Cost and Management Accounting Principles

This assignment delves into the fundamental principles of cost and management accounting. It requires students to demonstrate their understanding of various concepts, including costing methods, budgeting techniques, and performance measurement tools. The provided resources encompass scholarly articles, textbooks, and online materials that offer insights into the theoretical framework and practical applications of cost and management accounting.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................1
TASK 1 .....................................................................................................................................1
AC 1.1 Cost classification on various types..........................................................................1
AC 1.2 Determining the unit cost using job costing method.................................................3
AC 1.3 Cost calculation using absorption costing method....................................................3
AC 1.4 OAR using labour hours basis..................................................................................5
TASK 2 .....................................................................................................................................5
AC 2.1 Preparation and analysing the cost report and comment on the variances................5
AC 2.2 Performance indicator to identify areas for potential improvement.........................6
AC 2.3 Ways to reduce cost, improve product quality and enhance value...........................7
TASK 3......................................................................................................................................8
AC 3.1 Nature and purpose of budgeting process.................................................................8
AC 3.2 Appropriate budgeting method and its need.............................................................8
AC 3.3 Production and Material purchase budget.................................................................9
AC 3.4 Preparing Jeffrey & Son's cash budget...................................................................10
Working note: .....................................................................................................................10
TASK 4....................................................................................................................................11
AC 4.1 Computing variances, identify possible causes and recommend corrective actions
.............................................................................................................................................11
AC 4.2 Operating statement................................................................................................12
AC 4.3 Responsibility centres.............................................................................................13
CONCLUSION........................................................................................................................13
REFERENCES.........................................................................................................................14

INTRODUCTION
Managers play a crucial role in the organizations as they make policies, analyse
operational difficulties and take better decisions to remove hazards and run the business
successfully. Management accounting is a process of identifying, analysing and interpretation
of the financial information in order to take qualified decisions. In the present project report,
its importance will be discussed in accordance with a manufacturing organization named
Jeffrey & Son's. The company has a wide range of popular and branded product called
Exquisite.
In the present age, competition is rising at exponential rate. Thus, management
accounting plays a satisfactory role in the firms as it provides reliable and prominent
information’s to the managers and help to take effective decisions. In this report, numerous
managerial tools such as cost sheet, budgeting process and variance analysis have been
discussed. The report determines that how the techniques contribute to achieve organizational
targets and ensure long term survival.
TASK 1
AC 1.1 Cost classification on various types
Elements
Material Jeffrey & Sons need raw material to produce
its Exquisite product. Thus, the amount of
expenditure incurred on material purchase is
known as material cost (Paul, 2012.).
Labour Labours are the individuals who convert the
raw material into finished products through
putting their efforts (Datar and et. al., 2013).
Jeffrey & Son's make payment of wages to
the labours that are known as labour called
labour cost.
Overhead All the other incurred expenses are known as
overheads. It includes salary, printing
expenditures, rent and rates and etc.
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Functions
Production department cost The amount of expenses that has been
incurred for producing the goods of Jeffrey &
Son's is identified as production cost such as
factory lighting, rent and so on.
Office/Administrative cost Jeffrey & Son's administrative staff manage
the business functions thus, incurred office
expenditures such as office lighting,
stationery and photo copy charges.
Selling and distribution department cost After producing Exquisite, Jeffrey & Sons
sales and marketing manager are responsible
for selling the product in the market. It
includes all the marketing, advertisement and
free sample distributions.
Nature
Direct Chargeable business expenses directly
towards the product Exquisite is known as
direct cost such as material's purchase and
labour's wages.
Indirect A payment that cannot be directly charged to
the Exquisite product is known as indirect
cost such as insurance, depreciation and
manager's salary (VanDerbeck, 2012).
Behaviour
Fixed Expenditures that are unrelated to changing
the production volume of Jeffrey & Son's is
known as fixed cost such as depreciation and
building insurance (Blocher, Chen and Lin,
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2008).
Semi variable Expenses that are partially fixed or partially
variable are semi variable cost such as
electricity bill which remains unchanged up
to a specified production level and after
reaching at this point, it get changes
according to production changes.
Variable Changing the expenditures in a positive
direction with the production variability is
known as variable cost such as material cost.
AC 1.2 determining the unit cost using job costing method
The scenario depicts material, labour, fixed and variable overheads for 200 units.
Thus, unit cost can be determined by assigning these expenditures to job no. 444 (Mohapatra,
2015).
Expenditures Calculation Amount
Direct Material (50 hrs.*4£*200) £40000
Direct Labour (30 hrs.*9£*200) £54000
Production overhead:
Variable (30 hrs.*6£*200) £36000
Fixed (80000£/20000hrs*6000hrs) £24000
Total cost (£40000+£54000+£36000+£24000) £154000
Cost per unit (£154000/200) £770
On the basis of above computation, it can be reported that per unit cost for Job no.
444 will be 770£.
AC 1.3 Cost calculation using absorption costing method
Jeffrey & Son's product cost can be determined through absorption costing method.
The technique uses a fair allocation basis to identify the cost of Exquisite (Fisher and
Krumwiede, 2015).
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a) Primary allocation of overheads
Produ
ction
Servic
e
depart
ment
Basis of
allocation
Machine X
(£)
Machi
ne Y
(£)
Assembl
y 1 (£)
Stores
(£)
Maint
enance
(£) Total
Indirect wages and
supervision Given 100000.00
99500.
00 92500.00 10000 60000
362000
.00
Indirect material Given 100000.00
10000
0.00 40000.00 4000 9000
253000
.00
light and heating Area occupied 10000 5000 15000 15000 5000
50000.
00
Rent Area occupied 20000.00
10000.
00 30000.00
30000.
00
10000.
00
100000
.00
Insurance of
machinery
Book value of
machinery 7947.02
4966.8
9 993.38 496.69 596.03
15000.
00
depreciation
Book value of
machinery 79470.2
49668.
87 9933.77
4966.8
9
5960.2
6
150000
.00
Insurance of
building Area occupied 5000.00
2500.0
0 7500.00
7500.0
0
2500.0
0
25000.
00
Salaries of work
management
No. of
employees 24000.00
16000.
00 24000.00
8000.0
0
8000.0
0
80000.
00
Total 346417
28763
6 219927 79964 101056
103500
0
b) Reapportion of service department costs to production departments
Machine shop Machine shop Assembly(£) Total(£)
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X(£) Y(£)
Primary
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
c) Overhead absorption rate using machine hour basis
OAR = Total overheads/Machine hours
Machine X = 434905.88/80000 = 5.44£
Machine Y = 349960.92£/60000 = 5.83£
Assembly = 250133.2£/10000 = 25.01£
d) Total product cost
Product cost = Material+Labour+Overhead
= 8£ + 15£ + (5.44£*0.8) + (5.83£*0.6) + (25.01£*0.1) = 33.35£
AC 1.4 OAR using labour hours basis
OAR = Total overheads/Direct labour hours
Machine X = 434905.88£/200000 = 2.17£
Machine Y = 349960.92£/150000 = 2.33£
Assembly = 250133.2£/200000 = 1.25£
Product cost = Material+Labour+ Total production Overhead
= 8£ +15£ + (2.17£*2) + (2.33£*1.5) + (1.25£*1)
= 8£+15£+4.34£+3.50£+1.25£ = 32.09£
Difference: Overhead cost of all the production departments were 5.44£, 5.83£ and
25.01£ using machine hours basis. Thus, total overhead cost and total product cost are 10.35£
and 33.35£ respectively. However, on the basis of labour hours, production department
overhead cost get changed to 2.14£, 2.3£ and 1.25£. This in turn, total overhead and product
cost is 9.09£ and 32.09£ comparatively lower than machine hour basis. Henceforth, it can be
concluded that this allocation basis is more superior as it declined the Exquisite product cost.
Thus, Jeffrey and Sons has to compute their product cost through using labour hours
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allocation basis. It reduces company's cost and provides greater profitability. This in turn,
organization will be able to improve its operational performance and get benefited through it.
TASK 2
AC 2.1 Preparation and analysing the cost report and comment on the variances
Scenario represents the budgeted and actual cost of Jeffrey & Son's Ltd. for the month
of September.
Cost report for the month of September
Elements of cost Budgeted cost Actual cost Variance
2000 units 1900 units (budgeted-Actual)
Material 24000£ 22800£ 1200£
Labour 18000£ 19000£ (1000£)
Fixed Overhead 15000£ 15000£ 0
Electricity 8000£ 7625£ 375£
Maintenance 5000£ 4800£ 200£
Total 70000£ 69225£ 775£
Working note:
Cost element Calculation Actual cost
Material Cost (12£*1900) 22800£
Labour Cost (10£*1900) 19000£
Fixed overhead (Remain constant) 15000£
Electricity (Variable) (3000£/800*1900) 7125£
Electricity (Fixed) [8000£ - (3.75*2000 units)] 500£
Total electricity cost (7125£ + 500£) 7625£
Maintenance [5000£-(1000£/500*100)] 4800£
Comment on variances: Jeffrey & Son's material variance indicate favourable balance
of 1200£. It arises due to lowering the sales unit to 1900 from 2000 budgeted units.
However, material prices variance is nil as both the budgeted and actual material rate is 12£.
Labour cost variance indicate adverse balance of 1000£ as labour rate got inclined to 10£ per
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unit. Electricity cost get declined by 375£ due to lower the production. Further, maintenance
is a stepped cost that decreased by 200£ due to declined production volume.
AC 2.2 Performance indicator to identify areas for potential improvement
Measuring the performance is very important for all types of organizations as it helps
to determine areas for making improvement. In context to Jeffrey & Son's Ltd, the
performance indicators are discussed below:
Performance indicator Description
Business Revenue Jeffrey & Son's sale it’s branded products to the consumers
and generates revenues. If company's revenues shows an
increasing trend than it is beneficial for the business as it
lead to enhance revenues (Kaplan and Atkinson, 2015). On
contrary, if the revenues show a declining trend than Jeffrey
& Son's needs to identify the causes and eliminate it. For
instance, higher the price, lower the demand and consumers
unawareness may be the reason for lower the sales. In that
case, Jeffrey & Son's has to take appropriate pricing
decision and make effective marketing strategies to bringing
awareness and enhance their revenues.
Product Quality Quality is another component for measuring the
performance of Jeffrey & Son's. For instance, if it improves
its product quality than customer will be highly satisfied.
However, damaging the product quality will create negative
impact to the company. Thus, for improving the
performance, business needs to provide qualitative products
at reasonable prices to the customers.
Product cost Decreasing the product cost implies good performance.
However, if cost gets increasing than Jeffrey & Son's Ltd
has to reduce the cost through making effective control and
monitoring the operating functions of the business.
Business profit Good profitability concluded that business is performing
well in the market while if profit goes declining than Jeffrey
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& Son's Ltd need to enhance sales and reduce cost to
increase their profits.
AC 2.3 Ways to reduce cost, improve product quality and enhance value
Reduce cost Cost reduction is important for availing greater
amount of profits. It can be done by analysing,
evaluation and controlling the operation functions.
Moreover, curtailment of unnecessary expenses also
helps to decline the product cost (Malmi and
Granlund, 2009). For instance, Jeffrey & Son's can
reduce their material cost through searching sources
at which material is available at cheaper rates.
Improve product quality Jeffrey & Son's as a manufacturing organization has
to maintain its product quality. It can be done by
using good quality of material, using quality
management tools and upgraded and advanced
technology. Further, Total Quality management is
also a tool that helps to maintain product quality to a
great extent (Ahrens and Chapman, 2007). It helps to
meet customer demand at right time helps to reduce
the waiting time and enhance customer satisfaction.
Enhance value Jeffrey & Son's can enhance value through increasing
the profits, expanding the business operations, greater
the investment, increasing shareholder return and
making business development (DRURY, 2013).
Further, powerful competitive position and large
market share also helps to enhance corporate value.
TASK 3
AC 3.1 Nature and purpose of budgeting process
Nature of budgeting process: Jeffrey & Son's managers need to forecast the amount of
probable revenues and expenditures for FY. Revenues can be determined through sales
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estimation on the basis of probable consumer demand and previous year sales. Further,
expenditures can be forecasted through identifying the material, labour and overhead
payments to produce require number of units. Comparison between revenues and expenses
will results in deficit or surplus. For instance, higher the revenues than expenses will indicate
surplus otherwise deficit. Thereafter, Jeffrey & Son's managers have to determine the actual
operational performance for variance computation. Adverse variance need to be eliminated
through taking corrective actions as actual expenses are higher and actual incomes are lower
than set budgeted.
Purpose of budgeting process: Jeffrey & Son's Ltd construct budget for an estimating
future performance. It aims at determining operational performance of the company for future
years. The budgetary tools helps to maintain business profits through controlling cost to set
targets and maximize revenues (Zimmerman and Yahya-Zadeh, 2011). This in turn, Jeffrey &
Son's can achieve its target objectives to a great extent. Moreover, it aims at ensure optimum
allocation of business resources in various operating functions. At last, variance elimination
mainly aims at meet organizational objectives for long term success of the company.
AC 3.2 Appropriate budgeting method and its need
Budget must be prepared in an appropriate manner as it provides reliable and most
accurate estimate towards the future period. It is beneficial because it helps to take right
decisions with right cost and at right time. The present scenario depicts that sales volume is
the key component in Jeffrey & Son's budget manual. Moreover, paramount takes place in
order to establish co-ordination. Henceforth, it became clear that incremental technique has
been applied to prepare Jeffrey & Son's budget. Thus, the marketing manager as a budget
holder will face many problems. The reason behind that is this method increased all the
incomes and expenses by a fixed percentage or amount without examining their future
importance (cost and mangement accounting, n.d). Further, historical budget is the basis of
company's budgeting process hence, it do not make proper analysis of operating functions in
future context.
Zero base budgeting will be considered as most effective techniques for budget
construction. The need of adopting this technique will be arise because it identifies the
importance of all the operating activities for the FY (Glass, Stefanova and Prinzivalli, 2014).
Thus, it helps to cut off undesired expenditures and reduce business cost. Further, through
sales maximization and optimum allocation of resources, Jeffrey & Son's can improve their
profit earnings. This in turn, operational performance can be improved to a large extent.
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AC 3.3 Production and Material purchase budget
Production budget: Jeffrey & Son's production budget helps to determine required
number of units of Exquisite product to meet customer demand efficiently (Burns and
Scapens, 2000).
Production budget of Jeffrey & Son's Ltd.
July August September
Budgeted Sales 105000 90000 105000
Inventory at the beginning period 11000 13500 15750
(Sales – opening inventory) 94000 76500 89250
Inventory at the ending period 13500 15750 16500
Required Production 107500 92250 105750
Working note for ending inventory
Closing inventory: It is maintained at 15% of the budgeted sales of following months.
July = 15% of 9000o units = 13500 units
August = 15% of 105000 units = 15750 units
September = 15% of 110000 units = 16500 units
Material purchase budget: It helps to determine the quantity of raw material need to
be purchased for producing required number of units of Exquisite product.
Material Purchase budget of Jeffrey & Son's Ltd.
Material Require (2 per kg) 215000 184500 211500
Less- Opening stock 52000 46125 52875
163000 138375 158625
Add- Closing stock (25% of the
following month) 46125 52875 54250
Purchase 209125 191250 212875
Material requirements:
July = 107500 units*2 kg = 215000 kg
August = 92250 units*2 kg = 184500 kg
September = 105750 units*2kg = 211500 kg
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Closing inventory: It is maintained at 25% of required production in the following month.
July = 92250 units*2kg*25% = 46125 kg
August = 105750 units*2kg*25% = 52875 kg
September = 108500 units*2kg*25% = 54250 kg
AC 3.4 Preparing Jeffrey & Son's cash budget
Cash budget: It is a summarized statement of future probable cash revenues and
payments. Excess of cash revenues over the cash payments called surplus cash balance while
excess of cash payments over the revenues known as deficit balance (Mongiello, 2015).
Jeffrey & Son's cash budget is prepared here as under:
Particular July August September
Cash Receipts
Cash sales 900000 821250 864000
Total cash receipts 916000 821250 864000
Cash Expenditures
Material Purchase 365969 334688 372531
Direct wages 322500 276750 317250
Variable overhead 108500 98350 100350
Fixed Overhead 75000 87500 87500
Total cash
expenditures 871969 797288 877631
Net cash balance 28031 23962 -13631
Cash balance 16000 44031 67993
Cash Deficit or
surplus 44031 67993 54362
Working note:
Monthly sales
May June July August September
Total sales
(95000*9)
= 855000
(110000*9)
= 990000
(105000*9)
= 945000
(90000*9)
= 810000
(105000*9)
= 945000
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60% in the
same month 513000 594000 567000 486000 567000
25% in the
following
month 213750 247500 236250 202500 236250
10% after two
months 85500 99000 94500 81000 94500
5% bad debs 42750 49500 47250 40500 47250
Cash sales of Jeffrey & Son's Ltd.
July = (567000+247500+85500) = 900000
August = (486000+236250+99000) = 821250
September = (567000+202500+94500) = 864000
Month Material Purchase Direct wages
July (209125kg*1.75) = 365969 (107500*3) = 322500
August (191250*1.75) = 334688 (92250*3) = 276750
September (212875 * 1.75) = 372531 (105750*3) = 317250
Variable overheads:
July = (107500*60%) + (110000*40%) = 108500
August = (92250*60%) + (107500*40%) = 98350
September = (105750*60%) + ((92250*40%) = 100350
TASK 4
AC 4.1 Computing variances, identify possible causes and recommend corrective actions
Variances are the difference between budgeted and actual results (Mondal and
Percival, 2012). Jeffrey & Son's Ltd. Variances has been computed here as follows:
Variance Formula Calculation Result
Sales variance Budgeted-Actual (4*3500)-13820 180 (A)
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Sales volume variance (Std profit for AP-Actual
profit)
(4160-3040) 1120 (A)
Material price variance
(MPV)
Actual Qty(SP- AP) 1425(2.4-2.4) Nil
Material usage variance
(MUV)
Std. price(SQ-AQ) 2.40[(3500*0.4)-
1425]
60(A)
Labour rate variance
(LRV)
Std hrs.(SR-AR) 350(8-7.8) 70(F)
Labour efficiency
variance (LEV)
Std rate(SH-AH) 8(350-345) 40(F)
Fixed overhead
variance (FOV)
budgeted-Actual (4800-4900) 100(A)
Profit variance Budgeted-Actual (4160-3040) 1120(A)
Possible causes and recommend corrective actions:
Material variance: Nil material price variance indicates that budgeted and actual
prices are constant to 2.4£. Another, material usage variance of 60(A) implies that budgeted
quantity was 1400 while actual quantity used is 1425 impact operations adversely. It may be
arise due to loss of material, material wastage and poor material management. Effective
material management through making policies and reduce scrap will be helpful to eliminate
it.
Labour variance: Both the labour rate and efficiency variance are favourable. Jeffrey
& Son's decided labour rate to 8£ while actually labour are paid at 7.8£ thus, it reduce labour
cost. Furthermore budgeted hours are 350 while actual labour hours are 345. It indicates that
workers are efficient and performing well.
Sales and profit variance: Lower the actual selling price and sales volume results in
adverse sales variance of 180(A). It can be remove by increasing product prices in the
market. Furthermore, profit variance arises due to existed sales and cost variance. Jeffrey &
Son's adverse profit variance of 1120£ arise because actual sales are lower and actual cost are
higher. Thus, it can be remove through achieving targeted sales and reducing cost.
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AC 4.2 Operating statement
Cost variances Type Favourable (In £) Adverse (In £)
Net variance
(In £)
Material Price 0
Usage 60 60(A)
Labour Rate 70 70(F)
Usage 40 40(F)
Fixed overhead variance 100 100(A)
Sales price variance 180 180(A)
Sales volume variance 1120 1120(A)
Total 110 1460 1350(A)
Budgeted operating profit 4160
Less: Total net variance 1350(A)
Actual operating profit 2810
AC 4.3 Responsibility centres
Jeffrey & Son's responsibility centres play a major role in eliminating variances
through taking necessary decisions. Its cost centre is responsible for controlling the product
cost. As above computed variance, it can be reported that material cost variance arise due to
higher uses of material quantity. Therefore, it must be advised that Jeffrey & Son's cost centre
should reduce material waste to eliminate the variance. Labour overhead implies favourable
variance hence, it create positive impact to the profits.
Another, revenue centre is responsible for maximizing company's sales to enhance
revenues. The reason for decreasing the centre performance is company's actual selling price
are lower to 3.94£ than target selling price of 4£ resulted in lower the business revenues.
Thus, centre should enhance customer demand in order to increase business sales. Through
achieving the sales target and minimize the cost, Jeffrey & Son's will be able to meet their
profit targets and improve their actual operational result.
CONCLUSION
The above project report concluded that management accounting tools provide correct
information to the managers for analytical objectives. Managers can evaluate necessary
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information and take better quality of decision through such tools. It provides assistance to
reduce the production cost, maintain effective cash balance, control expenditures, maximize
revenues and eliminate adverse variances. This in turn, firms can achieve their set target;
make business growth and development for long term period.
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REFERENCES
Books and Journals
Ahrens, T. and Chapman, C.S., 2007. Management accounting as practice. Accounting,
Organizations and Society. 32(1). pp. 1-27.
Blocher, E., Chen, K. H. and Lin, T. W., 2008. Cost management: A strategic emphasis.
McGraw-Hill/Irwin.
Burns, J. and Scapens, R.W., 2000. Conceptualizing management accounting change: an
institutional framework. Management accounting research. 11(1). pp. 3-25.
Datar, S. M. and et. al., 2013. Cost accounting: a managerial emphasis. Pearson Higher
Education AU.
Drury, C. M., 2013. Management and cost accounting. Springer.
Fisher, J.G. and Krumwiede, K., 2015. Product Costing Systems: Finding the Right
Approach. Journal of Corporate Accounting & Finance. 26(4). pp. 13-21.
Glass, V., Stefanova, S. and Prinzivalli, J., 2014. Zero-based budgeting: Does it make sense
for universal service reform?. Government Information Quarterly. 31(1). pp. 84-89.
Kaplan, R. S. and Atkinson, A. A., 2015. Advanced management accounting. PHI Learning.
Malmi, T. and Granlund, M., 2009. In search of management accounting theory. European
Accounting Review. 18(3). pp. 597-620.
Mohapatra, P., 2015. Job Costing. Economics/Management/Entrepreneurhip.
Mondal, D. and Percival, D.B., 2012. Wavelet variance analysis for random fields on a
regular lattice. Image Processing. IEEE Transactions on. 21(2). pp. 537-549.
Paul, C.J.M., 2012. Cost Structure and the Measurement of Economic Performance:
productivity, utilization, cost economics, and related performance indicators. Springer
Science & Business Media.
VanDerbeck, E., 2012. Principles of cost accounting. Cengage Learning.
Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and control.
Issues in Accounting Education. 26(1). pp. 258-259.
Online
Cost and Mangement Accounting. n.d. [Pdf]. Available through: <http://www.icsi.in/Study
%20Material%20Executive/Executive%20Programme-2013/COST%20AND
%20MANAGEMENT%20ACCOUNTING%20%28MODULE%20I%20PAPER
%202%29.pdf>. [Accessed on 2nd February 2016].
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