An Analysis of Cost Accounting and Management: A Managerial Emphasis

The provided assignment content is a collection of articles and books related to management accounting and cost accounting. The texts cover various aspects such as managerialist studies in management accounting, material flow cost accounting, variance analysis for Monte Carlo integration, fault detection in rolling element bearings using wavelet-based variance analysis and novelty detection, mean-variance analysis of fast fashion supply chains with returns policy, and more. Additionally, the content includes online resources such as an introduction to management accounting and articles on cost and management accounting.

MANAGEMENT
ACCOUNTING
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Table of Contents
INTRODUCTION .....................................................................................................................1
TASK 1......................................................................................................................................1
AC 1.1 Classification of different types of cost................................................................1
AC 1.2 Unit cost and total job cost for Job 444................................................................2
AC 1.3 Computation of total cost and per unit cost for Exquisite using absorption costing 3
Method..............................................................................................................................3
a. Allocate and apportion overheads to Jeffrey & Son's production units........................4
b. Reapportion the support department cost to the production units................................4
c. Deduce overhead recovery rates for each production departments using machine hours. 6
AC 1.4 Analyse cost data using appropriate techniques...................................................7
TASK 2......................................................................................................................................8
AC 2.1 Preparation of cost report for Jeffrey and Son's Ltd for the month of September,
determine variances with necessary comment..................................................................8
AC 2.2 Various performance indicators for potential improvements.............................10
AC 2.3 Way's to reduce cost, enhance value and quality ..............................................10
TASK 3....................................................................................................................................11
AC 3.1 Purpose and nature of the budgeting process to the budget holders of Jeffery and
Son’s Ltd.........................................................................................................................11
AC 3.2 Appropriate budgeting methods for Jeffrey and Son's Ltd. and its needs..........12
AC 3.3 Production and material purchase budget for Jeffrey & Son's Ltd....................13
AC 3.4 Preparation of cash budget of Jeffrey & Sons for the three months ending on..14
September.......................................................................................................................14
TASK 4....................................................................................................................................15
AC 4.1 Variance computation, its causes and take corrective actions to eliminate adverse
.........................................................................................................................................15
Variances.........................................................................................................................15
AC 4.2 Operating statement that reconcile budgeted and actual results ........................17
AC 4.3 Report to the responsibility centres....................................................................17
CONCLUSION........................................................................................................................18
REFERENCES.........................................................................................................................18
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INTRODUCTION
In the present competitive age, management accounting plays a crucial role as it helps
to examine and evaluate financial performance and take effective decisions. Jeffrey & Son's
Ltd is a manufacturing organization who produces variety of popular products called,
Exquisite. Present report will helps to discuss the role and its importance of management
accounting in the success of the company. The report will explain different costing methods
to determine accurate product cost and take pricing decisions accordingly. Moreover, under
the budgetary analysis, project report will describe various kind of budgets for variance
detections and eliminate it through taking necessary corrective actions. Along with this,
various performance indicators will be explain through which performance can be improved.
Furthermore, different ways will be suggested to reduce cost, enhance value and quality.
TASK 1
AC 1.1 Classification of different types of cost
Cost is the value or price of something which is needed to pay for acquiring goods
and services. It can be classified into various groups according to the nature and purpose.
These are stated as follows:
Classification on the basis of nature: According to nature of elements, costs are classified
into direct and indirect cost in terms of materials, labour and expenses. Material cost is
further classified into direct and indirect material cost. In Jeffrey and Son’s Ltd, direct
material cost includes cost of consumption of direct materials like raw materials, taxes and
duties. Indirect materials are those small values which cannot be directly allocated to a cost
centres for example; lubricants and spare parts of machinery (Robinson, 2008).
Direct labour cost is the amount incurred on salary packages or wages provided to
workers by the staff of Jeffrey and Son’s Ltd which includes fringe benefits such as
incentives, PPFs and gratuity. On the other hand, indirect labour costs consists of cost of
daily wages payable to workers which are not directly allocable to the office or industry of
the organisation like security guards or accountants.
Direct Expenses are royalties, hiring charges for tools &equipment’s and job
processing charges other than direct material and labour cost. Indirect expenses are expenses
which cannot be directly allocated to cost centres of Jeffrey and Son’s Ltd.
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Classification on the basis of Elements of Product: By nature of elements of a product, cost
can be classified into direct material, direct labour, and factory overheads. This classification
provides information regarding income measurement and product pricing:
 Material: This cost consists of cost of procurement of inventories, taxes freight
inwards, trade discounts, sales tax and all other cost of material required for the
production of product or services (Vaidya, 2008).
 Labour: This cost includes payment made to employees in the form of salary
packages or wages. Labour cost is either directly or indirectly involved in the
production process. Here, salary packages consist of all benefits and compensations
provided to employees of Jeffrey and Son’s Ltd. like bonuses, leave encashment,
PPFs etc. Manufacturing Overheads: It is inclusive of all manufacturing costs other than labour
and material cost. Examples of factory overheads costs are like expenditures on
account utilities, account supervisors, factory facilities charges and rental payments
etc.
Classification on the basis on functions and activities: Cost can be classified on the basis of
various functions and activities performed like: Production, Administration, Selling and
Distribution, Finance, Quality Check and Research and Development (R&D) etc.
Classification on the basis of behaviour: The behaviour of cost is predicted with respect to
responses to change in activities or volume. Further, the costs are classified into fixed,
Variable and Semi-variable costs. These costs do not vary with the change in activities, total
fixed cost remain constant irrespective of change in output. For example; salaries, rental
payments and insurance etc are inclusive in this. In variable cost, total costs changes with
respect to change in volume activities (Lal and Srivastava, 2013). Variable costs are under the
control of head department of Jeffrey and Son’s Ltd. All the implications and planning of
variable costs are done by management department of the company. It includes sales
commissions, packaging, freights, direct labour and materials. Semi variable costs consist of
both fixed and variable cost. Fixed part of the same represents the minimal fee charged for
setting up of any service and use of that service charges variable cost for example; telephone
services (Needles, 2010.).
AC 1.2 Unit cost and total job cost for Job 444
Job costing is a order specific costing that accumulates all the incurred
production expenditures for the specified job (Horngren, 2009). Every job contains a
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less number of units out of total business production. In the given scenario, Jeffrey and
Son's data has been provided for job no. 444 that contain 200 units. Thus, job costing is
applying here for determining total cost and per unit cost.
Expenditures Amount ( In £)
Purchase direct material 40000
Direct Labour's wages 54000
Production Overheads
Fixed overhead 24000
Variable overhead 36000
Total overheads 60000
Total Job cost 154000
Unit cost per unit = Total job cost/number of units
Total cost £154000
Total number of units £200
Unit cost (£154000/200 units) = £770
Working note:
 Direct material purchase = £50*4 per unit*200 units = £40000
 Direct labour's wages = £30*9 per unit*200 units = £54000
 Variable production overheads = £30*6 per unit*200 units =£36000 Fixed production overheads = (£80000/2000 hours)*(30 hours*200 units) = £24000
Interpretation: Presented cost sheet indicates that Jeffrey & Son's incurred total cost
of £154000 for producing 200 units of Exquisite. However, if it will allocate to all units than
per unit cost will be £770. This cost determination will assist Jeffrey & Son's managers to
take better pricing decisions. It is because through preparing cost sheet, management can
determine incurred expenditures so that they will definitely charge some high selling prices
for receive sufficient amount of profits (Garrison and et.al. 2010). They often set prices to
cover all the fixed as well as variable overheads plus some extra mark-up percentage on it so
that Jeffrey & Son's will be able to generate good profits.
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AC 1.3 Computation of total cost and per unit cost for Exquisite using absorption costing
Method
According to the scenario, there are three production and two service or support
departments operating in Jeffrey & Son's Ltd. Production departments are directly engaged in
producing required number of Exquisite products whilst support departments provide services
to all the three production departments. Absorption costing is very appropriate method for
determining cost of the production for Jeffrey & Son's products. It is a costing method which
combines all the direct, indirect, fixed as well as variable expenditures all together (Blocher,
Chen and Lin, 2008). The method will provide a fair basis of allocating support department
expenses towards the total production so that company can calculate right cost and take right
decisions.
a. Allocate and apportion overheads to Jeffrey & Son's production units
Overheads
Basis of
allocation
Machine
X (£)
Machine
Y (£)
Assembl
y 1 (£)
Stores
(£)
Maintenanc
e (£) Total
Indirect
wages and
supervision As Given 100000.00 99500.00 92500.00 10000 60000
362000.0
0
Indirect
material As Given 100000.00
100000.0
0 40000.00 4000 9000
253000.0
0
light and
heating
Total Area
occupied 10000 5000 15000 15000 5000 50000.00
Rent
Total Area
occupied 20000.00 10000.00 30000.00
30000.0
0 10000.00
100000.0
0
Insurance
of
machinery
Book value
of
machinery 7947.02 4966.89 993.38 496.69 596.03 15000.00
Machinery
Depreciatio
n
Book value
of
machinery 79470.2 49668.87 9933.77 4966.89 5960.26
150000.0
0
Building Area 5000.00 2500.00 7500.00 7500.00 2500.00 25000.00
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insurance occupied
Salaries of
work
managemen
t
Number. of
employees 24000.00 16000.00 24000.00 8000.00 8000.00 80000.00
Total 346417 287636 219927 79964 101056 1035000
b. Reapportion the support department cost to the production units
Particular
Machine
shop X
( In £)
Machine
shop Y
( In £)
Assembly( In
£)
Store
department
Maintenance
department
Primary
distribution as per
above table
346417 287636 219927 79964 101056
Store 39982 29987 9995 (79964)
Maintenance 48506.88 32337.92 20211.2 (101056)
Total cost 434905.88 349960.92 250133.2 Nil Nil
Note: Store service department cost of £79964 has been reapportioned using direct
material basis. However, maintenance departments cost has been reapportioned on the basis
of used machine hours.
c. Deduce overhead recovery rates for each production departments using machine hours
As per the scenario, overhead absorption rate is determining here on the basis of
machine hours. Henceforth, its formula will be as follows:
Overhead absorption rate = Total production overheads/Used machine hours
Machine X
Total production overheads = £434905.88
Total machine hours = 80000
OAR = £434905.88/80000 = £5.44
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Machine Y
Total production overheads = £349960.92
Total machine hours = 60000
OAR =£349960.92/60000 = £5.83
Assembly
Total production overheads = £250133.2
Total machine hours = 10000
OAR = £250133.2/10000 = £25.01
Total cost of Product Exquisite
Total overheads cost
Machine X = £5.44*0.8 hours = £4.35
Machine Y = £5.83*0.6 hours = £3.5
Assembly = £25.01*0.1 hours = £2.5
Total = £4.35 +£3.5+£2.5 = 10.35
Total product cost = Material cost + labour cost + overhead cost
Material cost = £8
Labour cost = £15
Overhead cost = £10.35
Total product cost = £8+£15+£10.35 =£33.35
AC 1.4 Analyse cost data using appropriate techniques
As per the scenario, OAR should be traced using employed labour hours used for the
production purpose. Therefore, it can be computed through dividing total production
overheads with the total labour hours (McNichols and Stubben, 2008).
OAR = Total production overheads/Employed labour hours
Machine X
Total production overheads = £434905.88
Total machine hours = 200000
OAR = £434905.88/200000 = £2.17
Machine Y
Total production overheads = £349960.92
Total machine hours = 150000
OAR =£349960.92/150000 = £2.33
Assembly
Total production overheads = £250133.2
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Total labour hours = 200000
OAR = £250133.2/200000 = £1.25
Total cost of Product Exquisite
Total overheads cost
Machine X = £2.17*2 hours = £4.34
Machine Y = £2.33*1.5 hours = £3.5
Assembly = £1.25*1 hours = £1.25
Total = £4.34 +£3.5+£1.25 = £9.09
Total product cost = Material cost + labour cost + overhead cost
Material cost = £8
Labour cost = £15
Overhead cost = £9.09
Total product cost = £8+£15+£9.09 =£32.09
Differences under both the basis: Under the machine hour’s basis, total deprtment
ocverhead absorption rates are £5.44, 5.83 and £25.01 respectively. On contrary, the rates had
been turned out to £2.17, £2.33 and £1.25 in the labour hour’s basis. It indicate that under the
labour hour’s basis, all the rates gone declined. Moreover, the total overhead cost from
£10.35 to £9.09 it is comparatively lower in labour hours. So, it can be suggested that Jeffrey
& Son's has to use this allocation basis because it will decrease total cost from £33.35 to
£32.09 and improve profitability. This in turn, Jeffrey and Sons can take benefits of
enhancing operational performance.
TASK 2
AC 2.1 Preparation of cost report for Jeffrey and Son's Ltd for the month of September,
determine variances with necessary comment
Present scenario represents that Jeffrey & Son's Ltd managers decide budgeted output
of 2000 units. However, in actual, company produced only 1900 units of Exquisite.
Therefore, variances can be computed through comparing cost for desired and actual level of
output.
 Actual cost of material purchase:
Actual material price = £24000/2000 units = £12 per unit
Material cost = Actual number of units*material price per unit
= 1900 units*£12 per unit = £22800
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 Actual cost of Labour's wages
Labour's wages rate (as given) = £10 per unit
Labour's cost = Actual number of units*labour rate per unit
= 1900 units*£10 per unit = £19000
 Actual electricity charges: It is a semi-variable cost that remains still same before
achieving a certain level of output and thereafter, it goes changes with the production
changes. Henceforth, it combines both the fixed and variable nature of cost, calculated
hereunder:
Variable cost of electricity charges per unit
= Difference between actual cost/Difference between numbers of units
= (£8000-£5000)/ (2000 units-1200 units) = £3.75
Actual variable electricity charges = Actual production*variable rate per unit
= 1900 units *£3.75 = £7125
Fixed electricity charges = [£8000-(£3.75*2000 units)] = £500
Total actual electricity charges = Fixed + variable
= £500 + £7125 = £7625
 Maintenance, is a stepped cost that increases by £1000 for every 500 units of extra
production. However, in the given case, actual production went fall by 100 units
henceforth, Maintenance cost will be decreased by some amount, computed below:
Actual maintenance cost = £5000-(£1000/500*100) = £4800
Cost Element Budgeted cost Actual cost Variance
2000 units 1900 units (budgeted-Actual)
Material cost 24000£ 22800£ 1200£
Labour’s wages 18000£ 19000£ (1000£)
Fixed Overhead 15000£ 15000£ Nil
Electricity cost 8000£ 7625£ 375£
Maintenance cost 5000£ 4800£ 200£
Total 70000£ 69225£ 775£
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 Material variances: Material cost indicates favourable variance of £1200. It has been
arisen because actual output goes declined by 100 units. Therefore, actual material
cost goes reduced to £22800. However, material price variance is nil because
budgeted and actual material prices remain constant to £12 per unit.
 Labour variance: Labour's wages rate goes increased from £9 to £10, it has been
resulted in high labour cost. It increase actual wages payment by £1000 that impact
Jeffrey & Son's profitability in an adverse manner. This is because firm has to pay
more wages to their labours this in turn, profitability will be decreased. Thus, it
became clear that company has to maintain their staff wages so that budgeted targets
can be achieved (Bhimani, Horngren and Datar, 2008). It has to hire less number of
workers and at lower piece rates.
 Electricity charges: As above discussed, it is a semi-variable cost that combines both
the fixed and variable costs (Ting and Cho, 2008). Fixed cost remained constant to
£500 and does not impact operations in any direction. However. Variable cost got
reduced because of lower level of output. It went fall from £8000 to £7625 by £375. It
will reduce total operational expenditures but still target profits cannot be achieved.
 Maintenance cost: Being a stepped cost, it went fall by £200 as actual production has
been declined by 100 units. It will reduce actual business spending of Jeffrey & Son's.
AC 2.2 Various performance indicators for potential improvements
There are various performance indicators which tells about Jeffrey & Son's operations
that how it is performing at the market place. Revenue, cost, profits, technological
improvement, customer base, market share, waiting time, price stability, product quality are
some of the performance indicator (Salako and Yusuf, 2016). For instance, if Jeffrey & Sons
see any negative impact in all of these factors than firm should be work out to eliminate
adverse variance and enhance performance. Moreover, scrap management, workers ability,
product quality management, large level of production, strategic capability, new product
development and business expansion are the another indicators (Malmi, 2016). Jeffrey &
Son's need to regularly focus on all of these indicators and make analysis of it so that firm
can determine the reasons for negative performance and take appropriate decisions to remove
it.
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AC 2.3 Way's to reduce cost, enhance value and quality
In present scenario, with increasing market challenges it is important task for an
organisation to maintain its position in competitive market by enhancing its social values and
ethics. There are number of performance indicators are being used without sacrificing its cost
to increase the profitability and effectiveness of the company. Some of them are stated below:
 Increased efficiency: By applying improved technologies, re-entering process and
information systems Jeffrey and Son's Ltd can maximize its efficiency and
productivity which provide integrated solution to organisation.
 Reduced cost: Company can reduce its wastage cost by using innovative e-
procurement systems and strategic tools (Kilgore, 2010).
 Environment sustainability: Jeffrey and Son's Ltd is committed to reduce
environmental issues by adopting carbon neutrality mechanism and utilizing
digitalized techniques.
 Improved Quality: It is also committed to improve product quality. With enhancing
technology and operations functions, marketers can easily drive its operational and
processing unit (Mongiello, n.d). Many strategies are designs to evolve innovation in
manufacturing process and avoid obsolete product.
 Improved interactions: It is essential to communicate with customers to get reviews
about products and services rendering to them. Customer relationship management is
very important strategic tool to maintain a rapport between supplier and customers.
They give feedbacks and suggestions so it is essential to create powerful relationships
with customers.
TASK 3
AC 3.1 Purpose and nature of the budgeting process to the budget holders of Jeffery and
Son’s Ltd.
Budgeting is a qualified plan or list that shows the figures of each spending items and
revenues earned. A good budgeting is done with the perspective of political, managerial,
planning and financial dimensions. Many important decisions regarding government plans
and policies are made in the budget process. It encompasses the evaluation and development
of a plan for the provision of capital assets. Every decision involved in budgeting process has
long term perspective potential benefits. Budgeting process is very essential for the
organisation:
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 It helps the organisation to calculate its balancing revenues and expenditures. Jeffrey
and Son's Ltd. allocate its resources on the basis of identified operational goals.
 Budget process focuses on effective outcomes and results. It is a work plan of specific
activities and programmes of the organisation to attain certain specific objectives.
 The mission of budget process is to incorporate both political and managerial goals of
the organisation.
 It involves communication with stakeholders and citizens to make choices and
decisions among the competitive alternatives.
 Budget process includes stakeholders of the company including customers,
employees, citizens and media because it is necessary to take frequent reports from
them to provide accountability and information about the company.
 Many political factors affect the budgeting process, which may reflect in budgeting
plan of the company and reveal the priorities and commitments to various activities at
government level.
 The budget process should be centrepiece of decision making process for allocation of
resources and settlement of priorities in the company.
 Special financial plans, actions, programmes, policies and strategies are made by the
company to achieve its long term goal.
 Many tools and techniques of budgeting process should be developed by the company
to accomplish goals.
 There are number of issues which affect the implementation of successful budget
plan, so budget holder should be capable enough to handle these factors.
AC 3.2 Appropriate budgeting methods for Jeffrey and Son's Ltd. and its needs.
Jeffrey and Son's Ltd is about to prepare its forthcoming year's budget. The volatility
in market industry and other market challenges makes it difficult to design an effective
business plan. Jeffrey and Son's Ltd is planning to make incremental adjustments to the
forthcoming budget allowances. Incremental budgeting is traditional budgeting technique
whereby budget is prepared according to current market performance and adjusted in current
period's budget. Incremental amounts are adjusted according to current market scenario. It is
easy to prepare incremental budget according to current market scenario, makes marginal
changes and allow the policy makers of the company to emphasize on key areas. But it don't
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focus on the future operational objectives of the organisation. It does not give the overview of
performance of company and assumed that existing budgeting plan is satisfactory for
business (Cherry and R, 2015).
So it is recommended to use Zero-based budgeting, unlike incremental budgeting each
year's budget is judged from ground level. No budget lines are carried out from one period to
other, all assumptions and decisions are made according to new planning period. Zero-based
budgeting is appropriate budgeting technique for Jeffrey and Son's Ltd as challenges the
status quo of the company and also encourages to change its current business environment.
All activities and plans are recreated from zero-base, such that inefficient and obsolete
approaches are abolished. Moreover, it also encourages bottom-up approach in budgeting to
motivate its employees.
AC 3.3 Production and material purchase budget for Jeffrey & Son's Ltd.
Production budget: Being a manufacturing organization, Jeffrey & Son's Ltd, can
prepare production budget to estimate required number of units for future period (Kaplan and
Atkinson, 2015). Through estimating market demand, Jeffrey & Son's need to determine that
how many number of units will be needed to produce in forthcoming year for satisfying the
customer demand. It will assist in smoothing company's operation and achieve its target of
high profitability.
As per the given scenario, production budget has been prepared here for Jeffrey &
Son's to determine potential production of Exquisite.
Particulars July August September
Budgeted Sales 105000 90000 105000
Beginning period inventory 11000 13500 15750
94000 76500 89250
Ending period inventory 13500 15750 16500
Required Production 107500 92250 105750
Working note:
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Inventory at the closing period: Scenario indicates that Jeffrey & Son's management
decided to maintain inventory at 15% of budgeted sales for the upcoming period. Henceforth,
it can be computed here as under:
Ending period inventory = Budgeted sales for the next month * 15%
July = 90000 units*15% = 13500 units
August = 105000 units*15% = 15750 units
September = 110000 units*15% = 16500 units
Material purchase budget: In manufacturing organization, firms have to purchase
required quantity of material to produce required number of product units (Kokubu and
Kitada, 2015). Material purchase budget provide huge assistance to firm managers to forecast
the quantity of material needs to be purchased from outsiders to ensure required production.
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 require: Scenario depicts that Jeffrey & Son's Ltd will require 2 per kg of material
August = 92250 units*2kg = 184500 kg
September = 105750 units * 2kg = 211500 kg
Ending inventory: It is maintained at 25% of potential required production for the next
month.
July = 92250U*2kg*25% = 46125 kg
August = 105750U*2kg*25% = 52875 kg
September = 108500U*2kg*25% = 54250 kg
AC 3.4 Preparation of cash budget of Jeffrey & Sons for the three months ending on
September
Cash budget: It is a summarized statement of Jeffrey & Son's cash inflows and
outflows that can be arisen in future period so that firm will be able to estimate net cash
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balance (Ölveczky and Caccamo, 2006). As per this budget, excess of total revenues over
the total expenditures is known as surplus cash while excess of cash spending over the
incomes is called deficit. Through this, managers can optimum utilize their generated
incomes and make effective control over the cash through monitoring (Introduction to
management accounting, n.d.). It makes person accountable for generating budgeted
amount of revenues and not to increase expenses from the set target. Henceforth, it
became clear that it provide assistance to manage firm's cash flows.
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:
Cash revenues: Scenario depicts that 60% of the sales received in same month, 25%
receive in next month while 10% of the sales received in next month.
Particular July August September
60% of the monthly sales 567000 486000 567000
25% of previous sales 247500 236250 202500
10% of Sales before two months 85500 99000 94500
Total cash revenues 900000 821250 864000
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Material purchase at the rate of £1.75 per unit
July = 209125kg*1.75 per kg = £365969
August = 191250 kg * £1.75 per kg = £334688
September = 212875 kg * £1.75 per kg = £372531
Direct wages at the rate of £3 per kg
July = 107500 units* £3 per kg = £322500
August = 92250 units*£3 per kg = £276750
September = 105750 units*£3 per kg = £317250
Variable overheads at the rate of £1 per kg. Moreover, 60% of the variable expenditures will
be paid in same month while 40% is paid in upcoming month.
July = (107500*60%) + (110000*40%) = 108500
August = (92250*60%) + (107500*40%) = 98350
September = (105750*60%) + ((92250*40%) = 100350
TASK 4
AC 4.1 Variance computation, its causes and take corrective actions to eliminate adverse
Variances
Variance is the difference between actual and budgeted values. Adverse variance
indicate that actual spending are higher whilst actual incomes are lower. On contrary,
favourable variance indicate that actual revenues are higher whereas actual spending
are comparatively lower.
Variance Formula Calculation Net Result
Sales variance Budgeted-Actual (4*3500)-13820 180 (A)
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 Std hrs.(SR-AR) 350(8-7.8) 70(F)
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(LRV)
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)
Type of variance Possible causes Corrective measures
Material Material price variance is nil because
both the target and actual prices are
equal. However, material usage
variance indicated adverse balance of
60. Its causes is Jeffrey & Son's uses
high material quantity than set targets
(Li, Choi and Cheng, 2014). It
increase actual use of material by 25
kg from 1400 to 1425 kg. Another, it
may be arises because of material
scrap and wastage.
Jeffrey & Son's management
has to formulate some
policies for material
management. It will assist to
reduce scrap and wastage of
material (Pilleboue and et.al,
2015). Further, through
regular monitoring of
workers, company will able
to manage material uses
effectively.
Labour It indicate favourable balance because
of less wages rate and actual labour
hours. This in turn, total cost will be
reduce and affect operations
favourably.
No corrective actions is
required because of
favourable balance which
indicate that labours are
efficient and skilled in their
work.
Sales and profit Lower actual sales volume and selling
prices arise adverse variance of 180.
However, profitability variance arises
due to existed sales and cost
variances.
Sales variance can be
mitigate through charging
high selling prices (Ziaja and
et.al, 2016). This in turn,
profitability targets can be
achieved in a great manner.
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AC 4.2 Operating statement that reconcile budgeted and actual results
Particulars Favourable (£) Adverse (£) Net (£)
Sales volume variance 1120 1120 (A)
Sales price variance 180 180(A)
Material price variance
Material usage variance 60 60(A)
Labour rate variance 70 70(F)
Labour efficiency variance 40 40(F)
Fixed overhead expenditure
variance
100 100(A)
Total variances 110 1460 0
Total net variance 1350(A)
Budgeted operating profit 4160
(-) Total net variance -1350(A)
Actual operating profit 2810
AC 4.3 Report to the responsibility centres
There are various responsibility centres such as cost and revenue who are responsible
to achieve budgeted targets of Jeffrey & Son's. On the basis of above analysis, cost centre
must be reported about high actual material cost which indicate that centre is not managing
cost of material efficiently (Cost and management accounting, 2014). Therefore, it should
take decisions and frame policies so that actual material usage can be declined resulted in
removing adverse variance. However, revenue centre is responsible for generating target
revenues. In the present case, Jeffrey & Son's did not accomplished its budgeted revenues
hence, it should be reported with the sales variance. The centre must be reported that actual
selling price of Exquisite is lower resulted in declined actual revenues. Through this, centre
manager will increase charge prices to eliminate unfavourable variance and achieve set
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targets (Meidute, 2007). This in turn, desired business targets can be accomplished so that
firm will be able to improve its performance and future sustainability for long-term period.
CONCLUSION
Prepared project report concluded that in the present highly complex and competitive
age, management accounting will greatly assist managers to analyse and examine
organization performance. So that, they can take better quality of decisions and enhance their
potential performance. Present report concluded that through applying various managerial
tools, Jeffrey & Sons can reduce their product cost, manage cash sources, take effective
pricing decisions and frame competent policies for the future period. The report described
that budgetary tool is a very effective method to predict future performance and improve it
through continuous monitoring and controlling. It will ensure long term sustainability and
hazard free operations so that it can achieve high growth in upcoming period.
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REFERENCES
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