Financial Management Analysis

This assignment delves into the field of financial management, covering key aspects such as cost accounting, budgetary control, and financial statement analysis. Students are expected to demonstrate their understanding of these concepts through a critical review of provided research papers and online resources. The focus is on applying theoretical knowledge to practical scenarios in business settings.

MANAGEMENT ACCOUNTING
COSTING AND BUDGETING
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Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1.1.........................................................................................................................................1
P1.2.........................................................................................................................................2
P1.3.........................................................................................................................................3
P1.4.........................................................................................................................................5
TASK 2............................................................................................................................................6
P2.1.........................................................................................................................................6
P2.2.........................................................................................................................................9
P2.3.........................................................................................................................................9
TASK 3..........................................................................................................................................10
3.1.........................................................................................................................................10
P3.2.......................................................................................................................................11
P3.3.......................................................................................................................................11
P3.4.......................................................................................................................................13
TASK 4..........................................................................................................................................16
P4.1.......................................................................................................................................16
P4.2.......................................................................................................................................19
P4.3.......................................................................................................................................19
CONCLUSION..............................................................................................................................20
REFERENCES..............................................................................................................................21
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List of tables
Table 1: JOB COST SHEET FOR JOB NO.444.............................................................................3
Table 2: Cost Sheet for Jeffrey & Son's...........................................................................................6
Table 3: Production Budget..........................................................................................................11
Table 4: Material Budget...............................................................................................................12
Table 5: Cash Budget for Jeffrey & Son's.....................................................................................13
Table 6: Operating Statement of Jeffrey & Son's..........................................................................18
1

INTRODUCTION
Management accounting plays a very important role in the growth of the business for the
company. It assists the managers to effectively manage the business operations It mainly
includes the financial data analysis techniques which are essential for controlling the cost
incurred (Ahmed, 2010). Jeffrey & Son's is a manufacturing unit and is dealing in the production
of wide range of products which are called Exquisite. In this report, concepts related to
managerial accounting have been studied and analysed. Apart from that the study also focuses on
reducing the cost of production, increase the business income and take efficient decisions which
assist the organization to rise in the market. Different kind of approaches such as budgeting, cost
allocation, variance etc will be taken into consideration.
TASK 1
P1.1
The costs can be divided into different types of elements:
 Elements- In this, mainly three types of cost elements are considered which includes
material, labour and overhead cost. For Jeffrey & Sons, direct material cost includes the
price of raw material which is used for the production of goods. Further, direct labour is
associated with the expenditure made to pay the workers who are responsible for
production (Arai, Kitada and Oura, 2013). In addition to this, the other expenses which
directly can be attributed with the production process are known as the direct cost.
Further, the expenditure invested on buying tools and equipment are also included in the
direct expenses.
 Function- On the basis of function the cost can be divided into different categories such
as administration, selling and distribution. There are some overheads which can be
included within the business which includes factory rent, power, productive or
unproductive wages, power, lighting etc (Asongu, 2013). Along with that there is also
administration expenses such as staff welfare, stationery, wages, salary etc. Moreover, the
efforts taken by the company for selling the products are involved in the selling and
distribution overhead. These expenses include advertisement, marketing and promotion
means which incur huge amount of cost for the company. Expenses related to production
are associated with the manufacturing process of Jeffrey & Son’s. Depreciation, factory
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rent, wages etc comes into the above category. The non-production expenditure is also
concerned with the complete business procedures and processes (DRURY, 2013).
 Nature- Under this, the cost can be classified in two ways- direct and indirect cost. The
expenditure which is charged to a specific cost object such as production or certain
department is called as the direct cost (Assibey, Bokpin and Twerefou, 2012). It includes
the prices of raw material, wages, moulds etc. Although the indirect cost is not confined
to the category of specified object cost. Direct machine and labor hours can be taken as
the basis for classification. Here expenses related to printing, advertisement, postage,
marketing etc are recorded (Kaplan and Atkinson, 2015).
 Behaviour- In this the fixed, variable and semi-variable cost are included. The
expenditure which has a consistent nature without any change in the production are
known as the fixed cost (Bardy 2010). It includes building rent, insurance and watchman
salary. However, variable cost is directly related to the amount of production done and
the changes are held according to it. These are mainly cost of raw material and wages
given to the labour.
P1.2
Cost sheet is mainly prepared in the company to evaluate the outcome in terms of money
for an accounting year. It is formed according to the requirement of management. The
information included in cost sheet comprises of per unit cost and total price for the existing year
as well as of the preceding period (Broadbent and Cullen 2012). The data from the financial
statement is used to prepare the cost sheet. Here a job cost sheet is presented in relation to Jeffrey
& Son’s :
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Table 1: Job Cost Sheet
Details Total cost
Direct expenditure:
Material- 50Kg*4£ per kg * 200units
= 40000£
Labour cost-
 Hours- 30per unit*200units
= 6000 hours
 Cost- 6000hours*9£ per
hour= 54000£
94000
Overheads:
Fixed- 80000£/ 20000hours*6000hours
=24000£
Variable- 6£ per hour*6000hours
=36000£
60000
Total Cost 154000
Unit per cost- 154000£/200units
=770£
770£ cost per unit
P1.3
Absorption costing refers to the managerial accounting method which includes the cost of
all expenses related to the manufacturing of specific products (Budgetary control. 2011). It
involves the use of direct cost and overhead cost associated with the production of goods.
3

Production Department
Allocation Machine X Machine Y Assembly 1 Stores Mainte
nance
Total
Indirect wages
& supervision
As per the
question
1,00,000 99,500 92,500 10,000 60,000 3,62,000
Indirect
material
As per the
question
1,00,000 1,00,000 40,000 4,000 9,000 2,53,000
Overhead
expenses
Area
engaged
10,000 5,000 15,000 15,000 5,000 50,000
Office Rent Area
engaged
20,000 10,000 30,000 30,000 10,000 1,00,000
Insurance on
machinery
Net Asset
Value
7947.02 4966.89 993.38 496.69 596.03 15,000
Dep. Net Asset
Value
7947.02 49668.87 9933.77 4966.89 5960.26 1,50,000
Insurance on
building
Area
defined
5000 2500 7500 7500 250 25000
Salaries As per the
number of
employees
24000 16000 24000 8000 8000 80000
Total 346417 287636 219927 79964 101056 1035000
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Machine Shop X Machine Shop Y Assembly Total (£)
Distribution 346417 287636 219927
Store 39982 29987 9995 79964
Maintenance 48506.88 32337.92 20211.2 101056
Total Cost 434905.88 349960.92 250133.2
Absorption of expenses = for every production department
The rate of overhead absorption = Total overhead / machine hours
X division Y division Assembly
434905.88 / 80000 349960.92 / 60000 250133.2 / 10000
Total Cost 5.44£ 5.83£ 25.01£
Overhead calculation:
Total overhead cost Total Cost
= (0.8*5.44£) + (5.83* 0.6) + (25.01* 0.1)
= 4.35£ + 3.50£ + 2.50£
= 10.35£
= Material cost+ Labour cost + Overhead cost
= 8£ + 15£ + 1.35£
= 33.35£
P1.4
For this, overhead absorption rate using direct labour hours is used in Jeffrey & Son's.
Calculation of Overhead absorption rate = Total overhead / Total labour hours
Machine X Machine Y Assembly
434905.88£ / 200000 349960.92 / 150000 250133.2 / 200000
Labour Hours 2.17£ 2.33£ 1.25£
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Total Overhead cost Total Product cost
(2.17£*2) + (2.33£*1.5) + (1.25£*1)
4.34£ + 3.50£ + 1.25£
9.09£
Material + Labour + overhead
8£ + 15£ + 9.09£
32.09£
Interpretation:
On the basis of the machine hours, overhead cost related to three machines are as follows:
Machine X = 5.44£
Machine Y = 5.83£
Assembly = 25.01£
On the basis of labour hour apportion the overhead cost for different departments are as
follows:
 2.14£
 2.3£
 1.25£
It has to be noticed that the total overhead cost allocated for the product is 1035£ and 9.09£.
It is on the basis of machine and labour hours. For each of the case the total cost of products are
33.35£ and 32.09£. It can be concluded that the total cost is higher by using machine hours in the
organization. Thus, Jeffrey & Son's must adopt labour hour basis for producing goods as the total
cost for the product is reduced to 32.09£. This cost is lower as compared to machine hour basis.
It can be said that using labour hours is beneficial for the company in earning more profit. .
TASK 2
P2.1
The cost sheet is prepared as per the scenario given for Jeffrey & Son's to produce 1900
units. It identifies the total cost and cost per unit related to the production process. The variance
analysis is also being performed in order to identify the difference between budgeted and the
actual figures (Correia, C. and et.al., 2012).
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Table 2: Cost Sheet
Total budgeted output (2000
Units) Total Actual Output ( 1900 Units)
Details Per unit cost Total cost Per unit cost Total cost
Labour 9 18,000 10 19,000
Material 12 24,000 12 22800
Fixed Overhead 15,000 15,000
Electricity 8,000 7,625
Maintenance 5,000 4,800
Total 35 70,000 36.43 69,225
Working notes for the above table:
Details Calculation Amount
Material Cost 24000£ / 2000 units *
1900units
22800£
Labour cost 10£ per unit * 1900units 19000£
Variable cost per unit 8000£ - 5000£ / 2000 units –
1200units
3000£/800 Units
3.75 per unit
Fixed charges 8000£ - (3.75£*2000 Units) 500£
Variable electricity charges 3.75£*1900 Units 7125£
Total electricity charges 7125£ + 500£ 7625£
Maintenance cost 5000£ - (1000£/500 units*100
Units)
4800£
Cost per unit 69225£/1900 Units 36.43£
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Variance Analysis:
Details Budgeted cost Actual cost Variance
Labour 18,000 19,000 -1000
Electricity 8,000 7625 375
Material 24000 22800 1200
Maintenance 5000 4800 200
Fixed overhead 15000 15000 0
Total 70000 69225 775
Interpretation:
It has been found that the company has to bear less than the decided budget for material
variance. As from the above analysis, it has been found that material variance is zero because the
cost of material was consistent with 12£ per unit. But at the same time, total labour cost was
increased to 1000£ because of the higher actual cost of the product. Further, it gave rise to higher
labour rate which is 10£ for per unit. However, with the pace of time electricity cost is being
decreased to 7625£. For the production process, the budgeted cost was fixed to 8000£. It has
resulted into positive variance and it is being raised to 375£. Hence it can be said that
maintenance cost is impacted because of the lower production. This has decreased with the
variance to 200£ (Drake and Fabozzi, 2012). Further, it is stated that fixed cost remains constant
and do not get changed with the level of production. This concludes that the fixed cost variance
do not get affected from either condition if the company produces 2000 units or 1900 units. This
states that the labour cost and rate, material cost variances are the major elements which have a
high impact on the company towards the negative direction. Moreover, it affects the profitability
of the business to a higher extent. Thus, for this Jeffrey & Son's company must search for
different alternatives which can assist them in reducing their negative impacts.
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P2.2
In Jeffrey & Son's, they use different types of performance indicators which assist them
to evaluate potential improvements in the company. The following tools are used for identifying
performance:
 Business sales- It is an efficient tool used to evaluate performance of the organization.
The increasing sales indicate that the company is enhancing its productivity and earning
more profits. With the increase in turnover, the firm can be improve its performance at
the higher extent (Gitman, Joehnk and Billingsley, 2013). This can be ensured by
providing the customers with high quality products at the adequate prices. Further,
Jeffrey & Son's must use effective advertising, sales promotion and after sales services to
the customers.
 Business profitability- It is one of the most effective methods used to identify the
performance of company. It determines the clear view as higher the profit refers to
increase in the performance of the firm. For this, the organization prepares financial
statement which help to define the business operational results. Further, it also assist the
company to identify the areas which gives higher returns in terms of sales and profit and
make provisions to reduce the cost and earn maximum revenue (Iazzolino, Laise and
Marraro, 2012).
 Business position- The performance of the organization can also be evaluated by
comparing its business position with the other competitors. It can be done by comparing
on the basis of total sales and profit of each industry. The higher contribution of the
company states the performance of the firm and vice-versa (Legutko and Klingler, 2011).
Further, customer feedback also helps in checking the satisfaction level of the customers
in regard to company's products. This also assists in analysing the performance of the
organization.
P2.3
Every business is established to earn maximum profit and grow in the market. For this it
requires to reduce the cost of production, enhancing the value and maintain the quality for
achieving the goals of the company in an efficient manner. It becomes crucial for Jeffrey & Son's
to use several measures to reduce the cost and get higher yield. For this, the company must
reduce the business cost by using better and upgraded technology, cutting down the unnecessary
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expenses and also utilising the resources to the maximum (Cost and Management Accounting,
2013). Further, the firm must maintain its production as higher it would be lower will be its cost
per unit. To carry out the production process, the company must allocate the sources of getting
raw material where it will get goods at cheaper price with high quality. Moreover, to produce
with high efficiency it is important to appoint skilled and qualified employees at adequate wage
rate so as to decrease the labour payments. The company's value can be enhanced by increasing
the sales and profitability of the firm (Robb and Woodyard, 2011). It should pay good returns to
the shareholder so that the firm's value in the market can be increased.
Moreover, for the company large market share, competitive advantage and business
expansion also contributes in the development of business value as a whole. Further, competitive
advantage can be attained by providing the customers with range of products and services at low
price than the competitors . This will help to attract large number of people to the firm. Jeffrey &
Sons can create its good market image in the market by satisfying the customers to the
maximum. Moreover, with more business profitability and strong financial position assist to
increase the value of the company in the market (Vanderbeck, 2012). Further, for enhancing the
quality of products the company must use updated technology which will assist in getting high
yield of products in minimum time period. All the factors will affect the Jeffrey & Son's in a
positive manner which will help it to occupy wide range of market. This will help to grow and
develop at higher extent in the future.
TASK 3
3.1
Budgeting is the process related with the estimation. It estimates the expenses and income
related to the future period. Managers at Jeffrey & Son's company, predicts the future revenues
and expenses related to the business. These will be held to produce goods. The main purpose of
the firm to make budget is to compare between the actual figures and estimated one which assist
in defining the lacking points. Its objective is to determine the business variances and eradicate
the adverse variance which can have a negative impact on the operations of company (Ahmed,
2010). Further, it aids the managers to take efficient business decisions to remove the
compliances which can occur in future. Moreover, the amount to be invested on purchasing raw
material, equipment etc, has to be determined so that the company do not exceed the limit in its
10

expenditure. This will help to control the cost and will be easy in monitoring the expenses.
Further, there are several kinds of budgets which are prepared in the organization which includes
sales, purchase, production and cash budgets. The main purpose behind it is to make effective
decisions and reduce the cost in the firm. It will also eliminate the negatives variances from the
company.
The operations team at Jeffrey & Sons are required to estimate the sales and income for the
business. This will assist them to estimate cash inflow and outflow of the firm. Further, cash
outflows can be taken into account by considering the expenditures made on the purchases as
well as on the operational ones which include labour wages, staff salary and other capital
investment. The managers of the company can recognize the cash balances through deducting the
payments from the inflows (Arai, Kitada and Oura, 2013). It may result in surplus money or
deficit. If the firm earns more profit than it results in surplus money and vice versa. Further, the
cash balance must be added in initial cash balance for determining the end amount.
P3.2
In the present situation, Jeffrey & Son's is preparing the budget following the incremental
budgeting system. But it is advisable for the company to formulate the budget through zero based
budgeting system as it helps to overcome the incremental budgeting drawback. Further, the
advantage of this method is that the budget is prepared for each period considering the market
changes. In the above method, the management performs the function of identifying the business
activities are to be performed in future period. Cash inflows are allocated for the functions which
can fulfil the requirements of the business. Further, optimum utilization of resources will assist
the company to attain maximum profits out of it (Assibey, Bokpin and Twerefou, 2012).
Moreover, the firm can analyse its different alternatives and select which will be best for the
company. Through this, Jeffrey & Son's company can allocate its resources in an efficient
manner which will reduce the overall cost of the production. However, it will result in high
business profitability and growth.
P3.3
The production budget defines the volume of goods which an organization has to
produce. Further, the production budget for Jeffrey & Son's is prepared below:
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Table 3: Production Budget
Details 1 2 3
Sales 1,05,000 90,000 1,05,000
(-): Opening Stock 11,000 13,500 15,750
94,000 76,500 89,250
(+): Closing stock 13,500 15,750 16,500
Total Production 1,07,500 92,250 1,05,750
Working notes for the above table:
 Closing stock = Required to be equal to 15% of the next year sales
Month Details Closing stock
July 90000 units * 15% 13500 units
August 105000Units * 15% 15750 units
September 110000Units * 15% 16500 units
Material purchase budget:
The budget has been prepared to discuss the volume of raw materials needed to produce
the finished goods.
Table 4: Material Budget
Material Require (2 per kg) 2,15,000 1,84,500 2,11,500
(-) Opening stock 52,000 46,125 52,875
Total 1,63,000 1,39,500 1,59,000
(+) Closing stock 46,125 52,875 54,250
Purchase 2,09,125 1,91,250 2,12,875
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Working notes:
Material required = Production * material required per unit
Month Calculation Amt
July 107500 * 2 215000 kg
August 92250 * 2 184500 kg
Sept 105750 * 2 211500 kg
Closing stock = required to be 25% of the next month requirements
Month Calculation Amt
July 92250 Units*2 Kg*25% 46125 Kg
August 105750 units*2kg *25% 52875 Kg
Sept 108500 Units*2Kg*25% 54250 Kg
P3.4
Cash budget is considered to be the combination of estimated and forecasted cash inflows
and outflows for the long run. In other words it is mainly a plan for the expected cash receipts
and disbursement during the period (Budgetary control. 2011). It includes revenue collected,
expenses paid, loan receipts and payments.
Table 5: Cash Budget
Details July August September
Cash balance 16,000 44,031 67,993
Cash Receipts
Cash sales 9,00,000 8,21,250 8,64,000
Total cash Income 9,16,000 8,65,281 9,31,993
Cash Expenditures
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Material Purchase 3,65,969 3,34,688 3,72,531
Direct wages 3,22,500 2,76,750 3,17,250
Variable overhead 1,08,500 98,350 1,00,350
Fixed Overhead 75,000 87,500 87,500
Total cash expenses 8,71,969 7,97,288 8,77,631
Cash balance 44,031 67,993 54,362
Working notes for determining sales:
May June July Aug Sept
No of units 95,000 1,10,000 1,05,000 90,000 1,05,000
Price of sales 9 9 9 9 9
Total sales 8,55,000 9,90,000 9,45,000 8,10,000 9,45,000
60% in the
same month 5,13,000 5,94,000 5,67,000 4,86,000 5,67,000
25% in the
following
month 2,13,750 2,47,500 2,36,250 2,02,500 2,36,250
10% after two
months 85,500 99,000 94,500 81,000 94,500
5% bad debs 42,750 49,500 47,250 40,500 47,250
14

Further Sales for three months
July Aug Sept
60% of the monthly sales 5,67,000 4,86,000 5,67,000
25% of previous sales 2,47,500 2,36,250 2,02,500
10% of Sales before two
months 85,500 99,000 94,500
Total 900000 821250 864000
Details July August September
Purchase of raw
material
209125kg *1.75
= 365969
191250kg *1.75
=334688
212875kg *1.75
=372531
Labour expenditures 107500 * 3
=322500
92250 * 3
= 276750
105750 * 3
=317250
Variable Overhead
June July August September
Units 110000 107500 92250 105750
Variable cost per
unit 1 1 1 1
Total variable
overhead 110000 107500 92250 105750
60% in the same
month 66,000 64,500 55,350 63,450
40% in the next
month 44,000 43,000 36,900 42,300
Variable overhead for three months
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July August September
60% of the monthly
overhead 64500 55350 63450
40% of the previous
year overhead 44000 43000 36900
Total variable
overhead 108500 98350 100350
From the above tables determining the cash budget can be concluded that for the
subsequent months, Jeffrey & Son's is possessing positive cash balance for end of the accounting
period.
TASK 4
P4.1
For Jeffrey & Son's, the calculation of budgeted cost for 4000 units is been
determined under:
Details Cost per unit Budgeted
Sales (A) 4 16,000
Material 0.96 3,840
Labour 0.8 3,200
Fixed Overhead 4,800
Total Cost (B) 2.96 11,840
Profit (A - B) 1.04 4160
Working Notes:
Particulars Calculation Final Amount
Sales 4000 * 4£ 16000£
Material cost 0.4kg*2.40£*4000 3840£
Labour cost 8£*6/60*4000 3200£
16

Fixed overhead Remains fixed 4800£
Variance calculation
Details Budgeted Fixed Actual
Sales 16,000 14,000 13,820
Material 3,840 3,360 3,420
Labour 3,200 2,800 2,690
Fixed overhead 4,800 4,800 4,900
Profit 4,160 3,040 2,810
Sales Variance
Details Range Variance
Sales volume variance ( 4,160 – 3,040) 1,120 (A)
Sales price variance ( 14,000 – 13,820) 180 (A)
Details Formula Calculation Net variance
Material price
variance
Actual
Quantity*(Standard
Price- Actual Price)
1425(2.4£ - 2.4£) Zero
Material usage
variance
(Standard Quantity-
Actual
Quantity)*Standard
Price
[( 3500 *0.4)-(1425)*
(2.40)]
60(Adverse)
Total 60 (Adverse)
Labour Variance
17

Details Variance Net variance
Labour rate
variance
[(8£-7.8£)*350] 70 (f)
Labour efficiency
variance
[(3500*0.1)-(345)]*8£ 40(f)
Fixed overhead variance
Details Basis Variance Net variance
Budgeted fixed
production overhead
4800
Actual fixed
overhead
4900
Fixed overhead
expenditure variance
Budgeted -Actual 4800 - 4900 100 (A)
Interpretation and reasons for variances
From the above analysis, it indicates that sales amount is having negative variance with
2180£. The main reason behind this may be the decreasing cost of per unit sales. It is equal to
3.94£. The total sales volume has also been decreased to 3500 units. In order to overcome the
variances, the company must decrease the per unit sale price of the product. In addition to this,
the organization must adopt effective advertising and marketing techniques which will help to
promote its goods to wider range of people. As the number of units decreased it resulted in
increase of per unit material cost by 0.97£. The budgeted and actual quantity for 3500 units is
1400 kg and 1425 kg.
Further the material cost variance calculated is 420£. It is advised that Jeffrey & Son's
must purchase there raw material from other sources which provide them with less price and
high quality. Moreover, the value for labour cost variance and overhead variance have been
identified as 510£ and 100£. The labour per unit hour is 400. But the actual labour hours which
took place were only 345 hours. As seen from the above calculation that the budgeted labour rate
18

was 8£ but the actual labour rate exist was 7.8£. There was a variance in this, so the company
should be efficient enough to improve the labour efficiency in the firm.
P4.2
Table 6: Operating Statement of Jeffrey & Son's
Details
Charge
per unit Budgeted Units Cost per unit Actual Variance occurred
Sales 4 16,000 3.94 13,820 -2180
Material 0.96 3,840 0.97 3,420 420
labour 0.8 32,00 0.77 2,690 510
Fixed
Overhead 4,800 4,900 -100
Total 2.96 11,840 3.14 11,010 830
Operating
profit 1.04 4,160 0.8 2,810 1,350
P4.3
There are several departments in the Jeffrey & Son's company. It mainly includes
purchase, sales, production departments which are responsible for taking the decisions for the
benefit of the company. Further, the responsibility of the production department is to clearly
identify the quantity and rate per unit of the raw materials which are required for the final
production. However, the sales department must attain the targets sales in terms of unit as well as
in value (Ward, 2012). As from the given scenario it can be seen that in Jeffrey & Son's, they are
not able to meet the budgeted sales value. Thus, the department must make provisions to analyse
the variances responsible for it and take measures to overcome them. Marketing strategies can
assist the firm to enhance their sales in the market. Moreover, the company must evaluate the
needs and requirements of the customers while producing the goods. This will help to increase
with the sales of the company. It has been identified that production department has been
responsible for manufacturing number of units as per the market demand.
19

CONCLUSION
The above study has concluded that Jeffrey & Son's must use several management tools
in the business as it will help them to attain the objectives and goals in an efficient manner. It
must use zero based budgeting system in the organization as it provides with the figures by
analysing the current situation which will help the company to make adequate plans for the
future. The company must take the measures to reduces per unit cost of the products and enhance
its number of units so as to earn more and more profits.
20