Cost Accounting and Decision Making

This assignment delves into the crucial role of cost accounting in informing business decisions. It emphasizes the need for organizations to accurately record costs using appropriate costing and accounting methods. The analysis highlights the significance of variance computation by comparing actual and budgeted outcomes, enabling businesses to identify areas requiring improvement and enhance performance.

Management
accounting

TABLE OF CONTENTS
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................3
1.1 Classification of different types of cost.................................................................................3
1.2 Computation of unit cost and total job cost for Job 444........................................................4
1.3 Calculation of the cost of Exquisite using appropriate techniques........................................4
1.4 Analysis of cost data of exquisite using appropriate techniques...........................................8
Task 2...............................................................................................................................................8
2.1 Preparation and analysis of the cost report for the month of September...............................8
2.2 Use of several performance indicators in order to identify area for further improvement. .10
2.3 Recommendations for reduction of cost and enhancement of value and quality................10
Task 3.............................................................................................................................................11
3.1 Purpose and nature of budgeting process............................................................................11
3.2 Selection of appropriable budgeting methods in accordance with the needs of organization
...................................................................................................................................................11
3.3 Production and purchase budget..........................................................................................11
3.4 Preparation of cash budget...................................................................................................12
Task 4.............................................................................................................................................14
4.1Computation and analysis of variances................................................................................14
4.2 Operating statement for reconciliation of budgeted and actual results................................16
4.3 Variance analysis report.......................................................................................................16
Conclusion.....................................................................................................................................17
References......................................................................................................................................18
2

INDEX OF TABLES
Table 1: Statement showing total and unit cost of Job 444.............................................................5
Table 2: Statement showing computation of total cost of exquisite................................................5
Table 3: Allocation of cost of support departments on the basis of machine hours........................7
Table 4: Allocation Criteria of cost ...............................................................................................8
Table 5: Units to be produced .........................................................................................................8
Table 6: Statement showing computation of exquisite....................................................................8
Table 7: Statement showing computation of exquisite....................................................................9
Table 8: Production budget of Jeffrey and Son ...........................................................................12
Table 9: Material purchase budget of Jeffrey and Son's ...............................................................13
Table 10: Cash budget of Jeffrey and Son's...................................................................................13
3

INTRODUCTION
Management accounting is used in business to provide accurate and reliable information
to the managers so they can make viable decisions for their growth and success. Approaches of
management accounting consists of strategic, performance and risk management (Burns and et.
al, 2004). Present report foucues on case study of Jeffrey and Sons Ltd. In this report description
will be provided regarding theoretical and practical application of various costing approaches by
considering information of provided business. Further, cost report will be prepared in order to
provide recommendations to the company for resolving current issues by making improvement
in their operational strategies.
TASK 1
1.1 Classification of different types of cost
Cost can be defined as expenses incurred by business in order to attain an economic
benefit for business. In a business, cost can be bifurcated on the basis of following aspects: On the basis of element: According to the factor of element, cost can be segregated in
direct and indirect cost. Direct cost is incurred for the production activities while indirect
cost is incurred for attaining value added benefits (Jiambalvo, 2001). Example of direct
cost is raw material and labour and of indirect cost is rent and lightning expense. On the basis of function: Cost can also be bifurcated as per functional activities of a
business organization. General classification of the cost on the basis of function are
administration, distribution, production, advertising, research and development and
selling. On the basis of nature: As per the nature, cost can be classified into material, labour and
expenditure of overhead. Material expenses are incurred for the purchase of goods
required for production activities (Keown, 2005). Labour cost is incurred for the payment
of wages and salaries to the employees for services provided by them.
 On the basis of behaviour: By considering behaviour as a factor, cost can be bifurcated
into fixed, variable and semi-variable cost. Fixed cost are those expenses which does not
alter with the change in production units (Kont, 2013). Example of fixed cost is salary,
rent and depreciation. Variable cost is just opposite to the fixed cost as it is in direct
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proportion to the units to be produced. Example of variable cost is raw material and
packaging expenses. Cost having semi-variable behaviour has element of both fixed and
variable cost. Example of semi-variable is electricity expenses.
1.2 Computation of unit cost and total job cost for Job 444
In accordance with the approach of job costing, cost is computed by considering all the
expenses related to the specific job (Vance, 2002). This method is suitable for accumulation of
cost only if there is small unit level. Computation of job cost for job 444 is as follows
Table 1: Statement showing total and unit cost of Job 444
Particulars Amount
Prime cost
 Direct material £200
 Direct labour £270
Overhead cost
 Variable production overhead £180
 Fixed production overhead £120
Per unit cost £770
Units to be produced £200
Total cost (770*200) £154000
Working note
Computation of fixed production overhead
(Budgeted overhead / total direct labour hours) * Direct labour hours allocated to Job 444
=(£80000 / 20000 hours) * 30 hours
=£120
On the basis of allocation from this method, it can be noticed that per unit cost is £770
and total production cost is £154000.
1.3 Calculation of the cost of Exquisite using appropriate techniques
Table 2: Statement showing computation of total cost of exquisite
Machine
shop X
Machine shop
Y Assembly Stores
Maintenanc
e Total
Indirect
wages and
supervision £100,000.00 £99,500.00 £92,500.00 £10,000.00 £60,000.00 £362,000.00
Indirect £100,000.00 £100,000.00 £40,000.00 £4,000.00 £9,000.00 £253,000.00
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materials
Light and
heating £10,000.00 £5,000.00 £15,000.00 £15,000.00 £5,000.00 £50,000.00
Rent £20,000.00 £10,000.00 £30,000.00 £30,000.00 £10,000.00 £100,000.00
Insurance
and
machinery £7,947.02 £4,966.89 £993.38 £496.69 £596.03 £15,000.00
Depreciation
of machinery £79,470.20 £49,668.87 £9,933.77 £4,966.89 £5,960.26 £150,000.00
Insurance of
building £5,000.00 £2,500.00 £7,500.00 £7,500.00 £2,500.00 £25,000.00
Salaries of
works
management £24,000.00 £16,000.00 £24,000.00 £8,000.00 £8,000.00 £80,000.00
Total cost of
overhead £346,147.00 £287,636.00 £219,927.00 £79,964.00 £101,056.00
Working notes
Working Note
Lighting & Heating: Machinery X 10/50 x £50,000 — f10,000
Machinery Y 5/50 x £50,000 — £5,000
Assembly 15/50 x £50,000 — f 15,000
Stores 15/50 x £50,000 = £15,000
Maintenance 5/50 x £50,000 = £15,000
Rent: Machinery X 10/50 x £100,000 = f20,000
Machinery Y 5/50 x £100,000 = £10,000
Assembly 15/50 x £100,000 = £30,000 Stores
15/50 x £100,000= £30,000 Maintenance
5/50 x £100,000 = £10,000
Insurance & Machinery: Machinery X 800/1510 x £15,000 = £7,964
Machinery Y 500/1510 x £15,000 — £4,966
Assembly 100/1510 x : E15,000 — £994 Stores
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50/1510 x £15,000= £497
Maintenance 5/1510 x f15,000= £596
Depreciation of Machinery: Machinery X 800/1510 x £150,000 = £79,470
Machinery Y 500/1510 x £150,000 = £49,669
Assembly 100/1510 x £150,000 = £9,934
Stores 50/1510 x £150,000 — £497
Maintenance 60/1510 x £150,000 = £596
Insurance of Buildings Machinery X 15/50 x £25,000 — £5,000
Machinery Y 5/50 x £25,000 = £2,500
Assembly 15/50 x £25,000 = f7,500 Stores
15/50 x £25,000 — £7,500
Maintenance 5/50 x £25,000 = £2,500
Salaries of works mgmt. Machinery X 3/10 x £80,000 = £24,000
Machinery Y 2/10 x £80,000 = £16,000
Assembly 3/10 x £80,000 = £24,000
Stores 1/10 x £80,000 — £8,000
Maintenance 1/10 x £80,000 = £8,000
Table 3: Allocation of cost of support departments on the basis of machine hours
Machine shop X Machine shop Y Assembly Total
Store £39,982.00 £29,987.00 £9,995.00 £79,964.00
Maintenance £45,807.00 £32,338.00 £20,211.75 £101,056.00
Total £434,906.00 £349,961.00 £250,133.00
Working notes
Reappointing workings: based on material issues
Machinery X 400/800* £79,964 = £39,982
Machinery Y 300/800 * £79,964 = £29,987
Assembly 100/800 * £79,964 = £9,9995
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Based on time spent
Machinery x 12/25 * £101,056 = £48,507
Machinery y 8/25 * £101,056 = £32,338
Assembly 5/25 * £101,056 = £20,211
Table 4: Allocation Criteria of cost
Particulars Description
Indirect wages and supervision As per the provided amount.
Indirect materials As per the provided amount.
Light and heating On the basis of area occupied
Rent On the basis of area occupied
Insurance and machinery On the basis of book value of machine
Depreciation of machinery On the basis of book value of machine
Insurance of building On the basis of area occupied
Salaries of works management On the basis of number of employees.
Table 5: Units to be produced
Material cost £400,000.00 £300,000.00 £100,000.00
per unit material 8 8 8
A/B no. of units 50000 37500 12500
Overhead absorption rate
Machinery X= 434906/80000=5.44
Machinery Y= 349960/60000= 5.83
Assembly=250134/10000=25.01
Computation of absorption rate
Table 6: Statement showing computation of exquisite
£ £
Materials 8
Labour 15
Overheads
X (0.8*5.44) 4.34
Y (.6*5.83) 3.5
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Assembly (.1*25.01) 2.5
Total cost 33.35
1.4 Analysis of cost data of exquisite using appropriate techniques
Overhead absorption rate on the basis of labour hours
Machinery X= 434908/200000= 2.17
Machinery Y= 349960/150000= 2.33
Assembly=250134/20000= 2.15
Table 7: Statement showing computation of exquisite
£ £
Materials 8
Labour 15
Overheads
X (2*2.17) 4.34
Y (1.5*2.33) 3.5
Assembly (1*1.25) 1.25
Total cost 32.09
By considering alteration in the overhead absorption rate from machine hour to labour
hour, it can be said that there is a significant reduction in per unit rate. In accordance with the
costing principles, absorption on the basis of labour hours is more feasible approach (Youseef,
2013). By considering this aspect, management is required to make decision of cost on the basis
of this approach.
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TASK 2
2.1 Preparation and analysis of the cost report for the month of September
Cost report of September month
Budgeted cost Actual cost Variances
Particulars
Units 2000 units 1900 units
Material cost 24000 22800 1200 F
Labour cost 18000 19000 1000 A
Fixed overhead 15000 15000 -
Prime cost 57000 56800 -
Electricity
Fixed portion 500 500 -
Variable portion 7500 7125 375 F
Maintenance 5000 5000 -
Total production cost 70000 69425
Working notes
Calculation of standard budget at 1900 units
Budgeted cost Standard cost
Particulars
Units 2000 units 1900 units
Material cost 24000 22800
Labour cost 18000 17100
Fixed overhead 15000 15000
Prime cost 57000 54900
Electricity
Fixed portion 500 500
Variable portion 7500 7125
Maintenance 5000 5000
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Total production cost 70000 67525
Calculation of variable cost: electricity =
Change in total cost / change in number of production units
= (8000-5000) / (2000-1200)
= £3.75
Calculation of stepped cost
Maintenance cost of the organization is step cost because it is altered with the change in
slot of 500. In the standard budget there is reduction of 100 units due to this aspect there will no
change in this expense.
Variance analysis
Material variance is favourable in nature because company had to pay lower cost then the
expectations. This variance has been occurred due to variation in production and actual unit.
Labour variance shows adverse amount of 1000. However, in actual variance is 1900 adverse
(17100-1900). This variance has been occurred due to change in labour hour rate (Banks, 2008).
There is no variance in fixed overhead and maintenance cost. Variable portion of electricity cost
shows favourable variance of 375 due change in variable rate.
2.2 Use of several performance indicators in order to identify area for further improvement
By considering following performance indicators company will be able to identify potential areas
of improvement in order to attain aims and objectives of business in an effective manner: Financial statements: Jeffrey and Sons Ltd can identify their performance by making
comparison of financial statements of the company of past year. By considering
increasing, decreasing or fluctuating trend, management of company can identify the area
for improvement (Vanderbeck, 2012). For example, if there is continuous increase in cost
of material then organization is required to make efforts to identify the cause of increase
in order to take suitable step.
 Customer review: By considering review of customers, management of Jeffrey and Sons
Ltd can identify the issues faced by the users (Zawawi and Hoque, 2010). On the basis of
these issues then can modification in their operational activities in order to enhance the
level of customer satisfaction.
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2.3 Recommendations for reduction of cost and enhancement of value and quality
Management of Jeffrey and Sons Ltd is recommended to take suitable steps for the
prevention of variances in actual and budgeted values. For this aspect, management can use
following aspects: Just in time and economic order quantity: By the applicability of this technique,
organization can reduce their material cost as there will be optimization is store and order
cost. By ordering economic order quantity, there will be prevention of stock out issue and
reduction in abnormal loss. TQM and Kaizen costing: TQM approach is focused on improvement of overall
production process in order to enhance the quality. With the use of this approach, Jeffrey
and Sons Ltd can resolve quality issues in production process (Cohen and Kaimenaki,
2011). Further, Kaizen costing can be used by organization for the reduction of wastage.
 Management audit: This approach is suitable to develop effective internal control in a
business organization. With this technique, organization can monitor the performance of
employees in order to assure standard outcome.
TASK 3
3.1 Purpose and nature of budgeting process
Budgetary statements are prepared by business entity to make estimation of future
expenses and revenue on the basis of previous financial facts and current market trends. On the
basis of budget estimations, resources are allocated into various business activities in order to
enhance its revenue and profitability. Budgets are also used by business to make comparison to
actual and expected outcome to make improvement in operational strategies. Preparation of
budgets is accomplished on the basis of forecasting by managers (Kastantin, 2005). This budget
is reviewed by senior managers to finalize the statement. In this statement, expected revenues are
deducted from the revenues of business to determine budgeted profit of the accounting period.
3.2 Selection of appropriable budgeting methods in accordance with the needs of organization
Following methods can be used by management for the preparation of budgetary
statements:
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 Traditional approach: This method of budgeting is used in situation where there are
minor changes in the estimation. In this method, budget is prepared by considering
previous trends and figures. Zero based budgeting: Zero based budgeting is used by organizations, if they have to
start up of new venture of which they have no experience and there is no way to
determine standard estimations (Wildavsky, 2006). This budget is highly unpredictable in
nature as there is possibility of severe variances.
 Operational budgets: In accordance with this method, budgets are prepared as per the
operating activities of business. These budgets are prepared periodically and on the basis
of these values decisions are taken by management (Management accounting, 2014).
For Jeffrey and Son's most suitable approach is operational budgets as different
statements will be prepared in accordance with their business activities. Further, master budget
will be prepared by integrating entire budgets.
3.3 Production and purchase budget
Production budget
Table 8: Production budget of Jeffrey and Son
Particulars July August September October
Sales 105000 90000 105000 110000
Less: opening stock 11000 13500 15750 16500
Add: Opening stock 13500 15750 16500 15000
Units to be produced 107500 92250 105750 108500
Closing Stock:
July = 15% * August sales = 15%*90000 = 13500
August = 15% * Sept. sales = 15%*105000 = 15750
September = 15% * Oct. sales = 15%*110000 = 16500
October = 15%*Nov. sales = 15%*100000 = 15000
Material purchase budget
Table 9: Material purchase budget of Jeffrey and Son's
Particulars July August September
Production units 107500 92250 104250
Cost of material per unit £3.50 £3.50 £3.50
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Material to be purchased £376,250.00 £322,875.00 £364,875.00
Add: cost of material in closing stock £80,718.75 £91,218.75 £91,218.75
Total cost of material consumed £456,968.75 £414,093.75 £456,093.75
Less: Cost of material in opening stock -£166,400.00 -£80,718.75 -£166,400.00
Cost of material to be purchased £290,568.75 £333,375.00 £289,693.75
3.4 Preparation of cash budget
Table 10: Cash budget of Jeffrey and Son's
Particulars July (£) August (£) September (£)
Cash inflow
Sales receipts (w.n.1) 900000 731250 864000
Cash outflow
Purchase 365969 334688 372531
Labour (w.n.2) 322500 276750 317250
Variable O/H (w.n.3) 108500 98350 100350
Fixed O/H 75000 87500 87500
Net cash flow 28031 -66038 -13631
Opening balance 16000 44031 22007
Closing balance 44031 -22007 -35638
Working notes
Working Note-1
Sales (£) July (£) August (£) September (£)
May 855000 85500
June 990000 247500 99000
July 945000 567000 236250 94500
August 810000 486000 202500
September 945000 567000
July: 105000*9 = 945000
August: 90000*9 = 810000
September = 105000*9 = 945000
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July receipts August receipts September receipts
10%*855000 May 10%*990000 June 10%*945000 July
25%*990000 June 25%*945000 July 25%*810000 Aug.
60%*945000 July 60%*810000 Aug. 60%*945000 Sept.
Working Note-2
Labour
July 1075000*3 = 322500
August 92250*3 = 276750
September 105750*3 = 317250
Working Note-3
Variable overhead
July (£) August (£) September (£)
June 44000
July 64500 43000
August 55350 36900
September 63450
Total 108500 98350 100350
Based on June Sales = 40% * 110000 and it should be based on production of June and the
difference is in immaterial.
40%*110000 units = 44000*1 = £44000 from June and payable in July
60%*107500 units = 64500*1 = £64500 from July and payable in July
40%*107500 units = 43000*1 = £43000 from June and payable in Aug.
60%*92250 units = 55350*1 = £55350 from June and payable in Aug.
40%*92250 units = 36900*1 = £36900 from July and payable in Sept.
60%*105750 units = 55350*1 = £63450 from June payable in Sept.
(d) Budgeted profit and loss account
July (£) August (£) September (£) Total (£)
Sales 945000 810000 945000 2700000
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Less: bad debts 47250 40500 47250 135000
897750 769500 879750 2565000
Total MC of
production
806250 691875 793125 2291250
Add: opening
stock
82500
Less: closing
stock
123750
Cost of sales 2250000
Contribution 315000
Fixed overheads 300000
Profits 15000
July (£) August (£) September (£) Total (£)
Material 376250 322875 370125 1060500
Direct labour 322500 276750 317250 916500
Variable O/H 107500 92250 105750 305500
Total cost 806250 691875 943125 2582500
TASK 4
4.1Computation and analysis of variances
 Sales variances
Sales volume variance (4160- 3040) = (1120) (A)
Sales prices variance (14000- 13820) = (180) (A)
(Budgeted: 35000*£4- Actual sales)
 Material variance
The material prices variances
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AQ (1425Kg) X SR (£2.40) = £3420
The material usage variance 60(A)
SQ (3500 Units x 0.4) X SR (£2.40) = £3420
 The labor variances
AH(345Hrs) X AR (£7.8 ) =£2690
The labor variance rate 70 (F)
AH(345Hrs) X SR (£8.0 ) =£2760
the labour efficiency variance
SH (3500 Units x0.1)350hrs X SR (£2.40) = £2800
 Fixed overhead sending
Actual fixed overheard = £4900
The fixed overhead expenditure variances 100(A)
Budgeted fixed production overhead = £4800
Budget
Original Flexed Actual
Output (Production
and sales units)
4000 3500 3500
£ £ £
Sales revenue 16000 14000 13820
Raw materials -(3840) (3360) (1400)Kg (3420) (1425Kg)
Labour -3200 (2800)(350Hrs) (2690)(345Hrs)
Fixed overheads -4800 -4800 -4900
Operating profit 4160 3040 2810
By considering the computed variances, it can be said that actual performance is not in
accordance with the standard (Standard Costs and Variance Analysis, 2007). Variances had been
occurred due to inaccurate estimations of market and there is also reduction in overall volume.
4.2 Operating statement for reconciliation of budgeted and actual results
Operating statement
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£ £ £
Favorable Adverse
Sales volume variance 1120
Sales price variance 180
Material price variance 0
Material usage variance 60
Labor rate variance 70
Labor efficiency variance 40
Fixed overhead expenditure variance 100
Total variance 110 F 1460A
Total net variance -1350
Budgeted operating profit 4160
Less: Net variance -1350
Actual operating profit 2810
By considering operating statement it can be said that actual profit is less than budgeted
profit because of net adverse variance of 1350 because of operational inefficiency and market
fluctuations.
4.3 Variance analysis report
To
Managing director
Jeffrey and Son's Ltd
Subject: Reporting of variances to respective departments
On the basis of computation and analysis of variances it can be said that different
department are required to make use of effective strategies for prevention of variance in the
future. Sales department is required to make appropriable estimation of market demand.
Further, they are required to use promotional strategies to increase profitability. Production
department is required to use new techniques and make efforts to prevent abnormal loss.
Human resource department is required to work on efficiency of various department in order to
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enhance overall productivity.
Finance manager
Name: ____________
Signature: ___________
Date: ____________
CONCLUSION
Present study has been carried out for understanding conceptual framework of
management accounting. In accordance with the present study conclusion can be drawn that
organizations are required to record their cost in an appropriable manner in order to make better
decisions for business. For this aspect, they can make use of various costing and accounting
methods. In order to monitor performance of business, management of companies can compute
variance by comparing actual and budgeted outcome. On this basis of this analysis, they can
identify the area for further improvement in business.
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REFERENCES
Books and journals
Banks, A., 2008. Budgeting. 3rd ed. McGraw-Hill Australia.Lucey, T., 2002. Costing.
Continuum.
Burns and et. al, 2004. Management accounting education and training: putting management in
and taking accounting out. 1(1). pp.1-29.
Cohen, S. and Kaimenaki, E., 2011. Cost accounting systems structure and information quality
properties: an empirical analysis. Journal of Applied Accounting Research. 12(1). pp.5 –
25.
Jiambalvo, J., 2001. Managerial accounting. Wiley.
Kastantin, T. J., 2005. Beyond earnings management: Using ratios to predict Enron's collapse.
Managerial Finance. 31(9). pp.35–51.
Keown, A., 2005. Financial management. Upper Saddle River, N.J.: Pearson/Prentice Hall.
Kont, R. K., 2013. Cost accounting and scientific management in libraries: a historical overview.
Journal of Management History. 19(2). pp.225 – 240.
Vance, D., 2002. Financial Analysis and Decision Making. McGraw Hill Professional.
Vanderbeck, J. E., 2012. Principles of Cost Accounting. 16th ed. Cengage Learning.
Wildavsky, B. A., 2006. Budgeting And Governing. Transaction Publishers.
Youseef, M., 2013. Management accounting change in an Egyptian organization: an institutional
analysis. Journal of Accounting & Organizational Change. 9(1). pp.50-73.
Zawawi, M. H. N., and Hoque, Z., 2010. Research in management accounting innovations: An
overview of its recent development. Qualitative Research in Accounting &
Management. 7(4). pp.505 – 568.
Online
Management accounting. 2014. [Online]. Available at: <
http://www.e-conomic.co.uk/accountingsystem/glossary/management-accounting>.
[Accessed on 6th February 2016].
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