Costing Methods and Variance Analysis
Added on 2020-02-05
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MANAGEMENTACCOUNTING
Table of ContentsINTRODUCTION......................................................................................................................3TASK 1......................................................................................................................................3AC 1.1 Classifying different types of costs......................................................................3AC 1.2 Different costing methods....................................................................................4AC 1.3 Calculation of costs using appropriate techniques...............................................5AC 1.4 Analysis of costs data using appropriate techniques............................................6AC 2.1 Prepare and analyse routine cost reports..............................................................7AC 2.2 Use performance indicators to identify potential improvement...........................8AC 2.3 Suggest improvements to reduce costs, enhance value and quality.....................8TASK 2......................................................................................................................................9AC 3.1 Explain the purpose and nature of budgeting process..........................................9AC 3.2 Select appropriate budgeting methods for the organization...............................10AC 3.3 Preparation of budgets........................................................................................11AC 3.4 Prepare a cash budget.........................................................................................12AC 4.1 Calculate variances, its causes and corrective actions.......................................12AC 4.2 Prepare a reconcile operating statement.............................................................13AC 4.3 Report findings to the management with identified responsibility centres........14CONCLUSION........................................................................................................................14REFERENCES.........................................................................................................................14Index of TablesTable 1: C alculation of job cost for job no. 330........................................................................4Table 2: Calculation of product cost .........................................................................................5Table 3: Calculation of product cost .........................................................................................6Table 4: Cost reports..................................................................................................................7Table 5: production budget for XYZ Ltd.................................................................................11Table 6: Material purchase budget for XYZ ltd.......................................................................11Table 7: Cash budget for XYZ Ltd..........................................................................................12
INTRODUCTIONManagement accounting is a broad term which is concerned with identifying,presenting and interpreting financial performance of the business. The primary aim ofmanagement accounting is to formulate policy, strategy, planning, controlling the activtiesand taking efficient quality of decisions. In the present report, various tools of managementaccounting such as budgeting, costing method and variance analysis will be discuss.Moreover, the report will explain various types of costs that the organization incurred in theproduction. Along with this, the report will explain that how organization can reduce its cost,improve quality and value as well. This in turn, company can manage its operations effectiveand without any operational hazards.TASK 1AC 1.1 Classifying different types of costsCost can be classified into various ways depending on its nature and specific purpose.These classification of costs makes the cost information meaningful for business organization( Łukaszewski and Wilk, 2016.). The following are the important ones in which cost can beclassified- On the basis of nature: By the nature of expenses, cost can be classified into material,labour and overhead. Raw materials become an integral part of the product that can beconveniently traced by XYZ Limited. Labour cost are those cost that can be easily traced toindividual units of product. On the basis of element: This classification is based on the relation of cost elementwith the cost object. The classification is done into direct cost and indirect cost. XYZ Ltd.incur the expenses on material and labour which can be economically traceable for a product,job and service is known as direct cost. On the other side, expenses incurred on those itemswhich are not directly chargeable to production is known as indirect cost (Rumble, 2012).On the basis of behaviour: As the level of business activities changes, some costchange with change in output while others do not change. On the basis of behaviour, cost canbe done into fixed cost, variable cost and semi-variable cost. Fixed cost are those cost forXYZ Ltd. which remain fixed irrespective of change in volume of output. Variable cost arethose cost which can be change with the change in output and semi-variable cost are thosewhich have the characteristics of both fixed cost and variable cost.
On the basis of controllability: From the point of view of controllability, cost can beclassified into two categories as controllable cost and uncontrollable cost. Controllable costare those cost which are controlled by specific members of an organization. Material, labourcost are the examples of controllable cost (Drury, 2013). On the other hand, uncontrollablecost are those which are not regulated by specific member of undertaking. Factory rent andsalary are example of uncontrollable cost.AC 1.2 Different costing methodsThere are various types of costing methods such as job costing, unit costing, processcosting, contract costing and batch costing. Job costing: In this method, all the direct as well as indirect costs that are associatedto a seperate job of XYZ ltd, will be determined to compute total job costs (Costing methods,2015.). For instance, job costing method is applying here to calculate cost for job no. 330 of10000 units, as under:Table 1: C alculation of job cost for job no. 330ParticularsPer unitTotal costs for 10000 unitsDirect material550000Direct labour220000Direct overheads 110000Fixed overheads37500Total costs 117500Fixed overheads for 20000 direct labur hours = £50000Direct labour hours per unit for job no. 330 = 1.5Fixed overhead for 10000 units = £50000/20000 hours*(1.5 hours*10000 units) = £37500Thus, it has been clear that total job costs for 10000 units will be £117500.Unit costing: Another costing method is unit costing that is helpful to determine costper unit, also called single output costing. It is mainly used to assess cost for the productionthat can be expressed in quantiative terms. For instance, per unit cost for the above job no.330, has been computed here as under:
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