Report On Classification Of Cost & Performance Indicators

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
1.1 Classification of cost on the basis of various factors............................................................3
1.2 Calculation of job cost and unit cost.....................................................................................4
1.3 Calculation of the cost by using absorption costing technique.............................................4
1.4 Calculation of overhead absorption rate using direct labor hours.........................................6
TASK 2............................................................................................................................................7
2.1 Preparation of cost sheet and variance analysis...................................................................7
2.2 Various performance indicators used to identify the areas of potential improvements.......8
2.3 Ways to reduce cost, enhance value and quality..................................................................9
TASK 3 .........................................................................................................................................10
3.1 Nature and purpose of budgeting process...........................................................................10
3.2 Appropriate budgeting method for the organization and its need.......................................11
3.3 Material purchase budget and production requirement budget...........................................12
3.4 preparation of cash budget.................................................................................................13
TASK 4..........................................................................................................................................14
4.1, 4.2 Variance analysis and recommendation corrective actions.........................................14
4.3 Identifications of responsibility centers.............................................................................15
CONCLCUSION...........................................................................................................................15
REFERENCES..............................................................................................................................16
INDEX OF TABLES
Table 1: Calculation of total cost and per unit cost for a job...........................................................5
Table 2: Calculation of overhead absorption rate using direct labor hours.....................................7
Table 3: Preparation of budgeted and actual cost (In £)..................................................................8
Table 4: Variance analysis...............................................................................................................8
Table 5: Production budget for July, August and September (In Units).......................................13
Table 6: Material purchase budget (In Kg)....................................................................................14
Table 7: preparation of Cash budget..............................................................................................14
Table 8: Calculation of budgeted cost for 4000 units....................................................................15
Table 9: operating statement reconciling both budgeted and actual results..................................15
Table 10: Calculation of per unit variances...................................................................................15

INTRODUCTION
In the competitive business environment most of the firms are competing with each other
on the basis of price of the product. Due to this reason it become necessary for the firms to
reduce their cost of production and to keep control on the expenses that are incurred for
producing goods and services. In this report, classification of cost is done and the same is
explained in detail. Further, various performance indicators are explained in detail in the report.
Apart from this, steps that firms can take in order to reduce their cost of production is also
explained in the report. After that budget process and its main purpose is explained in detail. In
the report, cash, material and production budget are prepared and necessary comments regarding
same are made. At the end of the report, responsibility center is explained and managers are held
responsible for the mistakes they committed in compliance with the budget.
TASK 1
1.1 Classification of cost on the basis of various factors
Cost indicates the aggregate value that is incurred to produce the goods and while making
services available at the workplace. There are many types of costs and these are classified on the
basis of various parameters. Classification of costs is given as below:
Elements of cost- Costs are divided into three categories namely material, labor and
overhead cost. Labor cost refers to the wages that are paid to the labors for producing goods in
the manufacturing facility. On the other hand, material cost refers to the cost of purchase of raw
material that is used for the production of goods (Kaplan and Atkinson, 2015). At last, overhead
expenses come in which all expenses related to the production are included. All these costs are
added in order to compute the final cost of production.
Function – On the basis of functions, cost related to various departments is considered
by the firm. There are various departments like HR, marketing and finance, etc. Various
administrative expenses are incurred in these departments. By adding these expenses, final cost
of various departments are computed in the organization.
Nature- On the basis of nature, costs are classified into two categories like direct and
indirect costs. Direct cost is a cost that is incurred in the production process. On the contrary,
indirect cost refers to the cost that is incurred to support the entire production process (Zadek,
Evans and Pruzan, 2013). Cost incurred to purchase raw material is the example of direct cost.

But transport expense that is incurred for the transportation of raw material is an example of
indirect cost.
Behavior- On the basis of behavior, costs are divided into three categories namely fixed,
variable and semi variable cost. Fixed cost refers to the cost that does not change with the change
in production. Land and building purchase cost comes under fixed cost category. On the other
hand, there is the variable cost which keeps on changing with the change in production level
(Quattrone and Hopper, 2005). Semi variable cost is a special type of cost which contains
features of fixed and variable cost. Some parts of semi variable cost remain same and some part
of the same cost remains variable. Hence, it can be said that all costs fall under these three
categories.
1.2 Calculation of job cost and unit cost
For the calculation of job cost, a cost that is incurred to perform a specific task is
computed by company (Cohen and Zarowin, 2010). In order to calculate the job cost, both fixed
and variable costs are used by the cost accountant. Calculation of job cost and unit cost is as
follows:
Table 1: Calculation of total cost and per unit cost for a job
Job cost sheet for Job no. 444
Particulars Total cost
Direct material ( 50kg*200 units* 4£ per kg) 40000
Direct Labor ( 30 hours* 9£ per hour * 200 units) 54000
Fixed production overhead (80000£/20000*(200 Units *30
hours) 24000
variable production overhead ( 6£ *6000 hours) 36000
Total cost 154000
Unit cost (154000£/200 Units) 770
Interpretation
Unit cost of the production is 770 and this is computed by using direct material, labor,
fixed and variable cost. For the calculation, first direct material and labor is calculated. After
that, calculation regarding fixed and variable cost is done. In order to calculate the entire cost, all

these expenses or costs are added and then divided by the total number of units that firm
produces. Finally, by doing this, per unit cost is calculated.
1.3 Calculation of the cost by using absorption costing technique
a) Allocation and apportion of overhead into three production departments
Primary distribution
Producti
on
Service
departm
ent
Basis of
allocation
Total in
(£)
Machine X
(£)
Machin
e Y (£)
Assembly
1 (£)
Stores
(£)
Mainten
ance (£)
Indirect wages and
supervision
362000.
00 100000.00
99500.0
0 92500.00
Indirect material
253000.
00 100000.00
100000.
00 40000.00
light and heating
Machine
hours
50000.0
0 26666.67
20000.0
0 3333.33
rent
Area
occupied
100000.
00 20000.00
10000.0
0 30000.00
30000.0
0
10000.0
0
insurance and
machinery
Book value
of machinery
15000.0
0 3529.40 2205.90 4411.80 2205.90 2647.06
depreciation
Book value
of machinery
150000.
00 35294.12
22058.8
0 44117.65
22058.8
0
26470.5
9
Insurance of building
Area
occupied
25000.0
0 5000.00 2500.00 7500.00 7500.00 2500.00
salaries of work
management
No. of
employees
80000.0
0 24000.00
16000.0
0 24000.00 8000.00 8000.00

103500
0.00 314490.19
272264.
70 245862.78
69764.7
0
49617.6
5
b). Reapportion of the cost of service department into the three production departments
Secondary distribution
Producti
on
Service
departm
ent
Basis of
allocation
Total in
(£) Machine X
Machin
e Y (£)
Assembly
1 (£)
Stores
(£)
Mainten
ance (£)
Primary distribution
(Earlier table)
103500
0.00 314490.19
272264.
70 245862.78
69764.7
0
49617.6
5
Stores
Direct
material 34882.35
26161.7
6 8720.59 69764.7 -
Maintenance
Direct
machine
hours 23816.47
15877.6
5 9923.53 -
49617.6
5
1.4 Calculation of overhead absorption rate using direct labor hours
Table 2: Calculation of overhead absorption rate using direct labor hours
Particular Production
Basis of
allocation
Total in
(£) Machine X Machine Y (£) Assembly 1 (£)
Primary
distribution
(Earlier table)
103500
0.00 314490.19 272264.70 245862.78