Management Accounting - Cost Report

This presentation provides an overview of cost report in management accounting, including its preparation, interpretation, and performance indicators. It also offers suggestions to reduce costs and enhance value and quality. The subject is Management Accounting, and the document type is a presentation.

MANAGEMENT ACCOUNTING
(TASK 2)

Cost report
It can be prepared through combining actual as well as
budgeted targets.
In context to XYZ Ltd, it has been prepared here as
under:
Actual production = 2200 units
Actual material price = £10 per unit
Actual labour rate = £8 per unit
Overhead rate = £5 per unit
Fixed overhead = £10000

PARTICUL
ARS
BUDGETE
D ( 2500
UNITS)
ACTUAL
(2200
UNITS)
VARIANCE
Direct
material
20000 22000 -2000
Direct
labour
22500 17600 4900
Direct
overhead
12500 11000 1500
Fixed
overheads
10000 10000 0
Total costs 65000 60600 4400
Preparation of cost report

Interpretation
There is an adverse variance in material cost because; the
standard price of material is (£8) which is less than the actual
price of material which is (£10). Apart from this, the actual
price of labour (£10) which is more than the standard price of
labour (£8) which results in favourable variance in labour cost.
In overhead, actual and standard prices are same but the units
are changes which result in incur variances.

Performance indicators to determine
potential importance
XYZ Ltd has to measure its performance on a regular basis.
There are various types of performance indicators that are
helpful to identify areas for potential improvements. Some of
the Key Performance Indicators (KPIs) are described below:
Sales revenues: Rising trend of XYZ’s sales revenue indicates
better performance. However, if sales revenues are continuously
declining then, XYZ needs to determine its reasons and take
decisions to improve it. Lower customer demand, high prices,
ineffective marketing, availability of substitute products and
poor quality may be the reason behind this.

Contd.
Costs: It is also an important element that XYZ needs to be
analysed. A balance increase in costs with rising sales is quite
good but if costs are increasing at high rate without sales
increases then XYZ needs to be focus on it (Blank, 2012). High
material price, wages rate, administrative and selling cost may
be some of the reasons of it. Henceforth, XYZ Ltd has to
execute effective control on these factors and maintain their
cost.
Profitability: Rising trend is good but declining trend indicates
poor performance. Through getting high sales revenue and
controlling costs, XYZ can improve its profitability and
operational performance as well.

Contd.
Product quality: Qualitative products help to satisfy
XYZ's customer to a great extent. Therefore, any
negative factor may influence customer adversely and
lower the performance.
Waiting time: It is a time length of time gap between
demand and receipts of products by the customer.
Lower waiting time will be considered good for XYZ
Ltd and vice versa.

Suggestions to reduce costs
Lower material buying price: It can be done through finding
suppliers whose material sales prices is comparatively lower
than other suppliers. But still, it must be kept in mind that
quality should not be deteriorated.
Bargaining with labour: By appointing labour at lower wages
rate helps to reduce direct wages payment and reduce costs as
well.
Large production: It will provide benefits of economies of
scale. It helps to reduce per unit cost of the product in turn; per
unit profit can be maximized.

Contd.
Monitoring and controlling: Continuous monitoring of
all the operational functions helps to control XYZ's
costs in a great manner.
Curtailment of unnecessary expenditures will help to
reduce XYZ's cost.
Sale of waste material: Waste material is the unusable
products which company can sale in the market to get
some income and decline cost.

Suggestions to enhance value and
quality
Quality can be improved through using better quality of
material, advanced and better technological machinery for
production purpose. Standard product quality helps to satisfy
large number of consumers and increase repeated purchasing.
Innovations, expansion, diversifying customer base, high
profits, wide range of products, high market share and market
growth helps to enhance XYZ's value. Furthermore, strategic
capabilities, competitive strength, worldwide operations, loyal
customers and high shareholder's return will increase corporate
image and values as well.

Refrences
Bonazzi, G. and Iotti, M., 2014. Agricultural cooperative firms:
Budgetary adjustments and analysis of credit access applying
scoring systems. American Journal of Applied Sciences. 11(7).
p.1181.
Pilleboue, A. And et. al., 2015. Variance analysis for Monte Carlo
integration. ACM Transactions on Graphics (TOG). 34(4). p. 124.
Steven, G., 2014. Absorption Costing. Financial Management.
Shelby, R., 2013. Zero-Base Budgeting for the 21st Century Public
Administrator. Atlanta: Fiscal Research Center/Andrew Young
School of Policy Studies/Georgia State University.

Thank You!