Cost Accounting and Benchmarking Analysis

The assignment provides an in-depth examination of cost accounting and benchmarking practices in a business context. It explores various cost classification methods, including FIFO, LIFO, and average cost, and highlights the significance of identifying and addressing adverse labor variances. The document also touches on the topic of benchmarking and its role in improving quality and value within an organization.

MANAGEMENT
ACCOUNTING

Index of Tables
Table 1: Closing stock using FIFO..................................................................................................3
Table 2: Closing stock using LIFO..................................................................................................3
Table 3: Closing stock using Average cost......................................................................................4
Table 4: Routine costs......................................................................................................................5
Table 5: sales budget........................................................................................................................7
Table 6: Production budget..............................................................................................................8
Table 7: Material usage budget........................................................................................................8
Table 8: Material purchase budget...................................................................................................8
Table 9: Plastic usage budget...........................................................................................................8
Table 10: Plastic purchase budget....................................................................................................9
Table 11: Cash budget.....................................................................................................................9
Table 12: Calculating sales............................................................................................................10
Table 13: Raw material..................................................................................................................11
Table 14: Production overhead......................................................................................................11
Table 15: Variance analysis...........................................................................................................12

INTRODUCTION
Role of management accountant of an entity is to minimise the complexities imposed on
an entity. It help to make complete records of each and every transactions so that company will
run effectively. ABC Ltd has been selected in the given report in order to analyse the
performance of the firm in relation to various costs and variances determined. This report is all
about classification of costs, determination of closing stock using different techniques. Current
report emphasises on preparing budgets to forecast the future performance along with the
preparation of variance analysis.
TASK 1
1.1 Classification of costs
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Cost is regarded as one of the important aspects that needs to be identified by an
enterprise owner in their business. Cots is essential to be identified as this can affect overall
performance of an entity in the near future. From business perspective, cost is always taken into
negative sense as this would affect the ability of the firm by suppressing its sales and the
revenue. An entity owner identifies all kinds of costs in an entity by segregating them into
various categories. Classes of costs will be helpful for an entity owner in order to ascertain its
financial performance (Friesen, Lundquist and Van Stan, 2015). ABC Ltd is required to analyse
its present resources in relation to all the costs incurred in a firm as this may reduces the current
revenue generated in a particular financial year. Expenses are segregated on the basis of various
classes such as determinate costs, changeable costs and semi variable price on the basis of
behaviour. Production, administration and other office expenditures incurred in a firm are
categorised into functional costs of the business. On the other hand, indirect or direct costs
involved in a business are comes under the category of nature of costs. A single costs can fall
under all these three classification of costs. Cost accountant of ABC Ltd will be easily identified
all kinds of costs incurred in a corporation in order to meet all the costs appropriately in a firm.
1.2 Different costing methods
Costing is a study of all the methods that are used in state to determine different costs
which are acquire in a business. Efficiency of all the trade practices will be improved with the
passage as in this way existing performance of the firm will get increases. There are various
methods of costing used by an individual in identifying variety of costs in a firm are given as
below:
Job costing- In this type of costing different jobs are created in a business in which all the
targets are specifically treated as singular jobs. The evaluation of jobs includes direct material
cost, labour and overhead costs (Frank, 2015). These costs are evaluated in order to determine
the profit by excluding all the costs from the existing sales of an entity.
2

Process costing- In industry like construction, a process is evaluated from start till the end of the
process to determine the overall movement of goods from one process to another. Process
costing consider both direct and indirect costs which are integral part of an entity. In the end of
every process finished stock will be transferred to the finished stock ledger as the products are
processed with the help of al the processes whose accounting will be done in the current costing
methods.
Batch costing- It is a form of specific order costing. In batch costing items are manufactured for
stock. A finished product may require different components for assembly and may be produced
in economical batch lots. In general the procedures for costing batches are very similar to costing
jobs. The batch would be treated as a job during manufacture. On completion of the batch the
cost per unit can be calculated by dividing the total batch cost by the number of good units
produced.
Examples of products that are best accounted for cost through batch costing include:
 Production of engineering components
 Radios/television sets
 Medicine
 Footwear
 Clothing manufacturer
The costs included in the batch cost are direct costs of material, labour and direct expenses plus
overheads absorbed into the batch.
1.3 Calculating closing stock
Table 1: Closing stock using FIFO
Date
Purchas
e Unit Amount Sale Unit Amount
Closing
Stock Unit Amount
02/06/17 2000 15 30000 2000 15 30000
06/06/17 800 15 12000 1200 15 18000
11/06/17 1000 17 17000 1200 15 18000
1000 17 17000
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16/06/17 1200 15 18000 800 17 13600
200 17 3400
19/06/17 1000 19 19000 800 17 13600
1000 19 19000
26/06/17 700 17 11900 100 17 1700
1000 19 19000
Total 20700
Table 2: Closing stock using LIFO
Date
Purchas
e Unit Amount Sale Unit Amount
Closing
Stock Unit Amount
02/06/17 2000 15 30000 2000 15 30000
06/06/17 800 15 12000 1200 15 18000
11/06/17 1000 17 17000 1000 17 17000
16/06/17 1000 17 17000 800 15 12000
400 15 6000
19/06/17 1000 19 19000 1000 19 19000
26/06/17 700 19 13300 800 15 12000
300 19 5700
Total 17700
Table 3: Closing stock using Average cost
Date Purchase(Unit) Amount
2 2000 30000
11 1000 17000
19 1000 19000
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Total £66000
Per unit cost £66000/ 4000
=16.5
Cost of closing stock 1100*16.5
=18150
As per the above calculation, it has been interpolated that by using FIFO method,
company earn 20700 closing stock. On the other hand, by using LIFO method, company's
closing stock is 17700 pound, whereas with the use of average cost method, company closing
stock is 1815 pound.
1.4 Cost analysis using various methods
Two important costing techniques are used in order to analyse all the cost identified by an
enterprise as their desire aim is toe can give the desired aims and the objectives crafted by an
entity owner in ABC Ltd.
Marginal costing- Marginal costing is used to evaluate the cost identified as the focus of this
technique is to analyse all the variable cost covered in a business as determinate price are
deducted from the total costs (DRURY, 2013). Contribution of all the products will be
determined that help ABC Ltd in order to decided which products will be continue or rest will be
discontinue.
Absorption costing- In every entity, all the costs re considered by an entity that cover both fixed
and variable cost in an entity. The current technique is used to depict the clear picture about the
performance of an entity as the existing profit will be ascertained by the firm y considering both
variable and fixed cost.
By using both marginal and absorption costing method, it can be analysis that in marginal
costing only fixed costs are to be taken. As per the given data, there are following things
included in marginal costing:
Calculation of marginal costing
5

Direct material=£16000
Direct labour=£14590
Direct expenses= £3530
Total cost= 95980
Marginal costing= Total cost-(Direct material+ Direct labour+Direct expenses)
= 95980-( 16000+ 14590+3530)
= £61860
Calculation of Absorption costing
Direct material= £16000
Direct labour= £14590
Prime cost= £ 30590
Overheads= (£39530)
Total cost= (8940)
As per the above calculation of absorption and marginal costing, it have been found that
cost of marginal cost is higher as compare to marginal cost. The total cost calculated by marginal
costing method was £61860, whereas the amount which are generated from absorption costing
was (£8940). It means that company need to adopt marginal costing method while calculating the
cost.
TASK 2
2.1 Prepare routine costs
Table 4: Routine costs
6

2.2 Performance indicators to improve its performance
Key performance indicators are used as one of the important technique that focuses on
the existing performance of an entity (Key Performance Indicators: Tools for User
Empowerment, 2016). Weaknesses lies in an entity will be identified by ABC ltd in order to
improve their deficiency by adopting the best suitable method. The company is required to
analyse all its resources in order to emphasises on favourable as well as unfavourable variances
incurred in an entity.
Benchmarking- It is that technique used by ABC Ltd that emphasises on its current performance
as the ability of the business will get increases by comparing it with the external entity. The Best
industry's practices will inspire the existing users of the business in order to break the record in
the industry. Employees applies their efforts in order to achieve all the targets and aims within a
short span of time.
Application of Benchmarking
7

In terms of financial performance of ABC Ltd, desired rate of return on investment will
help in achieving the desired aims and targets of the business. For instance, benchmarking is
used by ABC Ltd in order increase their ROI of 6% to 8% as achieving higher percentage than
the standards decided by the industry. Favourable or unfavourable variances will be determined
by ABC by comparing their actual results with the standards framed by the experts of the overall
industry. Desired motive of the business is to capture higher share in the external business
environment.
2.3 Suggestion to reduce cost, value and quality
Three important component of the business concern is cost, value and quality that ensure
higher productivity of the business. Aims and objectives developed by an entity will be helpful
for an entity in order to enhance the existing worth of the firm in eyes of all the customers
located in the external business environment.
ABC- Activity based costing technique is used by an enterprise owner in order allocate all kinds
of costs in a business appropriately among all the departments. Efficiency of all the resources
will be maintained that will be helpful in meeting higher complexity. Cost drivers are effectively
used in order to identify various cost incurred in a business as the focus of an entity lies on the
weak areas of the business. Profit generated by an entity gets increases with the passage of time
when the current cost incurred by ABC Ltd gets reduces over certain period.
Balance score card- Quality management approach used by CEO of ABC Ltd in order to
identify the quality of all he resources used by them in delivering all the services. Quality of all
the services are required to be maintained by the business firm by emphasises on the existing
gaols and the objectives of firm. It has four different perspectives such as internal business
process, innovation ad creativity, customer experience and financial perspectives. These four
pillars are important for an entity as the overall evaluation of al the business activities is possible
with the help of current technique.
TASK 3
3.1 Purpose and nature of budgeting process
Budgeting is a written statement prepared in a business that cover income and
expenditure equally the main motto of the employer is to identify its existing performance
(Jobson, 2012). Costs are identified with the budget in order to manage its performance by
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utilising available resources. Different budgets are used by ABC Ltd in order to forecast their
future by analysing all the present resources in an entity.
Purpose and Nature of budgets
 It helps in forecasting future of an entity by analysing the current data of a firm.
 Providing significant financial information related t the firm such as income, costs, profit.
 Helps management in order to take decisions
 Optimum utilization of all the resources in an entity
 Delegating responsibilities among all the employees
3.2 Budgeting methods and its need in organisation
 Traditional budgeting- It is that kind of budget which is also recognises as incremental
budget in which income increases from previous period are easily identified (Jones and
et.al., 2013). Previous year figures forms base for the new budgets prepared as the
reasons for the increase or decrease in the company's performance can be found out.
 Zero based budget- Modernised version of budgeting in which no base is taken into
account as every budget prepared as fresh without carry forwarding past figures.
Efficiency of the firm get increases as new budgets prepared by them will enhance its
skills and the capabilities.
 Fixed Budget- A fixed budget, also called a static budget, is financial plan based on the
assumption of selling specific amounts of goods during a period. In other words, fixed
budgets are based on a set volume of sales or revenues. This is an easy way for
management to plan out expenses and operations when they assume that sales volume
and total revenues will be a set amount during a period.
 Flexible Budget- A flexible budget is a budget that adjusts or flexes for changes in the
volume of activity. The flexible budget is more sophisticated and useful than a static
budget, which remains at one amount regardless of the volume of activity.
3.3 Different budgets
Table 5: sales budget
9

Particular X Kite Y kite Z kite
Sales in Units 4,000 12,000 3,000
Selling price per unit £60 £80 £120
Budgeted Sales
revenue
£240000 £960000 £360000
Table 6: Production budget
Particular X Kite Y kite Z kite
Sales units 4,000 12,000 3,000
Add: Closing stock 400 700 350
Total production 4,400 12,700 3,050
Less: Opening stock 150 500 120
Units produced 4,250 12,200 2,930
Table 7: Material usage budget
Particular X Kite Y kite Z kite
Direct material
required
400*1.5=600 700*2= 1400 350*3= 1050
Less: Opening stock 150 500 120
Add: Closing stock 400 700 350
Material usage 850 1600 1280
Table 8: Material purchase budget
Particular Amount
Total Material usage 37300
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Add: Opening stock 5000
Less: Closing stock 3730
Material purchase 38570
Table 9: Plastic usage budget
Particular X Kite Y kite Z kite
Direct material
required
400* 4= 1600 700* 5= 3500 350*6 = 2160
Less: Opening stock 150 500 120
Add: Closing stock 400 700 350
Material usage 1850 3700 2390
Table 10: Plastic purchase budget
Particular Amount
Total Material usage 23820
Add: Opening stock 2000
Less: Closing stock (5 % of usage) 1191
Material purchase 24629
3.4 Cash budget
Table 11: Cash budget
11

Cash
Inflow
Opening
cash 7500 8160 4520 2520 520 -3280 -13480 -16500 -21320
cash
sales 4200 4800 4800 6000 7200 600 8400 9600 9000
sales on
two -
month
credit 2800 3200 3200 4000 4800 400 5600
Total
cash
inflow 11700 12960 12120 11720 10920 1320 -280 -6500 -6720
Cash
outflow
Raw
material 0 2800 3200 4000 4800 4800 5600 6000 6000
Producti
on
expenses 2100 2400 3000 3600 3600 4200 4500 4500 4500
Variable
producti
on
overhead
One
month
@80% 1440 1440 1600 1600 1600 1600 1920 1920 1920
Two
month@
20% 1800 1800 2000 2000 2000 2000 2400 2400
Producti 2200 2200 2200
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on
planned
Total
cash
outflow 3540 8440 9600 11200 14200 14800 16220 14820 14820
Closing
cash
balance 8160 4520 2520 520 -3280 -13480 -16500 -21320 -21540
Working notes
W.N.1
Table 12: Calculating sales
Particula
rs May June July August
Septemb
er October
Novemb
er
Decemb
er January
Sales
units 350 400 400 500 600 50 700 800 750
Sales
price 20 20 20 20 20 20 20 20 20
Total
sales 7000 8000 8000 10000 12000 1000 14000 16000 15000
cash
sales 4200 4800 4800 6000 7200 600 8400 9600 9000
sales on
two -
month
credit 2800 3200 3200 4000 4800 400 5600
Table 13: Raw material
13

Per unit 8 8 8 8 8 8 8 8 8
Raw
material 2800 3200 4000 4800 4800 5600 6000 6000 6000
0 2800 3200 4000 4800 4800 5600 6000 6000
Table 14: Production overhead
Particula
rs May June July August
Septemb
er October
Novemb
er
Decemb
er January
30th
June@1
800 1800 1800
31st
October 2000 2000 2000 2000
1st
novemeb
er@2400 2400 2400 2400
Total 1800 1800 2000 2000 2000 2000 2400 2400 2400
One
month
@80% 1440 1440 1600 1600 1600 1600 1920 1920 1920
Two
month@
20% 1800 1800 2000 2000 2000 2000 2400 2400 2400
TASK 4
4.1 Calculation of variances
Table 15: Variance analysis
14

Particulars Amount Remark
Sales variance
Sales revenue price variance
expected sales revenue 8000*240 1920000
achieved sales revenue 1800000
Sales revenue price variance 120000 Adverse
Sales volume contribution variance = (8400-
8200) units * standardized share per unit
22400 Adverse
gross sales volume revenue variance = (8400-
8000) units * standard revenue per unit
96000 Adverse
Particulars Amount Remark
Material variance
Total material cost variance
Standard cost of material variance is £60 per kg
Material cost for 8000 units of production 672000
Actual cost 660000
15

Material cost variance 12000 Favourable
Material price variance
12000 kg material 720000
Actual cost 660000
Physical price deviation 60000 Approving
Physical utilization deviation
For 8000 units should have used 11200 kg
Actual quantity 12000 kg
material usage variance -800 Adverse
cost per kg 60
material usage variance -48000 Adverse
Variance Summary
Material price variance 60000 Favourable
Material usage variance -48000 Adverse
Material cost variance 12000 Favourable
Particulars Amount Remark
16

Direct labor deviation
Whole direct labour cost variant
Labour cost for 8000 units of production 288000
Actual cost incurred 303360
Full direct labour cost variance -15360 Adverse
Direct labour rate variance
15800 labour hours should have cost 284400
Actual costs 303360
Direct labour rate variance -18960 Adverse
Direct labour efficiency variance
8000 units of production should have used 16000 hours
Actual costs 15000 hours
door-to-door labour efficiency variance 1000 Favourable
direct labour efficiency variance 18000 Favourable
Actual time variance
Labour hours paid 15800 hours
Labour hours worked 15000 hours
17

Idle time variance 800 hours
Idle time variance 14400 Adverse
Summary of variances
Direct labour rate variance -18960 Adverse
Direct labour efficiency variance 18000 Favourable
Idle time variance -14400 Adverse
Total direct labour cost variance -15360 Adverse
Particulars Amount Remark
Multivariate overhead variance
Total changeable overhead cost variance
Changeable overhead should have 480000
Actual costs 480000
Total direct labour cost variance 0
Variable overhead expenditure variance
15000 hours should have (15000 * 30) 450000
Actual costs 480000
Changeable overhead expenditure variance -30000 Adverse
18

Variable overhead efficiency variance
8000 units of production should take 16000 hours
Actual hours 15000 hours
Variable overhead efficiency variance 1000 hours Favourable
Standard cost per hour 30
Variable overhead efficiency variance £30,000.00 Favourable
Summary
Variable overhead expenditure
variance -£30,000.00 Adverse
Variable overhead efficiency variance £30,000.00 Favourable
Total variable overhead cost variance £0.00
Interpretation
It can be summarised from the above variance table that emphasises on analysing the
current performance of ABC Ltd in relation to various categories used as major segments such as
material, labour and overhead variance. Material variances shows favourable performance of an
entity but on the other hand, labour and overhead shows adverse condition as their budgetary
figures are less than compared to the actual results.
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4.2 Reconciliation Statement Of Operating Profit
20

4.3 Findings to management
Important part of standard costing is variances analysis that are used by an entity owner
in order to target weaker areas of the business concern. Standard and actual quantity sol is
negative due to poor implementation of marketing strategies to enhance the existing sales and the
revenue of an entity. Favourable material price variances shows good brand awareness among
the customers as the buyers less negotiate in order to get quality oriented services in return.
Adverse material quantity variance is due to higher wastage of resources in an entity. Resources
are wasted due to unqualified employees who uses different technology and software's in lack of
knowledge. Unskilled employees appointed in a business decreases the overall productivity of
ABC Ltd is the basic reason behind the adverse labour variances.
CONCLUSION
It can be summarised from the above report that Benchmarking will be used by ABC in
order to improve its quality and value. Cost are identified by the business using classification of
all the cost incurred in a business. Different inventory methods are used in order to determine the
closing stock is FIFO, LIFO and average cost but the best suitable method is average cost.
Majority of variances are adverse that needs to be improved with the passage of time.
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