Management Accounting Costing and Budgeting

This report discusses the concepts of management accounting, different types of costs and expenses, methods of cost segregation, inventory management, cost of goods sold, key performance indicators, and strategies to control costs and improve product quality. The case study focuses on Smart Looks Limited, a clothing company. The report provides insights into the company's financial data, cost analysis, budgeting methods, and inventory valuation techniques.

MANAGEMENT
ACCOUNTING COSTING
AND BUDGETING
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2

INTRODUCTION
The accounting process under which financial data are recorded, analysed and reviewed
by the managers of the company able to take internal business decisions is known as
management accounting. It considers in the business entity for manage the overall financials as
well as forecast for the upcoming times. In the current report Smart Looks Limited company is to
be taken into account for analsye and explain different concepts of the management accounting.
In this report, different kinds of costs are to be classified as per their criteria of segregation.
Different kinds of budgets like as sales, production, cash, overhead etc. are prepared and
reviewed here for the Smart Looks firm. In addition to this, at the current study there are
different kinds of budgeting methods such as zero based, flexible and fixed are to be explained
which supports to frame the budget statements. Moreover costs such as variable, fixed and semi
variable are analysed and after adding such all cost of total production and units expenses both
determined.
TASK 1
1.1 (A) Differentiate the costs and expenses
Variable cost and expenses Semi-variable cost and
expenditures
Fixed cost of production
Power for sewing machine
(level of power and
electricity changes as per the
units of production)
Deliver delivers pay
(In some situation cost of
deliver is fixed but due to
enhancing production by
high level then gets fluctuate
(Kaplan and Atkinson,
2015).)
Factory rent
(As per the signed agreements
between land lord and Smart
Looks rent of factory fixed)
Material for clothes
(when more number of cloths
produce then fabric and raw
materials also require in
more
quantity)
Factory heating
(Up to some extent heating
and fuel cost is fixed but
because of increasing
production at the higher level
then change)
Factory supervisor wages
(As per the signed contract
wages and salary fixed)
Packaging material Telephone charges (basic Office rates
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(Higher the number of cloths
lead to increase costs of
packaging and fewer units
incur low cost of packaging
the products)
cost and bills of the
telephone are fixed for each
month but as higher and
lower consuming lead to
increase and decline
respectively (Islam and Hu,
2012).)
(It is not related to the
production level and due to
this it remains same and not
varied)
1.1 (B) Other methods to segregate costs of the production
In the above section there are costs are to be segregated in basically three concepts which
are such fixed, variable as well as semi-variable expenses. Apart from this all there are other
ways on the basis of total expenses associated in the Smart Looks Limited. Varieties of the other
costs as well as expenses on the basis of which number of expenditures are classified are like as
prime costs, opportunity costs, sunk costs, conversion expenses etc. Furthermore, by considering
the direct as well as indirect costs and overheads expenses also total costs are classified at the
workplace. In addition to this, among the overheads also there are different expense comes which
are such as manufacturing, fixed as well as variable overheads (Hammad, Jusoh and Yen Nee
Oon, 2010).
1.2 Calculating the total expenses along with the unit cost
At the current task there are different kinds and varieties of costs comes under the
production and manufacturing process. After adding all types of expenses the company able to
assess the total cost of products which are stitched and manufactured in the firm of Smart Looks
Limited. Further, after consider the total cost as well as level of outputs the managers able to
assess cost and expense of every unit. Moreover, total and unit expenditure of the firm are stated
as below:
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At the current situation there are total costs of production and cloths are like as 215000
GBP and 270000 GBP for the units like as 15000 as well as 20000 units respectively. Apart from
this at the level of 25000 units total cost is calculated such as 325000. At here fixed cost is
constant which is worth of 50000 GBP at the every level of production and variable cost varied
in accordance to outputs level. The cost of total production is to assessed and determined with
the help of below mentioned formula:
Total cost and expense (TC): Total variable cost (TVC) + Total fixed cost (TFC)
Further, cost of each and every unit is worth of 14 GBP, 14 GBP as well as 13 GBP at the
level of output such as 15000 units, 20000 units and 25000 respectively. Cost of every unit is to
be determined using formula such as: Total cost of production / Total production.
1.3 Methods of inventory and stock management
There are mainly and basically three kinds of the methods and techniques for assessing
the value of stock and inventory available at the workplace. Generally three tools which are
adopted by Smart Looks Limited for derive stock value are like as LIFO, FIFO and weighted
average which are presented below:
 LIFO: The method under which the stock which comes at the last within business and
sale at the first time is called the last in first out method (Hinkel and et.al., 2014) In the
current case scenario of the Smart Looks company value of the stock and inventory is
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worth of 10000 GBP as well as 19200 GBP which is for the units of 500 and 800
respectively. On the basis of current stock valuation technique the business able to
determine effectual and proper value and takes the business decisions in the proper way.
Further, old and higher inventory lead to reduce productivity and liquidity of the firm due
to which LIFO method is better. FIFO: Another method for valuing the level of inventory and stock is such as first in first
out under which beginning stock is to be sold at the earlier and preference to the new and
current inventory is to be given (Clinton and White, 2012). At this technique stock value
of the Smart Looks company is such as 18200 GBP which is lower as compare to above
mentioned method. Higher the value of stock is better and due to which cause the above
discussed method is more effectual. Apart from this, after adopting the existing stock
valuation way the company able cannot sale the old stock which lead to decrease its
efficiency for generating revenue in the textile industry.
 Weighted Average: Combination as well as mixture of LIFO and FIFO both the methods
is known as weighted average technique where the firm can assess average value of the
overall stock (Eichfelder and Schorn, 2012). In the business entity Smart Looks average
value of the available stock comes worth of 15800 GBP which is lower from both the
tools. Hence, due to this overall stock valuation fall down this is not good for the firm as
compare to others. At this level of the stock value average production units are such as
667 units at the end of the financial year.
1.4 Analyse as well as interpret the costs using graphical representation
In the Smart Looks firm there are variable as well as fixed both kinds of costs associated
under stitching and producing cloths. After adding such both expenses total cost is to be
determined which shows and presented using the graphs stated below:
Total variable costs:
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15000 20000 25000
0
50000
100000
150000
200000
250000
300000
165000
220000
275000
In the firm cost of variable improves as level of production which is such as 165000
GBP, 220000 GBP and 275000 GBP for the cloth units like 15000, 20000 and 25000 units
respectively.
Fixed costs:
15000 20000 25000
0
10000
20000
30000
40000
50000
60000
50000 50000 50000
The cost which always remains same as well as constant even number of the cloths
changes and increase or decline is called as fixed expense. At this such kind of expenditure is
such as 50000 GBP.
Total cost of production:
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15000 20000 25000
0
50000
100000
150000
200000
250000
300000
350000
215000
270000
325000
Graphical representation of all costs:
1 2 3
0
50000
100000
150000
200000
250000
300000
350000
Total variable cost (A)
Fixed cost (B)
Total cost
On the basis of the above graphs it can be analysed that total cost of production is
different at the various level of production. The graph clearly states that as level of the output
enhances then total cost also give response in same direction (Otley, 2016). Here when the
production is at the 15000 units then total expense is worth of 215000 GBP and by increasing
number of cloth up to 20000 units then expenditures as well which are up to 270000 GBP. Apart
from this, at the level of production improves from 20000 to 25000 then the cost is worth of
325000 GBP. Hence, it has been reflected that as Smart Looks produce and manufacture more
units of cloth then total expenditures also improves.
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TASK 2
2.1 Report to the management of Smart Looks for the cost of goods sold
To,
Board of Director,
Smart Looks Limited,
Date: 28th April 2017.
In the company such as Smart Looks Limited there are several kinds of costs and
expenses comes which are like as variable, fixed semi-variable etc. Further cost which
associated for selling the cloths are provided In the below stated table:
Particulars Number of units Cost of each unit Total expenses
Inventory at the
beginning
500 20 10000
First purchase 800 24 19200
Second purchase 700 26 18200
Total goods and units
available for sale
2000 70 47400
Less: Inventory at the
end (500+800+7000-
1400)
600 26 (15600)
COGS 1400 44 61600
By considering the above table of cost of goods sold it can be said that in the company
there are total units and cloths which are sold at the end are such as 1400 units. At this level of
production units there are cost of each and every product and cloths comes is such as 44 GBP.
In the company total units which are the company going to sale are 2000 units but from it
closing stock is to be subtracted. Hence, the costs which incur at the workplace of Smart Looks
for selling in the market is worth of 61600 GBP which is derived by multiplying two values
such as cost of one unit and total outputs.
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2.2 Use of key performance indicators in order to assess business performance
It is highly compulsory to determine that in which way the company performing in the
industry of clothing and textiles. To assess performance and presentation of the company there
are different kinds of indicators and methods are used by the management. Among all key
performance indicators are the highly useful under which balanced scorecard, quality, sales and
turnover, performance appraisal etc. taken into account. On the basis of the quality if the
company such as Smart Looks enhance and improve level of the quality of cloths then it can be
said that it performs well in the industry (Boyns and Edwards, 2013). The balanced scorecard is
method under which four concepts and aspects are to be reviewed which are highly significant
for the overall firm. Further, main and key concept are like as learning and growth, customers
and buyers, financial performance as well as internal business process perspectives. Apart from
this, when firm found that consumers are more satisfied by consuming its cloths and garments
and increasing level of customer satisfaction reflect that its performance improves in the overall
industry.
2.3 Strategies and method for control costs as well as improve quality of products
In the company controlling and managing cost take one of the most significant place along
with improving level of the quality of fabrics and cloths. For this the management of Smart
Looks company needs to analyse and review the financial statements like as profit and loss
account. By this the firm assess that up to which extent expenses incur at the workplace. Further,
it requires to forecast the financial data using cash and sales budget and on the basis of that
strategies are framed. While talking about the quality aspect then Smart Looks should apply
TQM approach as well as six sigma and lean production (Seal, 2012). From this all, the firm
supportive for reducing the wastage materials and eliminated defective cloth pieces. In this
regards, there are total quality management supports to the managers in order to enhance quality
of the products. Further, six sigma is a concept under which percentage of defective items is such
as 0.06% behind total 100o units. Hence, as improving quality cost reduce and ultimately more
customers attract which is indication of enhancing revenue.
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TASK3
3.1 Budgets and purpose
Budget is the one of the main statement that is used to make project the cash inflow and
outflow that can take place in the business. There are number of methods that are used to prepare
the budget. It depend on the firm that which approach it find appropriate to prepare the budget.
Budget can be prepared for any time period whether it may be for two to six months. It is very
important to make accurate prediction because if same will be made then only budget can be
prepared accurately. It is possible that wrong prediction can be made by the managers. If same
will be done then in that case wrong values will be predicted and firm will take decision in
wrong direction. Purpose due to which budget is prepared by the most firms is explained below. Use of budget for short term target setting: Budget is the statement that is used to set
short term target for the business. Budget can be prepared for 3 to 9 months’ time period.
In the budget cash inflow and outflow is projected and accordingly for each month step
by step targets can be determined (Callahan, Stetz. and Brooks, 2011). Thus, it can be
said that budget is the one of the main tool that is used to set short term target in the
business. There is a huge significance of the budget for the business firms. Monitoring of firm performance: Monitoring of the firm performance is another main
objective behind preparation of budget. Under this projection is made about cash inflow
and outflow in the business and same is compared time to time with the budgeted values.
By doing so firm performance is monitored on monthly basis. Control function: Control function is also performed by using budget and under this if on
comparison it is identified that actual performance is below projected performance then
in that case corrective action is taken to improve firm performance (Mat, Smith and
Djajadikerta, 2010). It can be said that there is a huge importance of the budget for the
firms. Motivating employees: Employee motivation is another objective for preparation of
budget. In order to achieve overall target for each employee target is determined. Setting
of target motivate employees to achieve something on job. It can be said that budget help
firms in making effective use of its workforce.
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3.2 Methods for preparing budget
There are number of methods that are used to prepare budget and some of them are
explained below.
 Incremental budget: Incremental budget is the one of the budget that is prepared by the
firm in its business. Under incremental budget past month’s budget values are taken in to
consideration percentage is added to past values in order to prepare budget for the
upcoming months. There are some advantages and disadvantage s of this budget. Main
merit of the budget is that with increase in business operations revenue and cost increased
(Lukka and Vinnari, 2014). Thus, incremental budget approach help one in preparing
budget in proper manner. The main disadvantage of budget is that one can make wrong
estimation about percentage increase in income and expenses and due to this reason
budget can be prepared in wrong manner. Zero based budget: Zero base budget is another method that is used to make projection
by the business firms. Under this approach first of all departments prepare budget on their
own level and by considering all department budgets final budget is prepared for an
organization. The main advantage of the zero based budget is that it is prepared in
accurate manner because department managers better knows the expenditure that can be
made by the department in the upcoming time period. Hence, estimation of expenditures
is made by the managers accurately. The disadvantage of zero based budget is that
process is very lightly and time consuming (Hammad, Jusoh. and Yen Nee Oon, 2010). Fixed budget: Fixed budget is another sort of budget that is prepared by the firms in their
business. Under fixed budget fixed values are determined for all months. It can be said
that there is significant importance of the fixed budget for the business firm. This is
because every month expenses cannot be changed at fast pace. Thus, preparation of fixed
budget save lots of time of the business firm. Disadvantage of fixed budget is that in case
business conditions changed at fast pace than in that situation by using fixed budget
accurate decisions cannot be taken by the firm in its business.
3.3 Budget for the business firms
 Sales budget: Sales budget is the one of the budget that is used to make projection about
the sales revenue in the business. In order to prepare the sales budget product sales price
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is simply multiplied to number of units produced (Corina, Alina and Cristina, 2014). In
the month of May it is expected firm will made sales up to1500 in its business. In the
month of June it is expected that revenue of 75000 will be earned by the firm in its
business. It can be said that it is expected that in the upcoming time period sales of the
business firm will increase at specific rate. Production budget: Production budget is another budget under which number of units
that will be produced by the firm in terms of value is determined. There is significant
importance of the production budget for the business firms. Production budget for the
firm is given below.
It can be seen from the table given above that units to be produced is increasing
consistently as its value declined in the second month and then it elevate consistently
from 2350 to 6000. Raw material budget: Raw material budget is one under which projection is made about
the amount upto which raw material will be consumed in the business. Raw material
budget help one in tracking extent to which firm is consuming inventory up to expected
level.
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Figure 1Raw material budget
It can be seen from the table that material to be purchased are decreasing in the second month
and same is increasing consistently in the month of June and quarter basis. It can be said that
consumption of raw material is reducing in the business because it is expected that sales will
decline in the month of May. Labor budget: Labor budget is the another important budget because it reflect the extent
up to which firm will pay to the labors for the work they do in the production place.
It is clear from the table that in the month of April estimated value of labor expenses is
1350 which increased to 2250 in the month of May. Thereafter, value declined to 900 and
on this basis it can be said that labor budget values are not estimated properly because in
the month of May sales declined and then also labor cost is elevating which means that
projection is not made in proper manner.
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 Total overhead budget: Total overhead budget is reflecting the indirect expenses that are
made in the business. Total overhead budget is given below.
Total overhead budget is reflecitng that expenses declined in the month of May to 9200
from the 11225. It can be said that in alignment to decline in sales overhead are also
reduced in the business.
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3.4 Cash budget
Figure 2Cash budget
It can be seen from the table that in the first month closing balance value is negative which is -
13612. Value of closing balance in the month of May is 27725 and on this basis it can be said
that it is expected cash flow become positive in the month of May. Same also increased to the
month of June. It can be said that firm cash flows increased.
TASK 4
4.1 Marginal costing methods and price determination for new product line
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Interpretation: - Through marginal costing method cost of material and labor is
computed. It must be noted that in the marginal costing method only variable expenses are taken
in to account. Thus costing is different in case of marginal and absorption costing method. It
can be observed that, material cost incurred in the business is 141360 and same for labor is
99000. Standard position value for direct material and labor is 375000 and 90000. Actual value
of material is 233640 and same for labor is -9000. It can be said that there is difference between
actual and standard value.
4.2 Comparison of budgeted and actual profit for Smart Looks Ltd
Budget is the one of the main tool that is used to measure the firm performance. Under
this actual value is compared with the standard value to measure the firm performance. It can be
said that there is a huge importance of the budget for the business firms. On the basis of above
table it can be said that there is a negative variance in case of labor (Grabner and Moers, 2013).
However, it can be said that in case of material variance is positive. There is no negative
variance in case of fixed budget and on this basis it can be said that firm performance on this
front is excellent.
A) Budgeted profit
It can be seen from the table that actual revenue earned in the business is 468000 and
budgeted revenue is 487500. Budgeted profit is 19500 and this reflects that firm is earning less
amount of revenue in its business than expected. Hence, it needs to improve its performance.
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b) Actual profit
Actual profit in the business is 77640 as it can be observed that actual revenue in the business is
468000 from sale variable and fixed expenses are subtracted. It can be seen from the table given
above that variable expenses value is 240360 and same of fixed expenses is 150000. By
deducting both values from the actual revenue actual profit is computed.
c) Material and sub variances
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It can be observbed that material price variance is 141330 and material usage variance is
12000. It can be said that firm give good performance in its business and maintian contorl on its
expenses.
d) Operating statement
4.3 Report to board of directors on the basis of budget
To
Baord of Directors
Smart look limited
Date: 28th April 2017
It can be seen from the image given above the actual sales value is below the expected sales
value. As it can be seen that current sales value is 468000 and budgeted value is 487500. This is
reflecting that less amount of profit is earned in the business. This happened because economic
conditions are uncertain in the business. Due to bad economic condition of the nation personal
disposable income of the people get reduced and due to this reason their spending power reduced
to large extent. It can be said that due to less spending capacity there is less demand of the
product in the market. This is the reason due to which firm failed to sale target units in the
market earned less revenue in the business. It is recommended that business firm must bring
attractive offers and discounts in the market and by doing so must elevate demand of same in the
market.
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CONCLUSION
On the basis of above discussion it is concluded that management accounting is the vast
and one of the most important field through which performance of the firm is measured in the
systematic way. There are number of methods of management accounting like variance analysis
and marginal costing by using which effective decisions can be taken by the managers in the
business. Thus, these methods must be used by the managers time to time to take effective
decisions. Budget must be prepared by using appropriate method because if wrong prediction
will be made then decision that are taken on the basis of budget will also be wrong.
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