this,
fixed overhead cost inclined from £4800 to £4900. Due to this, per unit cost of the product is also
increased and there by reduces the profit margin of an organization. It can be seen in the
statement that actual cost of per unit is 3.14 whereas budgeted cost was 2.96. Thus, organization
needs to make control over their expenditures. It enables them to offer their products to the
customers at very cost effective rates and there by improve their profitability aspects.
4.3 Responsibility centers
There are specifically two types of responsibility centers such as responsibility cost and
profit center. Both centers are accountable to meet the budgeted performance. Responsibility cost
center take responsibility in relation to the expenses which organization will make during the
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