Management Accounting Benefits and Implementation

This assignment discusses the importance of management accounting in small and medium-sized enterprises (SMEs) and its selection models. It also explores the benefits of implementing management accounting tools, such as ERP systems, and provides insights into understanding the role of communication in the management accounting and control process.

Management Accounting
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Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1: Categorise of various types of cost .....................................................................................1
1.2: Calculation of units cost through various costing method ..................................................3
1.3 Calculation of cost of exquisite by using absorption costing techniques..............................4
1.4 Analysation of Exquisite cost for Jeffrey & Son’s Ltd.........................................................6
TASK 2............................................................................................................................................6
2.1 Preparation and analysis of cost report.................................................................................6
2.2 Use of performance indicators for identify areas for potential improvements.....................8
2.3 Suggested options to reduce cost, enhancing value and quality...........................................8
TASK 3............................................................................................................................................9
P3.1: Purpose and nature of the budgeting process to the budget holders of Jeffrey and Son's
Ltd...............................................................................................................................................9
3.2: Select the appropriate budgeting methods for the organisation and its needs...................10
3.3: Preparation of budgets.......................................................................................................11
3.4: Cash budget........................................................................................................................12
TASK 4..........................................................................................................................................13
4.1 variances analysis, possible causes and recommended actions...........................................13
4.2 operating Statement reconciling budget and actual budget.................................................14
4.3 Report the findings to management in accordance with identified responsibility centres..15
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................17
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INTRODUCTION
Accounting is one of the tool of business management and operation to accomplish the
goals and objectives of organisation. This is one of the supporting factors helps to communicate
the managers and departments properly (Pärl, 2012). Basically the accounting reports are the part
of managerial accounting and helps to make strategies and plans for better operations and
formations. Business environment is changing gradually and various type of records need to
maintained by the organisation in present scenario and business environment. These records are
helpful in decision making to analyse critical sources and situations in summarised way. This
report defines the objects and motives of budgetary control, difference between management
accounting and financial accounting. Elements, functions and nature are defined in this report to
analyse the behaviour of cost classification. Different types of cost and variances analysis done
in respect of reducing cost. Purpose of budgeting process and calculation of profir by using
absorption costing techniques explained in this report.
TASK 1
1.1: Categorise of various types of cost
In every business organisation, it is necessary for the company to determine there costs
those are incur during production of product and services (Grabner and Moers, 2013). It is
known as the amount which is use by company in order to manage there business transactions.
On the other hand, plenty of expenses that are generate at time of production units. All these are
company's operating costs which are mainly known as cost. It is divided into various parts which
are based on functions, attitude behaviour and type of expenses etc.
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Illustration 1: Different types of costs
(Source: Elements of Costs, 2012)
Element: Some of the key component of costs such as material, labour and expenses. All
these are more vital for the company take necessary decision regarding coming aims and
objectives. Material is an essential aspects which is considered by project managers in
formulation of finish goods. Whereas, labour cost is related with expenses that are made on
human power those engage in production process (Lennox, Francis and Wang, 2011). Moreover,
all expenses collected during the manufacturing of products and services are considered as
important part of cost.
Nature of expenses: It has been seen that most manufacturing company's are paying
wages to labour forces. In order to make effectively completion of projects the company need to
have proper skill and capability in labours. Hence, salaries and remuneration is require to have
knowledge and ability to labour and have to pay according to their performance.
Function: There are various department that are been carried out by an organisation.
Thus, every department incur certain individual costs which are affecting performances of a firm.
According to the functions, some costs is divided into as selling cost, selling and distribution
costs.
Behaviour: It is based on production volume of the company. These are termed as those
costs that consists of total volume and units of manufacturing. It is primarily depend upon market
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demand and other external factors those are affecting the performance and growth of the
company. It include fixed, variable and semi-variable costs. The cost of material is perfect
example as it did not remain same for very long time.
1.2: Calculation of units cost through various costing method
In management accounting there are different types of costing method are being used.
These are necessary for the company's to conduct proper analysis of total cost that are incur
during production process. Some of them are:
Job costing method: It refers as one of the crucial aspects for managers for computing
total cost of a particular job (Mahesha and Akash, 2013). This method is effectively utilise in a
business for various types of products and services. These are applied according to particular
requirement of consumes. It will be helpful in determining certain consideration about direct or
indirect cost of a particular job.
Marginal costing: It is known as one of the important costing method which is incur by
the company for the production of one additional units of products (Albelda, 2011). It consists of
direct material, labour and expenses or other overheads those are used. It is consider as best
method for the purpose of making valuable decision making.
Absorption costing: It refers as all those cost which are impose on total production of
product and services. It consists of both direct or fixed costs. It is not that much effective
techniques as compare with other one.
There are certain aspects needed to taken into account according to per unit cost of
Jeffrey and son's production Ltd company:
Computation of total cost and units of JOB 444
Particular Amount
Total cost
Direct material 270
Direct Labour 200
Indirect cost
Variable overhead cost 180
Fixed cost 120
Cost per units 770
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Units to be manufacture 200
Total cost 154000
Working note:
Fixed cost: Budgeted overhead / Total direct labour hours
: 80000/20000 = 4 *30= 120
Total cost: 770
No. of units: 200
Units cost= Total cost / no. of units
= 770/200= 3.85
The above mention calculation is indicating specific information about Job 444 that is
delivering total cost of 770.
1.3 Calculation of cost of exquisite by using absorption costing techniques
(a) Allocation and appropriation of overheads among three production departments
Production Department Service department
Basis of
apportionin
g
Total Machine
shop X
Machine
Shop Y
Assembly Stores Maintena
nce
000'
Indirect
materials
Area
occupied
253 100000 100000 40000 4000 9000
Indirect wages Allocated 362 100000 99500 92500 10000 60000
Rent Area
occupied
100 20000 10000 30000 30000 10000
Lighting and
heating
Area
occupied
50 10000 5000 15000 15000 5000
Salaried of
works
No. of
employees
80 24000 16000 24000 8000 8000
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Insurance of
building
Area
occupied
25 5000 2500 7500 7500 2500
Insurance and
machinery
Book value
of
machinery
15 7947 4967 993 497 596
Depreciation of
machinery
Book value
of
machinery
150 79470 49669 9934 4967 5960
Sub totals 1035 346417 287636 219927 79964 101056
Maintenance 48507 32338 20211 -101056
Stores
departments
39982 29987 9995 -79964
Totals 434906 349961 250133 0 0
Allocation of overheads and cost are based upon the ratios. There are major three parts
are defined in this report. Fixed overheads are as depreciation allocated in book value of
machinery. Indirect wages and material cost are allocated as per area occupied by the machine X
and Y. Rent, lightning and heating, salaries are allocated as per the area occupied by the
machines. Insurance of machinery and depreciation are charged in respect of book value of
machinary.
(b) Reapportion of departmental cost to the production departments
Production Department
Distribution
ratio
Machine shop
X (£)
Machine Shop
Y (£)
Assembly (£)
Preliminary
distributing as stated
earlier
346417.02 287636 219927
Stores department
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Direct material [4:3:1] 39982 29987 9995
Maintenance
Department
Maintenance machine
hours
[12:8:5] 48506.88 32377.92 20211.2
Total 434905.9 349960.92 250133.2
(c) reduction of overhead absorption rates for each of the production department X,Y and
assembly
This allocation remain divided in three steps
First step: Allocation of available cost among production department
formula = total cost / machine hours on particular shop
Department Total cost Machine hours Calculation Results
Dept. X £434,906 80,000 hours £434,906/80,000 hours £5.83/hours
Dept. Y £349,959 60,000 hours £349,959/60,000 hours £5.44/hours
Assembly Dept. £250,133.47 10,000 hours £250,133.47/10,000 hours £25.01/hours
Second step: Allocation of service cost among manufacturing department
Overheads are calculated below
Production department Overhead rates
Machine Shop X £5.83/Hr.
Machine Shop Y £5.44/Hr.
Assembly £25.01/Hr.
Third step: Allocation of manufacturing department cost as per machine hours and absorption
of overheads
1.4 Analysation of Exquisite cost for Jeffrey & Son’s Ltd
Below are the rates given in respect of production departments of company.
Particulars Calculation Cost
Direct material £8
Labour £15
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Overheads: Machine shop X £2.17*2 £4
Machine shop Y £2.33*1.5 £3.50
Assembly Department £1.25*1 £1.25
Total £32.09
Analysis
As per the analysis the cost of per production is calculated and overall cost is measured
£32.09. as per above analysis there of absorption cost in respect of machine hours production
hours are divided on machine shop X £5.83/hr., machine shop Y £5.44/hr. and assembly
department £25.01/hr.
TASK 2
2.1 Preparation and analysis of cost report
Cost report for the month of September of Jeffrey and son's Ltd
Budgeted cost Actual cost Variance
2000 units 1900 units
Particulars £ £ £
Cost of material 24000 22800 -1200
Cost of Labour 18000 19000 1000
Fixed overheads 15000 15000 -
Prime cost 57000 56800 200
Electricity
Fixed part 500 500 -
Variable part 7500 7125 375
Maintenance 5000 5000 -
Total cost of production 70000 69425 575
Calculation of standard budget at 1900 units
Budgeted cost Budgeted cost
2000 units 1900 units
Particulars £ £
Cost of material 24000 22800
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Cost of Labour 18000 17100
Fixed overheads 15000 15000
Prime cost 57000 54900
Electricity
Fixed part 500 500
Variable part 7500 7125
Maintenance 5000 5000
Total cost of production 70000 67525
Workings:
1. calculation of variable cost – Cost of electricity = variation in total cost / Variation in
the amount of production units
= (8000-5000) / (2000-1200)
= £3.75
as per analysis of unit cost there are some variances come across from standard and budgeted
report that the labour cost contains the difference of £1000 extra cost. The net effect would be
fall upon the total prime cost of which is calculated of £57000 for production of 2000 units and
£54900 for production of 1900 units.
2. Material variances – as per the variances come from the standard and actual
budget there are some certain part of cost would be remain fixed. The fixed part
of electricity of £500 remain fixed while measuring the cost per unit for 1900
units. Variable portion which was £7500 for 2000 units would be decrease to
£7125 for 1900 units. Material cost decreased to £1200 for 1900 units.
3. Labour variances – There is an increase amount of £1000 found while calculating
the labour variances. Labour cost per unit was calculated of £9 in actual and it
become £10 per unit for 1900 units. To recover the difference of the variable cost
there was an compensation written off in respect of 18000 units.
4. Fixed overheads would be remain same for the production of 1900 units.
5. Electricity was in composite form which need to be separated as fixed part and
variable part. Total electricity cost was recorded as £8000 in which £500 and
£7500 is variable part. While calculating total cost £500 will remain constant and
the variable cost for 1900 units would be £7125.
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2.2 Use of performance indicators for identify areas for potential improvements
As per above analysis there are some recommendations mentioned below which would be
helpful for potential investors.
 Financial analysis of company indicates the level of performance and which provides the
information and supports related to improvement.
 There are significant change are required in respect of controlling the cost and effective
evaluation is required.
 Variable overheads and classifications are required to analyse and bifurcate the expenses
in different type of production departments.
 Budgeted sales records shows the possibilities of less production due to less requirement
and demand of product (Hasniza Haron and et. al., 2013). It will effect the amount of sale
and will decrease the sales amount. Organisation need to change the policies in respect of
labour cost and variances analysation. Some of the fixed overheads in respect of
electricity and depreciations are irrelevant need to rectify and analysed in effective
manner.
2.3 Suggested options to reduce cost, enhancing value and quality
Below are some methods and tools are given in respect of reducing the cost of production
and maximise the amount of profitability.
 TQM which is known as total quality management technique which would help to insure
the amount of goods and better use of improved techniques (Lachmann, Knauer and
Trapp, 2013.). This method is considered as most effective and important part in respect
of reducing the cost and maximising profit.
 Company need to measure the factors and areas in respect of improve the quality of
products.
 Organisation need to reduce the cost of operations and valuation of products for assets.
TASK 3
P3.1: Purpose and nature of the budgeting process to the budget holders of Jeffrey and Son's Ltd
Budget is essentially required to prepare by the top authority of company through which they can
formulate, allocate resources in important areas and direction in order to achieve efficiency in the
business activities which further help them in making effective decisions with a motive of
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generating huge revenue and market share in competitive market world. The management should
follow budgeting process to prepare effective budget (Lavia López and Hiebl, 2014).
The purpose of preparing budgeting process of Jeffrey and Son's Ltd: The main
purpose of setting budget is to forecast the income and expenditure that to be incurred in future
business activities. The manager also predict the complex environment which can influence and
affect the business operations so that they are prepared in advance by formulating corrective
measures in order to reduce the impact when such complex situation occurs. Preparing budgeting
process help company top analyse and evaluate the performance by comparing actual
performance with the standard performance which will bring positive result for the company. It
also helps in making optimum utilisation of resources by appointing skilled and knowledgeable
employees which can allocate available resources in those important field which can bring
positive outcome in future (Kotas, 2014). This will directly help in minimising cost and
expenditure incurred while execution of business operations. Through budgeting process the
management can effectively communicate and coordinate with all departments which help them
in performing various functions such as planning, organising, staffing, controlling and directing.
Employees feels motivated by getting effective support and motivation from the management of
company regarding their roles and responsibilities. This will help in production of company.
Nature of budgeting process: The company Jeffrey and Son's Ltd should use their
budgeting process in formulating effective decision through using pats performance data and
comparing the actual and current result in business activities which help them to identify the
changes that to be required in future business activities (Caglio and Ditillo, 2012). By taking
previous data the manager can easily forecast the income and expenditure incurred in near future
and accordingly implement effective decision in order to achieve growth and success. The
budgeting nature provide a structure of roles and responsibilities to every members in an
organisation which help them to perform well and achieve best possible result.
3.2: Select the appropriate budgeting methods for the organisation and its needs
Jeffrey and Son's Ltd need to utilize following budgeting methods in order to achieve positive
result in future business activities:
Zero based budgeting method: While following this method the management of
company need to fresh budget without utilising any previous year data as they start from zero
(Granlund, 2011). This method is mostly used by new company or firm but Jeffrey and Son's Ltd
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has also option to use this method in order to bring improvement in the productivity and
appropriate allocation of available resources in order to get positive outcome.
Top down budgeting method: This method should be used by top authority of company
ton prepare an effective budget (Chenhall and Smith, 2011). They focus on preparing budget
with the help of information available with them and once the budget is prepared then they are
able to allocate financial funds to different departments in order to achieve desired target. This
will help in improving communication between every department of organisation. Through using
method Jeffrey and Son's Ltd can able to allocate work as well to different departments in order
to bring efficiency and achieve growth and success.
Incremental budgeting method: Using this method the management need to make
changes in previous year data for the purpose of improving performance of their organisation.
This will help company in achieving better result as compared to past performance. Jeffrey and
Son's Ltd should get to know the areas where they mainly focus for improvement in order to
bring efficiency and improve overall performance of company.
Activity based budgeting method: With the help of using this method management get
to know the estimated cost incurred in very activities of their production process. This will help
in identifying unit numbers which are required in each activity. While following this method
Jeffrey and Son's Ltd need to identify activity that to be required in production at various level.
Bottom up budgeting method: With the help of using this method the company can
make accurate estimation related to the income and expenditure incurred in future business
operations (Fullerton, Kennedy and Widener, 2014). This budget is considers as an accurate as
the workers are involves in to operation prepare it. Jeffrey and Son's Ltd should motivate their
employees through using this statement which will also help them in resolving the issues and
problems arises between the employees. This will directly make a positive impact on the
company's productivity and profitability.
3.3: Preparation of budgets
Budget: It is known as a financial program for a specify period of time, mainly prepare
for one year. It consists of sales volumes and revenues, cost and expenditure or cash flows
(Christ and Burritt, 2013). It is known as one of the essential aspects of management tools which
provide perfect idea about company's future growth chances. Some of the budgets are:
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Production budget: It will evaluate total number of units of products those are produce
with the combination of sales forecast and amount of inventory products. In simple term,
financial plan that consists certain list of items to be produce during the time.
Production budget in terms of units:
Particular July August September Total
Total estimated sale 105000 90000 105000 300000
Add: 0
Closing stock of
inventory 13500 15750 16500 45750
Total expected stock 118500 105750 121500 345750
Less:
Stock at the opening 11000 13500 15750 40250
Total stock require 107500 92250 105750 305500
Working note: Computation of closing stock with 15% sales
 July: 90000 units *15%= 13500units
 August: 105000u*15%= 15750u
 September: 110000u*15%= 16500u
Material purchase budget: This budget is slightly different from a profit or expenditure
budget (Contrafatto and Burns, 2013). Because the entire focus of the company is on evaluating
the essential requirements of raw material and stock. It indicate budgeting beginning and closing
material of stock that are use in production of products and services.
Computation of material budget:
Particular July August September Total
Total production estimate 107500 92250 105750 305500
Material per units 2 2 2 6
Total raw material
require 215000 184500 211500 611000
Add: 0
Closing stock 46125 52875 54250 153250
Total require production 261125 237375 265750 764250
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Less:
Stock at the beginning 52000 46125 52875 151000
Raw material purchase 209125 191250 212875 613250
Cost per units 1.75 1.75 1.75
Total raw material 365968.75 334687.5 372531.25 1073187.5
Working Note: Computation of closing stock with 25% of total purchase of Raw material :
 July: 185500u*25%= 46125u
 August: 211500u *25%= 52875u
 September: 217500u*25%= 54375u
3.4: Cash budget
It is know as a budget which record all the information of cash inflows and outflow those
are done by the company from various activities. Such as operating, investing and financing. It
is also said to be an estimation of company's total cash position in the coming time (Fullerton,
Kennedy and Widener, 2013). For large organization, it is more crucial for the purpose of
deciding whether to grant loan or increase credit to company. It can provide information about
whether too much cash is being use for production of products.
Computation cash budget:
Particular July August September
Cash at the beginning 16000 43531 69843
Add:
Cash earn from sale 900000 821250 864000
Total cash receive (A) 916000 864781 933843
Less:
Raw material purchase 365969 334688 372531
Direct wages 322500 276750 317250
Fixed expenses 75000 87500 87500
Variable expenses 109000 96000 99000
Total cash equivalent (B) 872469 794938 876281
Closing cash amount (A-B) 43531 69843 57562
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Working note: 1
Direct wages
Month Units produce Direct wages
July 107500 322500
August 92250 276750
September 105750 317250
Working Note: 2
cash sales
Particular May June July August September October
Novemb
er
Sales per units 95000 110000 105000 90000 105000 110000 100000
Selling cost per units 9 9 9 9 9 9 9
Total sales 855000 990000 945000 810000 945000 990000 900000
Cash earn 60% 513000 594000 567000 486000 567000 594000 540000
25.00% 213750 247500 236250 202500 236250 247500
10.00% 85500 99000 94500 81000 94500
Total cash sales
during the year 513000 807750 900000 821250 864000 911250 882000
Working note: 3
Variable expenses
Particular May June July August September October
Novemb
er
Variable cost per
unit 95000 110000 105000 90000 105000 110000 100000
variable expense
earn 60% 57000 66000 63000 54000 63000 66000 60000
40.00% 38000 44000 42000 36000 42000 44000
Total cash sales
during the year 57000 104000 107000 96000 99000 108000 104000
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TASK 4
4.1 variances analysis, possible causes and recommended actions
Calculation of variances of Jeffrey and son's make
Particulars Budget Actual Variances Nature of
variances
Per unit Total Per unit Total
Sales 4 per unit 14000 3.95 per
unit
13820 -180 Adverse
Fixed overheads (a) 4800 4900 100 Adverse
Cost of Material (b) 2.4 kg 3360 2.4 per kg 3420 60 Adverse
Cost of labour (c) 8 per hour 2800 7.80 per
hour
2690 -110 Favourable
Total cost (a+b+c) 10960 11010 50 Adverse
Actual profit 3040 2810 -230 Adverse
Budget
Original Flexed Actual
Output (Sales and
production units)
4000 3500 3500
£ £ £
Revenue from sales 16000 14000 13820
Labour -3200 -2800 (350 Hrs.) -2690 (345 Hrs.)
Raw material -3840 -3360 (1400 kg) -3420 (1425 kg)
Fixed Overheads -4800 -4800 -4900
Operating profit 4160 3040 2810
As per above budget analysis variable cost is been increased. Raw material cost and fixed
overheads also get increased which need to control by reducing the cost.
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4.2 operating Statement reconciling budget and actual budget
Reconciliation operating statement of Jeffrey and son's
Particulars Amount (in £)
Budgeted profit 3040
Less: variances of sales -180
Less: variances of cost -60
Less: overhead -100
Add: labour 110
Actual Profit 2810
Operating statement for the month of May
£ £ £
Favourable Adverse
Fixed overheads expenditure
variance
Labour rate variances
Material price Variance 0
Material usage variances 60
Sales Price Variance 180
Sales volume variance 1120
Total variances 110 F 1460 A
Total Net variances -1350
Budgeted operating profit 4160
Less: net variances -1350
Actual operating profit 2810
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4.3 Report the findings to management in accordance with identified responsibility centres
These are the centres which remain responsible to present the final report. Finance
managers, auditors and accounts remain the part of the financial reporting (Dillard and
Roslender, 2011). Accountant is the first person who keep recording all the transactions and
events related to productions and sales. Accountant maintain the records for a particular time
duration and use these records to summarise the informations (Implementation of management
accounting tool in organisation, 2017). Accountant produce the report to production manager he
prepare the final records. There statements supports the forecasting process. Manager become
able to analyse the material requirement, labour charges and overheads for a specific duration.
CONCLUSION
Management accounting is one of the important aspect in organisational context which
helps to communicate the departments and operations in optimum manner. This report is
prepared to classify the elements of cost and analysation of profit by using various type of cost
analysation techniques. Cost accounting is one of the branch of management accounting which
helps in decision making and strategic planning. Jeffrey and Son's Ltd cost analysation of
different departments are described in this report. Allocation and appropriation of overheads at
different production departments defined properly. Absorption costing technique is used to
allocate the overheads and expenses to analyse exquisite cost.
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