MANAGEMENT ACCOUNTING INTRODUCTION 1 TASK 11 AC 1.1 Classification of different types of cost1 AC 1.2 Unit cost and total job cost for Exquisite using absorption costing 3 Method3

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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