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Cost Accounting and Managerial Decision-Making

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This assignment delves into the significance of cost accounting within a business environment. It examines how appropriate costing systems enable managers to make informed decisions regarding pricing, production, and resource allocation. The text explores different costing methods and their impact on organizational effectiveness, highlighting the crucial role of accurate cost information in driving successful managerial outcomes.

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Management Accounting:
Costing and Budgeting

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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Classification of cost ............................................................................................................3
1.2 Different costing methods and explanation on use of same by the firm...............................3
1.3 Calculating cost using appropriate techniques......................................................................4
1.4 Analysis of cost data.............................................................................................................4
TASK 2............................................................................................................................................7
2.1 Preparation and analysis of cost reports................................................................................7
2.2 Performance indicators for identifying potential improvement............................................8
2.3 Suggestions to reduce quality enhanced value and quality ..................................................9
TASK 3............................................................................................................................................9
3.1 Purpose and nature of budget process...................................................................................9
3.2 Budgeting methods used in case study and comments on same...........................................9
3.3 Way for preparing a budget and and use of method for this purpose.................................10
3.4 Cash budget for the firm.....................................................................................................11
TASK 4..........................................................................................................................................12
4.1 Calculating variances and finding out possible causes and recommending corrective action
...................................................................................................................................................12
4.2 Preparing reconciled operating statement...........................................................................13
4.3 Reporting findings to management in accordance with responsibility center....................14
CONCLUSION..............................................................................................................................14
INDEX OF TABLES
Table 1: Trade payable budget.......................................................................................................11
Table 2: Raw material budget........................................................................................................11
Table 3: Production budget............................................................................................................12
Table 4: Sales budget.....................................................................................................................12
Table 5: Cash budget.....................................................................................................................12
Table 6: Variance calculation of May............................................................................................13
Table 7: Reconciled operating statement of May..........................................................................14
Table 8: Variance at 10% reduction in demand.............................................................................15
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INTRODUCTION
Management accounting is one of core branch of accounting that is used to measure
company performance. In this report, costs are classified on the basis of several factors and type
of costs that firm incurred is identified. Along with this, different costing methods are explained
in detail in the report. In the middle part of report budgets are prepared and their results are
interpreted in proper way. Finally, in the report variance analysis is done and comments are done
on same. In this report ways that firm can follow in order to improve its performance are also
described in detail.
TASK 1
1.1 Classification of cost
Costs can be classified on the basis of nature, function and behavior. These classifications
are given below. Behavior- On the basis of this category costs are classified a fixed, variable and semi
variable cost. Fixed cost is a cost that remain static and does not get changed. In case of
Bittern ltd fixed cost is given as £5000 per annum (Kaplan and Atkinson, 2015).
Whereas, in case of variable cost there are production and material cost. It is a cost that
keeps on changing consistently with variation in production. There is semi variable cost
in Bittern ltd which cover labor cost. Some part of this cost is fixed for the firm and
some part is variable. Hence, it can be said that costs of the firm are classified on the
basis of behavior. Function- On this basis cost is divided in to various departments that are running an
organization. Cost related to production, finance and marketing departments are included
in this category of cost.
Type- On the basis of this parameter cost are divided in to labor, material and production
expenses (DRURY, 2013). Labor cost include wages paid to employees and material cost
include cost of purchase of raw material. Hence, it can be said that these are the expenses
that are incurred by every type of organization.
1.2 Different costing methods and explanation on use of same by the firm
Different costing methods that are used by business firms are as follows.
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Job costing- This is a method in which costs are determined for each and every order
individually because each job have its own specifications. This method of costing is used
in case of building repair projects etc. Contract costing- This costing method is used for for calculating cost for large size
projects. Each contract is assumed as separate unit for costing purpose (Zimmerman and
Yahya-Zadeh, 2011). This costing method is often used for construction of brides and
building etc.
Unit cost- Bittern ltd is using unit cost method and under for per unit of product that is
produced in an organization costing is done. Under this method of costing units are
prepared and there cost is computed. Thereafter, costs are divided by the number of unit
produced. By doing so cost of per unit is computed at Bittern ltd.
1.3 Calculating cost using appropriate techniques
In order to calculate cost appropriate methods are as follows. Variable costing method- This method is also know as direct costing method and under
this technique of cost computation fixed cost are not taken in to account and only variable
cost that are incurred during the production process are considered. Bittern ltd is using
this costing system in its business.
Absorption costing- It is known as full costing methods and under this method all sort of
costs are taken in to account in order to compute cost of production for the firm (Herman,
2011). Hence, it can be said that this method is inverse of variable costing method.
If we compare both methods then it can be said that in absorption costing all sort of costs
are considered but in variable costing system all costs are not taken in to account. Hence, in
terms of profit measurement it can be said that absorption costing system reveal actual profit
earned by the company.
1.4 Analysis of cost data
As per scenario given, Bittern Ltd sale a per unit of its product at a price of £25 per unit.
Earlier, it use a variable costing for cost computation and now it decided to evaluate the system
and to compare same with an absorption costing system (Gow, Ormazabal and Taylor, 2010).
The computaiton of Bittern’s profits in constant-price-level terms for a three-year tenure using
variable costing system and full-cost absorption costing system is given below.

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1) Stable production, sales and inventory
Table 1: Calculation of profitability by variable costing
Variable costing t1 t2 t3
Sales 25000 25000 25000
Production material 10000 10000 10000
Distribution costs 1000 1000 1000
Labour (Variable costs) 2000 2000 2000
Total costs 13000 13000 13000
Profitability 12000 12000 12000
Cost per unit 13 13 13
Closing stock (Units) 100 100 100
Closing stock (in value) 1300 1300 1300
Table 2: Calculation of profitability by absorption costing
Absorption costing t1 t2 t3
Sales 25000 25000 25000
Production material 10000 10000 10000
Distribution costs 1000 1000 1000
Labour 7000 7000 7000
Overheads 4000 4000 4000
Total costs 22000 22000 22000
Profitability 3000 3000 3000
Cost per unit 22 22 22
Closing stock (Units) 100 100 100
Closing stock (in value) 2200 2200 2200
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2) Stable sales but fluctuating production, sales and inventory
Table 3: Calculation of profitability by variable costing
Variable costing t1 t2 t3
Sales 20000 20000 20000
Production material 15000 8000 7000
Distribution costs 1000 1000 1000
Labour 3000 1600 1400
Total costs 19000 10600 9400
Profitability 1000 9400 10600
Cost per unit 12.6666666667 13.25 13.4285714286
Closing stock (Units) 600 400 100
Closing stock (in value) 7600 5300 1342.8571428572
Table 4: Calculation of profitability by absorption costing
Absorption costing t1 t2 t3
Sales 20000 20000 20000
Production material 15000 8000 7000
Distribution costs 1000 1000 1000
Labour 8000 6600 6400
Oveheads 4000 4000 4000
Total costs 28000 19600 18400
Profitability -8000 400 1600
Cost per unit 18.66666666 24.5 26.28571428
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67 57
Closing stock (Units) 600 400 100
Closing stock (in value) 11200 9800
2628.571428
5714
3) Stable production but fluctuating sales and inventory
Table 5: Calculation of profitability by variable costing
Variable costing t1 t2 t3
Sales 10000 24000 26000
Production material 10000 10000 10000
Distribution costs 600 400 100
Labour 2000 2000 2000
Total costs 12600 12400 12100
Profitability -2600 11600 13900
Cost per unit 12.6 12.4 12.1
Closing stock (Units) 600 400 100
Closing stock (in value) 7560 4960 1210
Table 6: Calculation of profitability by absorption costing
Absorption costing t1 t2 t3
Sales 10000 24000 26000
Production material 10000 10000 10000
Distribution costs 600 400 100
Labour 7000 7000 7000
Oveheads 4000 4000 4000

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Total costs 21600 21400 21100
Profitability -11600 2600 4900
Cost per unit 21.6 21.4 21.1
Closing stock (Units) 600 400 100
Closing stock (in value) 12960 8560 2110
TASK 2
Note: (Presentation is available separately)
2.1 Preparation and analysis of cost reports
Following is the process for preparing and analyzing cost. Gathering information- In this stage Tesco managers will collect data related to sales
and cost earlier in previous year (Zang, 2011). This will help in preparation of cost
reports in legitimate way and will be used for making business decisions. Itemized tangible cost- In his stage table is prepared in which all tangible costs are listed.
It help managers in keeping record related to actual expenses that were made by the firm
in specific time period. Categorizing intangible cost- In this stage data related to all intangible expenses is
collected like expenses made to in relation to develop goodwill of the business. Inclusion
of these costs will help in computing actual product cost and will also help managers in
determining margin percentage on produced units. Presenting cost in systematic way- In this stage all tangible and intangible costs are
included in single table in order to get overview of entire cost that is incurred by firm in
its business. Hence, this table will be very helpful to managers in making cost related
decisions. Costing benefit analysis- This analysis will help managers of Tesco in identifying the
benefit that firm is getting on the cost that it is incurred in its business. By doing so firm
will come to know about the return that it is earning on the incurred cost.
Calculating the payback time period- In order to analyze cost time period will be
identified within which firm will be able to recover cost incurred and will start earning
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profit (Bebbington, Unerman, and O'Dwyer, 2014). Hence, these are the steps that will
be followed in order to compute cost and analyzing same.
2.2 Performance indicators for identifying potential improvement
Performance indicators to identify areas of potential improvement are as follows. Profitability/sales- This is one of important performance indicator and by using this firm
performance is measures. If relative to previous year firm make good profit then it is
assumed that firm perform better. If inverse happens then it is assumed that firm give
worst performance. In such case profit or sales is identified as area where potential
improvement is required. Customer retention- Today most of firms are paying attention on retaining old customers
and creating new customer's. This act as performance indicator because if firm get
success in retaining customer's then it means that firm is performing good or vice verse
(Garrison and et.al., 2010). If firm customer's base is reduced consistently then it is
assumed as area of potential improvement for the firm.
Cost reduction- It is a performance indicator that is used by most of the companies in
their business irrespective of their size. By using this parameter firm profit making
capacity and management efficiency is measured. Hence, this performance indicator to
great extent help in identifying areas of potential improvement.
2.3 Suggestions to reduce quality enhanced value and quality
Following are the suggestions that can be used by Tesco to reduce its cost and enhanced
value as well as service quality. Cost reduction- Under this firm will focus on reducing its product cost and in this regard
firm can purchase product in bulk. By doing so it will get huge discount from firms in
product purchase. Hence, by doing so cost of goods can be reduced to great extent. Review of transportation route- Under this firm will evaluate transport cost and will
identify shorter routes to procure items from the suppliers (Ward, 2012). By doing so it
can reduce its cost and can enhance revenue.
Establishing multiple counters- In order to improve service quality firm can increase
number of counters at its premises. By doing so it can provide service to the customer's
on time and can solve problem of long queue this will also enhance value of its service.
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TASK 3
3.1 Purpose and nature of budget process
The main purpose of budget it to keep expenses in control. In budget expenses amount is
determined earlier and managers try to keep expenses in control. By doing so expenses are
incurred within determined limit by the managers and firm earn good profit in its business.
Budge is also prepared to motivate employees to work hard. In order to achieve target objectives
of each employee is determined and by doing so they are motivated to work hard for benefit of
the company (Dechow, Myers and Shakespeare, 2010). Collection of data is very important
characteristic of budget process. This is first stage that is followed for preparing a budget and
under this past budget and their performance are reviewed and on that basis new budget is
prepared for the firm. Determining standards is another important characteristic of the budget
process and under this figures of same are acting as standard and same are used to measure
performance of organization. By comparing actual values with budget values it is identified
whether firm give good or worst performance.
3.2 Budgeting methods used in case study and comments on same
In the given case study cash budget and operating budget is prepared by the managers.
All budgets other then cash budget are included in the operating budget. There is a need to
prepare cash budget for the firm because by using this budget revenue is projected and amount
within which each expense must be made is determined Hence, by using this budget managers
practically control expenses of the firm and increase its profitability (Grabski, Leech and
Schmidt, 2011). There is strong need to prepare operating budget because by doing so target for
different business activities can be determined like raw materiel procurement etc. Hence,
preparation of operating budget helps in managing core business activities. It is advised that
Antonio ltd must prepare both type of budget because by doing so it can control its expenses and
can manage business activities effectively.
3.3 Way for preparing a budget and and use of method for this purpose
In order to prepare a budget old budgets are reviewed and on that basis budget for present
year is prepared by the firm. In this regard forecasting methods are used by the managers to
forecast figures for the budget.

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Table 7: Trade payable budget
Months Jul Aug Sep Oct Nov Dec
Opening trade payable 0 3200 7200 12800 18400 24000
Add-Payable 6000 7200 8800 9600 10400 11600
6000 10400 16000 22400 28800 35600
Less: Cash receivable trade 2800 3200 3200 4000 4800 5200
Closing trade payable 3200 7200 12800 18400 24000 30400
Table 8: Raw material budget
Months May Jun Jul Aug Sep Oct Nov Dec Jan
Units to be
produced 350 400 500 600 600 700 750 750 750
Raw material
needed in each
unit 8 8 8 8 8 8 8 8 8
2800 3200 4000 4800 4800 5600 6000 6000 6000
Less-beginning
raw material on
hand 2800 3200 4000 4800 4800 5600 6000 6000
Total raw material
in nine months 2800 6000 7200 8800 9600 10400 11600 12000 12000
Table 9: Production budget
May Jun Jul Aug Sep Oct Nov Dec Jan
Budgeted sales
units 350 400 400 500 600 650 700 800 750
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Add: Planned
ending units 50 50 53 56 58 60 62 65 68
Less: Begining
units 20 30 20 33 23 35 25 37 28
Planned production
units 380 420 433 523 635 675 737 828 790
Table 10: Sales budget
Months May Jun Jul Aug Sep Oct Nov Dec Jan
Units 350 400 400 500 600 650 700 800 750
Sales price/unit 20 20 20 20 20 20 20 20 20
Total sales 7000 8000 8000 10000
1200
0 13000 14000 16000 15000
It can be observed from the figures given above that sales of the firm is increasing with
passage of time period. Consequently, production and raw material consumption by the firm also
get increased. Trade payable amount is increasing sharply because firm is purchasing entire raw
material on credit basis. Hence, it is matter of concern for Antonio ltd.
3.4 Cash budget for the firm
Table 11: Cash budget
Months May Jun Jul Aug Sep Oct Nov Dec Jan
Opening balance 3460 4460 6300 10700 10100 8400 7780 10880
Sales 7000 8000 8000 10000 12000 13000 14000 16000 15000
Total revenue (A) 7000 11460 12460 16300 22700 23100 22400 23780 25880
Expenses
Raw material 2800 3200 0 4800 4800 5600 6000 6000
Advertisement 1000 1500
Other production 2100 2400 0 3600 3600 4200 4500 4500 4500
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expenses including
labor
Production
overhead 1440 1800 1960 2000 2000 2000 2320 2400 2400
Overhead
Purchase of new
plant 2200 2200 2200
Total expenses 3540 7000 6160 5600 12600 14700 14620 12900 12900
Deficit/Surplus 3460 4460 6300 10700 10100 8400 7780 10880 12980
Interpretation
It can be observed from the figures given above that sales of the firm is increasing
consistently. Along with this expenses of the firm are also increased. Hence, it can be said that
firm is expecting growth in its business. Firm cash balance is also increasing consistently on
month on month basis. Hence, it can be said that firm is giving good performance in its
business.
TASK 4
4.1 Calculating variances and finding out possible causes and recommending corrective action
Table 12: Variance calculation of May
Particulars E Actual Variance
Nature of
variance
Per unit Total Per unit Total
Sales (A) 4/unit 14000 3.95/unit 13820 -180 Adverse
Cost of material(a) 2.4 per kg 3360 2.4 per kg -3420 60 Adverse
Labor charges (b) 8 per hour 2800 7.80 /hour -2690 -110 Favorable
Fixed overheads (c) 4800 -4900 100 Adverse
(a + b + c) Total
Cost 10960 11010 50 Adverse
Profit (A-Total
cost) 3040 2810 -230 Adverse

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In this table calculation of variance is done. Variance in performance is identified by
comparing budgeted and actual figures of profit, sales and other related expenses. The table
given above is revealing that sales revenue of Toscanini Ltd is less then projected figures. Due to
this reason there is adverse variance comes in existence. It was expected to 14000 amount of
units will be produced but actual production is 13820 which is relatively low. On other hand,
cost of material was expected to be remain at 3360 but it increased to 3420 and this reflects that
firm does not have any control on its expenses. Apart from this, labour charges or wages has
positive variance of 100 and it can be said that here firm perform well. Along with this, negative
variance is observed in case profitability and cost by 230 and 50 respectively.
The major factor that is responsible for variation in manufacturing is poor management
by managers at the workplace (Bamber, Jiang and Wang, 2010). It can be said that human
resource department of an organisation does not give emphasis on skills and enhancement of
knowledge of its workforce. This mistake to large extent affect productivity of an organization.
Apart from this, improper allocation of financial resources is one of main factor that is
responsible for higher deviation in actual and expected figures. Addition to this, poor marketing
by the firm may be another important reason that may be responsible behind low sales turnover.
Hence, it can be said that proper training must be given to the employees so that their efficiency
level can improved to great extent.
4.2 Preparing reconciled operating statement
The reconciled operating statement is given below and in preparing same budgeted profit,
variance in sales and cost are taken in to account. It is clear from the figures that budgeted profit
was valued at 3040 but due to deviation in sales ad cost rate of return has been decreased to
2810. It shows that Toscanini Ltd must make efforts to cut down cost of production by preparing
and executing effective strategies at ground level (Dyreng, Hanlon and Maydew, 2010). The
reconciled operating statement is revealing that in case of labours there is a favourable variance
and it is a good for company. Managers of firm must review reconciled statement for creating
and executing business strategies for reducing cost of production to a large extent. By reviewing
reconcile statement firm will comes to know about the areas where it needs to make
improvement in its business. Business strategy will be formulated in order to convert firm weak
point in to strength. This will help firm in eliminating barriers that are preventing firm from
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achieving its business objectives. Managers of Toscanini Ltd can also take help of experts to
resolve problems that are related to actual and estimated figures.
Table 13: Reconciled operating statement of May
Particulars Amount (£)
Budgeted profit 3040
Less: Variance of sales -180
Less: Variance of cost -60
Add: Labor 110
Less: Overhead -100
Actual profit 2810
4.3 Reporting findings to management in accordance with responsibility center
Table 14: Variance at 10% reduction in demand
Particulars E Actual Variance
Nature
of
variance
Per unit Total Per unit Total
Sales (A) 4/unit 14400 3.95/unit 14215 -185 Adverse
Cost of material(a) 2.4 per kg 3456 2.4 per kg 3518 -62 Adverse
Labor charges (b) 8 per hour 2880
7.80
/hour 2767 113 Favorable
Fixed overheads (c) 4800 4900 -100 Adverse
(a + b + c) Total
Cost 11136 11185 -49 Adverse
Profit (A-Total cost) 3264 3030 234 Adverse
It is clear that there were many reasons that were responsible for negative variance and
corporation must take necessary actions to convert weakness in to strength. All departments
whether it is finance, production and marketing as well as HR must fulfil their responsibilities by
putting active efforts. Finance manager of Toscanini Ltd must give top priority to the cost
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reduction in order to control cost in an organisation (What is a responsibility center, 2016). In
same way, human resource manager must lay down special emphasis on development of
employees that are working in an organization. In this regard on the job training can be given to
the employees and by doing son their efficiency level can be improved to great extent. Hence,
these are some of ways that can be adopted to improve firm performance.
CONCLUSION
On the basis of above discussion it is concluded that management accounting is very
important disciple and by using same performance of an organization can be improved to great
extent. It is also concluded that managers must determined realistic value in the budget because
by doing so targets can be achieved properly. If there will be unrealistic value in the budget then
managers will make themselves responsible for negative variance. In order to prepare budget in
proper way it is very important to review budget. It is also concluded that firms must use
appropriate costing system at the workplace because by doing so costing can be done in
appropriate way by the managers.
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