Cost Analysis of Yuri Cutlery Ltd.

This assignment delves into a cost analysis of Yuri Cutlery Ltd., focusing on absorption costing and its impact on managing expenditures. The report explains how absorption costing helps control and manage company costs, enabling effective operation completion. A variance analysis is conducted to identify negative and positive differences in the company's financial position, providing insights into the underlying causes.

MANAGEMENT ACCOUNTING

TABLE OF CONTENTS
Introduction......................................................................................................................................1
TASK 1: Analyze cost for Columbus Ltd.......................................................................................1
1.1 Classify costs into fixed, variable and semi variable.............................................................1
1.2 & 1.3 Computing gross profits for both Columbus Ltd and Steel Ltd..................................2
1.4 Identify the kinds of Expenditure..........................................................................................3
TASK 2: Costing reports for performance indicators......................................................................5
2.1 Cost of Production.................................................................................................................5
2.2 & 2.3 Performance indicators for improvement to reduce cost, enhance value and quality. 6
Task 3: Budgeting............................................................................................................................8
3.1 Purpose and nature of Budgeting...........................................................................................8
3.2 Budgeting methods................................................................................................................9
3.3 Demonstrating flexible budgeting.......................................................................................10
3.4 Flexible budget....................................................................................................................11
PART B (3.4).............................................................................................................................12
Task 4: Variance Analysis.............................................................................................................13
Part A) 4.1 Variance analysis of Yuri Cutlery budget...............................................................13
Part B) 4.2 Operating statement.................................................................................................14
4.3 Memorandum report............................................................................................................15
Conclusion.....................................................................................................................................17
References......................................................................................................................................18

INTRODUCTION
Looking at the present market conditions, the efficiency of enterprise depends upon the
ability of managers in understanding and applying the principles, approaches, methods of
modern management to carry out operations in ethical and reliable manner. However,
management accounting can be defined as the application of different principles of accounting
and financial management in order to create, procure, protect and enhance the value for money
of the associated stakeholders irrespective to the sector (Kaplanand Norton, 1993). The main
purpose of management accounting is to minimize the financial risks and uncertainties by
applying varied analytical tools and techniques.
In the current report, researcher focuses on cost information for both current and future of
the different business enterprises. Further, the main purpose of researcher behind carrying out
this study is to enhance understanding regarding how cost data is collected, compiled, analysed
and processed into information that is useful for business managers in making effective and
efficient decisions. Further, it consist of different costing and budgetary system and the cause of
resulting variances, together with the possible implications and potential measures undertaken by
managers of different organisations. However, in order to carry out financial aspects of different
operations in effective way it is important for the managers to have in-depth analysis of
management accounting.
TASK 1: ANALYZE COST FOR COLUMBUS LTD
1.1 Classify costs into fixed, variable and semi variable
Cost in general can be defined as the monetary measure of resources which are sacrificed
in order to achieve an objective. In context to a company, there are several costs associated with
it such as people employed, execution of operations, purchasing of raw materials etc. These
running or operating costs are defined as the accountants revenue expenditure which is important
for the company to incur for achieving desired results and outcomes (Hill, 2003). There are
different types of costs associated with the functioning of Columbus Ltd which are as follows:
On the basis of costing and pricing:
 Direct costs:This type of costs can be defined as the combination of material, labour and
other overheads incurred or consumed in order to produce a particular unit of products
and services. Direct labour is the costs which is associated with the entire process of
production that company produces and for computing it managers undertake timesheet or
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job cards on the basis of which remuneration is decided. Further, direct material is cost
that Columbus Ltd incur at time of purchasing raw materials which are used for
producing finished products. Lastly, direct overheads are those which are apart from
labour and material that Columbus Ltd has to incur in order to carry out production
process e.g. rent and equipment maintenance.
 Indirect costs:This type of costs consist of materials and labour that are not directly made
used in producing a unit of products and services (Bevilacqua, Ciarapicaand Giacchetta,
2007). However, they are firstly charged to the cost centres and then split over the
products and services.
On the basis of behaviour:
 Fixed costs: These are the costs which remains the same despite of change in level of
production. According to the given scenario, manufacturing costs can be defined as the
fixed costs for the Columbus Ltd.
 Variable costs: these are the direct and indirect cost that changes with the alteration in
level of production. Herein, direct material cost refers to the variable costs for
theColumbus Ltd as it changes with the level of production.
 Semi-variable costs:It is the combination of fixed and variable costs as in this, cost is
fixed at certain level of production or consumption and once the level is crossed it
becomes variable and increases with the level of production.
1.2 & 1.3 Computing gross profits for both Columbus Ltd and Steel Ltd
In general, marginal costs can be defined as the change in the total expenditure due to
increase in production units. However, in order to compute gross profit, cost management tools
is used by the mangers because it assist in analysing the expenditure and revenue information
which includes all the associated variable cost and provide contribution at the end. Further,
absorption cost is the expenditure that includes both variable and fixed expenses (Islam and
Dellaportas, 2011). However, the main aim of manager behind indulging absorption cost is that it
helps in controlling and managing the expenditure of the company in order to complete the
operations appropriately. Through the means of this, managers can easily make smart and
effective decisions regarding managing financial prospects of manufacturing unit.
Gross profit calculation of Columbus Ltd:
Particulars Year 1 Year 2 Year 3
2

Sales 234900 313200 287100
Less cost of sales - - -
Opening inventory 0 27000 36000
Variable cost of
production
108000 117000 112500
Less closing inventory 27000 36000 50100
Less: Cost of sales 81000 108000 98400
153900 205200 188700
Less other VC 0 0
Contribution 153900 205200 99700
Less fixed cost 90000 90000 90000
Gross loss/ Profit 63900 115200 98100
Computation of closing stock (Units)
Year 1
Step 1
Opening stock balance B/F = Nil
Add: Units produced =3,600
Total Units produced =3,600
Less: Units Sold = 2700
Closing Stock =900
Step 2
Calculation of cost per unit produced
Marginal cost of production
Divided by total material produced=
£108,000/3600
£30 per unit
Step 3
Value of closing stock
3

Closing stock multiply by cost per unit
900*£30 = £27,000
Year 2
Step 1
Calculation of closing stock (Units)
Opening stock balance b/f =900
Add: Units Produced = 3900
Total Units produced = 4,800
Less Units Sold = 3,600
Closing Stock =1,200
Step 2
Calculation of cost per unit produced
Marginal cost of production
Divided by total units produced=
£144,000/4,800
£30 per unit
Step 3
Value of closing stock
Closing stock multiply by cost per unit
1,200*£30 = £36,000
Year 3
Step 1
Calculation of closing stock (units)
Add: Unit Produced: = 3750
Total Units produced = 3,950
Less: Units Sold = 3,300
Closing Stock = 1,650
Step 2
Calculation of cost per unit produced
Marginal cost of production
Divided by total Units produced
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£148,500/3,950 = £30 per unit
Step 3
Value of closing stock
Closing stock multiply by cost per unit
1,650*£30 = £49,500
Gross profit of calculation of Steel Ltd:
Particulars Year 1 Year 2 Year 3
Sales 234900 313200 326250
Less: cost of sales - - -
Opening inventory 0 49500 63692
Variable cost of
production
108000 117000 112500
Fixed overhead
absorbed
90000 90000 90000
Less :closing inventory (49500) (63692) (89100)
Total cost of sales 148500 192808 288700
Gross profit 86400 120392 149158
Year 1
Value of closing stock
Step 1
Total absorption cost = £198,000
Total units produced=3600
Absorption cost of production per unit
Cost per units consumed=£198,000/3,600=£55
Step2
Closing stock = units produced less units sold
3600-2700 = 900
Step 3
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Value of closing stock = closing units*cost p/u
£55*900=£49,500
Year 2
Step 1
Total cost=£256,500
Total units produced
900+3,900=4,800
Absorption cost of production per unit
Cost/units consumed=£256,500/4,800 = £53.4375
Step 2
Closing stock=units produced less units sold
4800-3900=1,200
Step 3
Value of closing stock=closing units*cost p/u
£53.4375*1200
£64,125
Year 3
Step 1
Total cost=£266,625
Total units produced = 3750+1200=4950
Step 2
Absorption cost of production per unit cost/units consumed =
£266,625/4,950 = £53.863636364
Closing stock = units produced less units sold
3750+1200=4950-3300=1,650
Step 3
Value of closing stock=closing units*cost p/u
1650*£53.863636364 = £88,875
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1.4 Identify the kinds of Expenditure
Cost of can be several types as discussed above but according to the present given case,
costs can classified in different forms which are as follows:
Various expenditure Type of expenses
Raw material for goods Direct expanses
Rent of factory building Fixed costs
Sales staff salaries Indirect costs
Wages machinery operates in office Direct costs
Depreciation of lathes in factory Indirect costs
Depreciation of fixtures in sales
showroom
Sales and Distribution expenditure
Supervisor’s wages in factory Direct expenses
Royalty paid for each item
manufactured
Direct expenses
Workers managers salary Indirect costs
Raw material incorporated in goods
sold, but too difficult to tress to the
goods being made
Indirect costs
Depreciation of motor vehicle used
for delivery of finished goods
Indirect costs
Semi fixed costs
Wages of craned derived in factory Direct expenses
Fixed expenditures
Discount allowed Indirect
Semi variable
Company secretary’s salary Indirect costs
Advertising Indirect expenses
Variable costs on the basis of marketing
budget
Wages of staff of canteen used by Direct costs
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factory staff only Variable costs
Cost of hiring special machinery for
use in manufacturing one special
item
Direct expenses
Fixed costs
TASK 2: COSTING REPORTS FOR PERFORMANCE INDICATORS
2.1 Cost of Production
Cost of production for Howorth Products Ltd:
Particulars Materials Conversion
Units accounted for as follows:
Completed and transferred 4800 4800 4800
Work in process, May 31 400
Materials 40% complete 160
Conversion 25% complete 100
5200 4960 4900
Particulars Materials Conversion Total Cost
Cost to be accounted for:
Work in process, May 1 £ 9,600 £ 5,575 £15,175
Costs added to production in May £368,600 £350,900 £719,500
Total cost £378,200 £356,475 £734,675
Equivalent units 4,960 4,900
Cost per equivalent unit £76.25
(378.200/4,960)
£ 72.75
(356,475/4,900)
£149
(76.25 + 72,75)
Particulars Materials Conversion Total
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Total Cost
Cost accounted for as follows:
Transferred out during May 4,800 4,800
£715,200
(4800 x £149)
Work in process, May 31:
Materials (400 x 0.4) 160 £12,200
(160 x £76.25)
Conversion (400 x 0.25) 100 £7,275
(100 x 72.75)
Total work in process, May 31 19,475
Total cost accounted for £734,675
Working Note:
Note1
Work in progress at end (units)
Work in progress at beginning @ May 1 =200
Add: Production started during May 5,000
Total Production in May 5,200
Less: Production completed in May 4,800
Work in progress at end 400
Note 2
Cost per Equivalent units Total Material Conversion
Total cost (Second step) A £734,675 £378,200 £356,475
Equivalent Units B 4,960 4,900
Cost per equivalent unit A/B £149.00 £76.25 £72.75
Note 3
Equivalent Units (at end) Total Material Conversion
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400 - -
Material(40% complete) 400*40% 160 -
Conversion(25%complete)400*25% - 100
Total unit 160 100
Note 4
Equivalent unit costs(Total) Material Conversion
Cost per unit multiply by equivalent units
Material (£76.25*160) Note 2*Note3 £12,200 -
Conversion(£72.75*100) Note 2*Note3 - £7,275
Note 5
Total Cost Accounted:
Effective units Materials Conversion Effective rate P/U Total cost
£ £
4,800 4,800 4,800 149.00 715,200
- 160 - 76.25 12,200
- - 100 72.75 7,275
Total 4,960 4,900 734,675
From the above computation of production cost for Howorth Products Ltd it has been
analysed that the materials and conversion work in progress are 70% and 45% respectively that
has been completed during the month of May. However, production manager of Howorth
Products Ltd expected to produce 5000 units at the beginning of the month but was only able to
produce 4800 units during the course of month. Henceforth, it can be said that, cost of
unproduced 200 units will not be counted within the month of May which leads the cited firm to
incur total costs of £734675.
2.2 & 2.3 Performance indicators for improvement to reduce cost, enhance value and quality
It is essential for a firm to evaluate its performance at constant basis so as to identify and
ensure that its operations are functioning as per the competitive market. However, performance
indicators is considered asthe important tool for analysing the current position of business
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enterprise and accordingly set the future realistic goals and objectives (Gupta, Sharmaand Ahuja,
2012). Further, through the means of this management of the firm can carry out change and
development. Especially in manufacturing company like Howorth Products Ltd the role of
performance indicators is to highlight the present condition of the production unit so as to
measure the effectiveness of manufacturing decisions taken by the top level management.
Following are the key performance indicators for the manufacturing unit:
 Output: It is considered as the most significant performance indicators for the production
unit. However, every company sets the target of attaining the desired level of output.
Therefore, monitoring the constant performance of employees and operations will assist
in analysing the variance between budgeted and actual level of output so that if required
potential measures can be employed (Lindholmand Suomala, 2007).
 Reject ratio: This ratio helps in evaluating the amount of waste produced by the
manufacturing unit during the entire process. Therefore, it is important for the senior
authority to monitor the production’s scarp and indulge appropriate quality measure to
reduce the waste and enhance the level of production.
 Quality: It is the most significant performance indicator because every business wants to
produce quality of products and services. Therefore, senior authority can measure the
performance of entire business on the basis of quality offered by them to customers
(Maelah and et.al, 2012).
 Rate:In a manufacturing business, there is variable rate of production which assist in
determining that higher the pace of production will assist in producing better quality
products. While on the other hand, low pace of production will decline the level of
quality. Thus, it is the duty of production manager to ensure that unit maintains the
sustainable speed for the production.
 Target: This is the most common approach of measuring the performance of business.
However, in this manager needs to compare the actual outcome of the department with
the expected to budgeted results and outcomes. Through the means of this, company can
motivate the employees to perform in effective and appropriate way so that better results
can be achieved in near future.
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 Production time: It is the time required by the company to complete its production
cycle.The main purpose behind this performance indicator is that it helps in monitoring
manufacturing process effectively and ensures positive outcomes.
 Visual management: Through the means of this approach management define the KPI’s
for three different aspects that consist of output, quality and efficiency. Therefore, it is
implemented at the factory level for analysing the performance of employees and if
required potential measures can be employed (Harrison and Lock, 2004).
Recommendation:
Looking at the present functioning of Howorth Products Ltd, management is
recommended to undertake visual management as the performance indicator. However, rationale
behind this suggestion is that it will help top level management of Howorth Products Ltd to
monitor the performance of employees as well as assist in allocating the resources in appropriate
way. In this regard, any variance identified by the functional manager than he/she can take
suitable and reliable measures to overcome the associated risks and uncertainties.
TASK 3: BUDGETING
3.1 Purpose and nature of Budgeting
Budgeting can be defined as the procedure of forecasting for completing the desired tasks
and operations in suitable and reliable manner. However, it is considered as the planning tool
that helps the course of senior authority in making smart and effective decisions regarding use of
available funds or money. There are various purpose of preparing budget:
 Communicate information:Through the help of different budgets top level management
can easily gather wide range of data about the actual financial position of the firm and
accordingly share the informationmake sure that workforce can mould their functioning
as per the requirement (Warren, Reeveand Duchac, 2011).
 Evaluate performance of business entity: Budgets are prepared with the aim of comparing
actual performance with the desired or budgeted performance.
 Control the spending: With the help of budgets senior authority of firm can allocate the
funds in effective and appropriate way so as to control the spending and maintain the
cash balance.
Following are the six stages of budgetary control system with the help of which management can
manage and control the financial position of the business enterprise.
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 Setting new budget: This cycle starts by preparing a new budgeted in respect with the
department.
 Defining the performance measurements:After preparing the budget, it is important to
define the quantifying performance measurement of budget on the basis of efficiency and
effectiveness of past actions.
 Measuring actual performance: Through the help of budgeting control techniques
management can measure the actual performance and evaluate the current position of
business in competitive market (Hudson, Smartand Bourne, 2014).
 Examining variances:In order to compute variance manager has to compare actual
performance with the estimated results so as to analyse the potential causes.
 Taken action if necessary:After evaluating the variance it is important for the top level
management to take actions against the adverse variances and generate fruitful results in
near future.
3.2 Budgeting methods
Budgeting procedure is considered as the important aspect of management control
system. However, it assist in providing a system of planning, coordination and control for the
management. Further, it is considered as the difficult task to carry out and people involved in
making budgets have high grades of responsibilities (Riley, 2012). There are different types of
budgeting methods and as per the needs and wants of business, management can select their
own.
 Incremental budgeting: Under this method of budgeting, finance manager consider
figures of last year as a base as well as adapts the changes in inflation, price, cots and
activity levels. The main benefits of incremental budgeting is that it is easy to understand
and simple to operate. However, but the major drawback of this approach is that there is
no room for any changes or modifications within the budget whenever internal and
external factors influence the overall operations (Bragg, 2013). Along with this, it ignores
the incentives under the innovation and development of business enterprise. Further,
through the means of this budget it is very difficult for the firm initiate or carry out a new
activity.
 Zero based budgeting: Under this method of budgeting, each set of functional department
are required to justify the resource acquired by them for attaining the desired set of goals
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and objectives. Further, this method is based on different stage which assist the manager
to evaluate each activity and accordingly allocate the available funds and resources.
However, properly allocation of resources is one of the major pros of the budgeting
method as well as beneficial in decreasing the costs related to the operations of business.
But zero based budgeting requires time from managers because of the amount of analysis,
meetings and reports required to be made and at times it leads to develop conflicts
between different departments.
 Bottom to top budgeting: This method assist in providing chance to the budget holder in
contributing to the entire budgeting process. However, the main purpose behind
undertaking this approach is that it assist in identifying and evaluating all those activities
which are involved in or required to accomplish the operations appropriately (Method of
costing. 2014).
 To down budgeting: On the basis of given name, budgets through this approach is also
prepared from top to down. However, in this approach, costs of higher level is decided
and the remaining resources are distributed to the down level activities for their
appropriate execution. This budgeting system saves the time as divisional managers have
right to make decisions but contradicting to this, senior authority may lose the control
over activities of different departments. It is suitable for the small scale enterprise which
consist of very few departments.
On the basis of above evaluation of different types of budgeting method it can be
recommended to the senior authority of Max Ltd that, it should undertake top down budgeting as
it will assist in making optimum utilisation and allocations of available resources.
3.3 Demonstrating flexible budgeting
Variable
costs
Static
budget on
1000 units
Static
budget on
900 units
Actual
production
cost of 900
units
Variances F/U
Direct
Labour
2000 1800 1800 0
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Direct
Materials
1500 1350 1400 -50 U
Factory
supplies
250 225 260 -35 U
Total
variable
costs
3750 3375 3460 -85
Fixed costs 0
Depreciation 2000 2000 2100 -100 U
Occupancy
cost
800 800 760 40 F
Total fixed
cost
2800 2800 2860 -60 U
Total cost of
overhead
6550 6175 6320 -145
Interpretation:
On the basis of above calculation of budget it has been evaluated that, manufacturing
firm has incur high expenditure as compared to the estimated expenses. However, it is because,
at the initial stage of production budgeted expenditure was estimated at the production unit of
900. Thereafter, cost of materials was projected accurately which leads to no variance position.
But in case of direct labour, Max Ltd incur higher cost than budgeted which showed negative
variance. Therefore, it is important for the top level management of cited firm to understand the
actual position of business and accordingly indulge the potential measures so that to reduce the
negative variance and generate desired results and outcomes.
3.4 Flexible budget
Units Produced Unit cost 1000 920 940 960 980
Variable Costs
Direct labour 2 2000 1840 1880 1920 1960
Direct materials 1.5 1500 1380 1410 1440 1470
Factory 0.25 250 230 235 240 245
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supplies
Total variable
cost
3750 3450 3525 3600 3675
Fixed Costs
Depreciation 2000 2000 2000 2000 2000
Occupancy
costs
800 800 800 800 800
Total Fixed
Costs
2800 2800 2800 2800 2800
Total Overhead
Costs
6550 6250 6325 6400 6475
Interpretation:
The main aim behind preparing flexible budget is to show different level of production.
However, with the help of computed budget it can be analysed that, fixed costs remains the same
at all the levels of project output. But considering the sales expenditure and variable costs which
constantly changes with the change in level of production. Therefore, at 940 units Max Ltd will
incur the total variable costs of 3525 and will change with increasing level of production as
shown in the above table. But on the other hand, fixed costs of 2800 remains the same as there is
no change in depreciation and occupancy costs of the business.
PART B (3.4)
Cash Budget:
In general, cash budget can be defined as the statement in which finance manager records
all the transaction related to the cash inflow and outflow (Gupta, Sharmaand Ahuja, 2012).
However, the main purpose of preparing this budget is to manage the inflow and outflow of cash
during the reporting period. Herein, cash budget of Max Ltd is prepared for the three months
ending ay 30th June 2012.
Particulars April May June
Opening balance 3100 4350 5800
Cash inflow
Sales 3800 4100 5200
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Total cash inflow 3800 4100 5200
Purchases (1800) (1900) (2050)
Rent (450) (450) (450)
Salaries (300) (300) (300)
Total cash outflow (2550) (2650) (2800)
Net cash flow 1250 1450 2400
Closing balance 4350 5800 8200
Working note:
Note1
Sales
April May June
Cash Sales £4,100 £5,200 £6,000
Credit Sales(One month's credit allowed)
January Sales due in February nil nil nil
February due in March
March due in April nil nil £3,800
Total £4,100 £5,200 £9,800
Note2
Purchases(Suppliers)
Two months credit allowed
Feb due in April £1,800 £1,800 -
March due in May £1,900 £1,900
April due in June £2,050 £2,050
Total 1,800 £1,900 £2,050
Note 3
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Rent is £5,400 for the year =12months
Monthly rent is £5,400/12=£450
Interpretation:
Through the means of above cash budget exact position of cash or liquidity within the
Max Ltd has been analysed. However, positive opening balance of 3100 clearly indicates that the
sales strategies of cited firm are working in effective manner and helping the course of company
to generate desired financial outcomes. However, it is positive sign for the firm as it is operating
in such a competitive market and its strategies are paying off good dividends. Further, the
strategy employed by top level management of Max Ltd regarding providing 1 month of credit is
attracting large audience from the target market which has helped the cash inflow and maintained
the position of business in the market. Increasing sales figures in every month are showing that,
employed sales strategies are effective in nature as well as quality of products are sold to the
market by the company. Lastly, having adequate amount of cash inflow clearly indicates that
cited firm have ability to meet short term financial needs and wants in effective way and attain
long term sustainability in near future.
TASK 4: VARIANCE ANALYSIS
Part A) 4.1 Variance analysis of Yuri Cutlery budget
Particulars Budget Actual Variance
Units sold 100000 75000 (25000)
Materials 15000 22500 (7500)
Direct Labour 22500 24375 (1875)
Particulars Material (£) Labour (£)
Price/ Rate variance (4500) 3750
Usage/ Efficiency variance (3000) (5625)
Total variance (7500) (1875)
Interpretation:
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Variance in general refers to the difference between desired and actual outcomes.
However, it is important for the senior authority of every business irrespective to their sector
should undertake variance analysis as it will help in evaluating and analysing the differences
between actual and budgeted figures and if required provides potential measures to overcome the
negative variances. According to the present given case, project budgeted variance of Yuri
Cutlery has been analysed. Further, through the means of computation it has been identified that,
cited firm was unable to achieve the projected sale of 100000 unit has it had negative variance of
25000 units. This clearly indicates that the sales strategies employed by the firm are not effective
in terms of generating revenues for the business. Further, marketing and promotional tactics are
unable to influence target market due to which negative variance is sales has been generated.
Thereafter, material and direct labour negative variance of (7500) and (1875) clearly indicates
that, management is unable to allocate the funds effectively which indeed create hindrance in
making optimum utilisation of it. Further, high negative variance in both segments highlights the
inefficiency of business operations in achieving desired goals and objectives.
Furthermore, negative price/rate variance of (4500) indicates the competitiveness of
market in which Yuri Ltd operates and the demand of quality steel is high. Therefore, supplier
increases the price in different patches which affects the price of raw material for the company
and increases the negative variance. Whereas, positive variance of labour rate indicates that
employed workforce were not efficient enough in performing the given tasks and operations
effectively. Further, in case of usage variance of material negative outcome indicates that, lack of
experienced labour in Yuri Ltd caused more wastage of materials. While on the other hand, lack
of training generate adverse efficiency variance clearly indicates that Yuri Ltd have inefficient
employees.
Part B) 4.2 Operating statement
Particulars Amount in ('000)
Sales of 50000 units 2250
Prime cost
Direct material 528
Direct Labour 1375
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Variable production
overhead
245
Cost of production 2148
Fixed cost 650
Cost of goods sold 2798
profit or loss during the
period
2250-2798 -548
Budgeted figures Actual figures
Selling price 55 45
Prime cost
Direct material (5 litres) 10 11
Direct Labour (4 Hours) 20 22
Variable production
overhead
5 4.9
Cost of production 35 37.9
Fixed cost 15 13
Cost of goods sold 50 50.9
profit or loss during the
period
5 -5.9
Interpretation:
On the basis of above calculation of operating system helps in analysing the actual selling
price and cost of manufactured products by cited firm. However, present case consist of two
different types of information which includes selling price of 50000 units and cost price of 40000
units. Further, the amount of revenue generated by company over 50000 units is 2250000 and
costs incurred is around 214800. While fixed costs of 650000 enforces the firm to attain the
situation of loss with 548000.
4.3 Memorandum report
Financial reporting is a process of recording all the business operational and the financial
transaction in an appropriate manner. Every business organization prepares financial statement to
determine the business performance. Mainly there are two statements prepared by the firms that
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are profitability statement and balance sheet. Profitability statement summarize the operating
functions and measure the operational performance in terms of profit and loss. In context to
given business scenario, Mean Ltd profitability statement includes all the generated business
revenues and incurred expenditures for a specified accounting period (Bevilacqua, Ciarapicaand
Giacchetta, 2007). Managers can acquire detailed records of business operations in terms of
revenues and expenditures. Thus, it provide assistance to the managers in analysing, evaluating
and monitoring the business expenses and maintain effective control over it. This in turn, cost
can be minimize resulted in maximizing profitability. Along with it, balance sheet is the
statement of financial position that measure the financial performance of the enterprises. It is a
summarized statement of Mean Ltd assets and liabilities. Thus, through using such statement,
management can identify the cost of acquired finance sources. This in turn, Mean Ltd managers
will be able to fulfil their finance requirement at lower the cost.
On the basis of identified results, it can be reported to the managers that there is worst
business performance of Mean Ltd. Thus, it can be said that operational functions do not provide
favourable results to the Mean Ltd business as it bear a loss of 548£. The reason behind the poor
performance is Mean Ltd is offering its services to the customers at lower the selling prices. This
in turn, business generates lower the incomes and profitability. Company decides budgeted
selling price to 55£ while in actually, it sold the product at the rate of 45£. It reduce the business
earnings and the profit margin as well (Harrisonand Lock, 2004). For eliminating this variance, it
should be advised that Mean Ltd should increase the product prices to set budgeted. By
providing the services at higher rates, Mean Ltd business will be able to enhance its incomes
helps to mitigate the negative availability of profits and improve operational performance.
Along with lower the company's revenue, high production cost is another reason for
negative business return. In context to Mean Ltd., material price variance indicated that company
paid higher charges on material purchase than the budgeted prices. Mean Ltd. managers decide
budgeted price of 2£ per litre while actual material price is 2.2£ per litres. It will lead to increase
the material cost. Thus, it can be advised that Mean Ltd should search for another material
supplier who provide material at cheaper the rates without affecting the material quality.
Another, the labour time variance also impacts the Mean Ltd profits in an adverse direction as
the budgeted labour hour per unit is 4 hours while actual labour hours is 5 per unit. It may be due
to machinery breakdowns, unskilled labour and higher the idle time. Moreover, labour rate
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variance is negative as actual labour rate per hour is 5.5£ comparatively higher than set budgeted
rate of 5£. It implies that company is paying higher wages rate to the workers. This in turn, the
actual labour cost will tend to increase resulted in lower the business profits. Thus, for
eliminating this negative variances, company should improve the workers performance and their
productivity (Hill, 2003). Furthermore, machinery breakdown has to be reduced will lead to
decrease the actual labour hours and lower the labour cost. By doing this, Mean Ltd business will
be able to reduce its production cost and increase the business return to a great extent. This in
turn, the organization can achieve long term business success and future sustainability.
CONCLUSION
In conclusion to the above report it has been analysed that, management accounting plays
significance role for the managerial level people in maintaining the costs and expenses of the
firm. In context to a company, there are several costs associated with it such as people employed,
execution of operations, purchasing of raw materials etc. Further, report assist in evaluating that
the main aim of manager behind indulging absorption cost is that it helps in controlling and
managing the expenditure of the company in order to complete the operations appropriately.
Lastly, with the help of variance analysis negative and positive differences for Yuri Cutlery Ltd
has been analysed which helped in analysing different reason for the situation in which current
financial position of cited is in.
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