Cost Accounting Concepts and Methods

This assignment examines fundamental principles of cost accounting, covering various costing methods such as job costing and activity-based costing. It discusses the importance of budget planning and control, analyzing different budgeting techniques like zero-based budgeting. Furthermore, the assignment explores variance analysis, explaining how it helps in identifying performance deviations and taking corrective actions. The focus is on understanding the practical applications of these concepts in managing costs effectively.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION......................................................................................................................1
TASK 1......................................................................................................................................1
AC 1.1 Different types of cost classification.........................................................................1
AC 1.2 calculation of job cost for 200 units using job costing method................................2
AC 1.3 Determination of Exquisite cost using absorption costing technique.......................3
AC 1.4 Analyse cost data using appropriate techniques.......................................................5
TASK 2......................................................................................................................................6
AC 2.1 Preparation and analysis of cost report and determine variances.............................6
AC 2.2 Performance indicator that helps to find the areas for potential improvements.......7
AC 2.3 Ways that helps to reduce cost, improve quality and enhance value to the business
...............................................................................................................................................7
TASK 3......................................................................................................................................8
AC 3.1 Budgeting process: Nature and Purpose to the budget holders of Jeffery & Son's...8
AC 3.2 Appropriate budgeting methods for Jeffrey & Son's and its need............................8
AC 3.3 Preparation of production and Material purchase budget.........................................9
AC 3.4 Preparation of cash budget......................................................................................11
TASK 4....................................................................................................................................12
AC 4.1 Identify variances, its causes and taking corrective actions....................................12
AC 4.2 Preparation of operating statement through combining budgeted and actual results
.............................................................................................................................................12
AC 4.3 Report the findings to the management along in accordance with the responsibility
.............................................................................................................................................13
Centres.................................................................................................................................13
CONCLUSION........................................................................................................................13

INTRODUCTION
Management accounting is one of the special branches of accounting. In the present
competitive and dynamic business environment, every organization needs to make effective
decision making. Strategic and qualified managerial decisions help organizations to ensure
long term survival. Analysis, interpretation and evaluation of financial information help to
build strategic management process in an effective manner. Financial and management
accounting are distinct from each other. Financial accounting refers to the consolidation of
financial data and information of an organization. However, under management accounting,
managers use information from the financial statements so as to reduce uncertainty and risk.
Jeffrey and Sons is a manufacturing company that produces variety of products such
as Exquisite. The present report mainly aims at identifying the role of managerial decisions in
the organization success. The report will discuss various management accounting practices
and techniques for achieving the organizational goals. The present report discusses the nature
of cost related information and decisions in order to reduce product cost. Moreover, the
importance of budgeting process techniques will be discussed that controls business
expenditures and maximize its revenues.
TASK 1
AC 1.1 Different types of cost classification
Basis of
classification
Type of cost Meaning
Elements Material, Labour
and overhead
Material is one of the most important elements that
include expenditures to purchase raw material for
producing the goods. However, workers are the
person who produces the goods. Therefore, the
payments made to them for their efforts are known as
labour cost (Datar and et. al., 2013). Apart from the
material and labour cost, all the other expenses are
known as overhead cost. For example, factory rent
insurance, salary and so on.
Functions Production,
administration,
All the production expenses that have been incurred
for converting raw material into finished goods are
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selling and
distribution.
called production cost (Shepherd, 2015). However, all
the office expenses that are required for controlling
the business operations are termed as administration
cost which includes office rent and stationery. Selling
and distribution cost includes the expenditures for
promoting business sales. For instance, marketing
cost.
Nature Direct and indirect
cost.
Expenditures that can be charged to the product and
services are known as direct cost (Fillat, Garetto and
Oldenski, 2015). For instance, material and labour
cost. However, all the other business expenses that are
not directly related to the production expenses which
cannot be charged from the cost of product and
services are termed as indirect cost. For instance,
supervision, rent and rates, insurances etc.
Behaviour Fixed, semi variable
and variable
Expenditures that are not affected with increase or
decrease of production volume are called fixed cost
which includes foreman salary and building rent.
Semi variable cost changes after a specified
production volume (Fisher and Krumwiede, 2015). It
includes; electricity and telephone bill. However,
variable cost directly changes according to change in
production volume. For instance, material cost
increases with the rise in production and vice versa.
AC 1.2 calculation of job cost for 200 units using job costing method
Job costing method: Job record mentions all the elements of cost that can be assigned
to each and every job. The elements include all the material, labour and manufacturing
overhead expenses for a given job (Mohapatra, 2015). As per the stated scenario, cost data
have been provided for job no. 444 that produces 200 units. Under the job sheet, the material,
labour and variable as well as fixed production overheads are required for manufacturing 200
units of products are ascertained below:
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Name of Item Amount
Direct material £40000
Direct Labour £54000
Production overhead:
Variable £36000
Fixed £24000
Total cost of 200 units £154000
Cost per unit £770
Necessary working note:
Particular Qty per
unit
Rate Calculation Cost
Direct material 50 kg. 4£ per kg 50kg*4£*200 40000£
Direct labour 30 hours 9£ per hour 30hours*9£*200 54000£
Variable
production
overhead
30 hours 6£ per hour 30 hours*6£*200 36000£
Fixed production
overhead
(80000£)/(20000 hours)*(30*200) 24000£
Cost per unit (154000£)/(200 Units) 770£
AC 1.3 Determination of Exquisite cost using absorption costing technique
Absorption costing: This is a costing method in which all the manufacturing
overheads are allocated to the production and service departments using an appropriate basis
(Muzaffar, Atmapoojya, and Agarwal, 2013). As per the scenario, Jeffrey & Son's company
have three production departments that are machine X, machine Y and assembly. However,
stores and maintenance departments are the company's service departments.
(a) Allocation and apportion of overheads to the production departments
Basis of Machine Machine Assembly Stores Maintenan
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allocation shop X shop Y ce
Indirect wages
and supervision Allocated £100,000.00
£99,500.0
0 £92,500.00
£10,000.
00 £60,000.00
Indirect
materials Allocated £100,000.00
£100,000.
00 £40,000.00
£4,000.0
0 £9,000.00
Light and
heating Area occupied £10,000.00 £5,000.00 £15,000.00
£15,000.
00 £5,000.00
Rent Area Occupied £20,000.00
£10,000.0
0 £30,000.00
£30,000.
00 £10,000.00
Insurance and
machinery
Machinery book
value £7,947.02 £4,966.89 £993.38 £496.69 £596.03
Depreciation of
machinery
Machinery book
value £79,470.20
£49,668.8
7 £9,933.77
£4,966.8
9 £5,960.26
Insurance of
building Area occupied £5,000.00 £2,500.00 £7,500.00
£7,500.0
0 £2,500.00
Salaries of
works
management
Number of
employees £24,000.00
£16,000.0
0 £24,000.00
£8,000.0
0 £8,000.00
Total cost of
overhead £346,417.02
£287,636.
00
£219,927.0
0
£79,964.
00
£101,056.0
0
(b) Reapportion of service departments to production departments
Particular Basis Machine X Machine Y Assembly
Primary
Distribution
As Stated Earlier 346417.02£ 287636£ 219927£
Stores
Department
Direct material
(4:3:1)
39982£ 29987£ 9995£
Maintenance
Department
Maintenance
machine hours
(12:8:5)
48506.88£ 32337.92£ 20211.2£
Total cost 434905.9£ 349960.92£ 250133.2£
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(C) Overhead absorption rates (OAR) for production departments using machine hour
basis
OAR = Total cost/Actual machine hours
Particular Machine X Machine Y Assembly
Total cost 434905.9£ 349960.92£ 250133.2£
Actual machine hours 80000 60000 10000
OAR 5.44£ 5.83£ 25.01£
(D) Calculation of cost
Items Calculation Per unit cost
Material 8£
Labour 2 hours*7.50£ 15£
Production Deptt. Overheads
Machine X 0.8 hours*5.44£ 4.35£
Machine Y 0.6 hours*5.83£ 3.5£
Assembly 0.1 hours*25.01£ 2.5£
Total cost 33.35£
AC 1.4 Analyse cost data using appropriate techniques
As per the scenario, Jeffrey & Son's finance director is not satisfied with the current
allocation basis to calculate overhead absorption rates (Jorgensen, Patrick and Soderstrom,
2012). The scenario stated that overheads must be absorbed on the basis of direct labour
hours.
Calculation of overhead absorption rates using labour hours as a basis
Overhead Absorption rate = Total cost/direct labour hours
Particular Machine X Machine Y Assembly
Total cost 434905.9£ 349960.92£ 250133.2£
Labour hours 200000 150000 200000
OAR 2.17£ 2.33£ 1.25£
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Calculation of cost
Items Calculation Per unit cost
Material 8£
Labour 2 hours*7.50£ 15£
Machine X 2*2.17£ 4.34£
Machine Y 1.5*2.33£ 3.5£
Assembly 1*1.25£ 1.25£
Total cost 32.09£
Thus, it become clear that labour hours basis is quite good basis of allocation. The
reason for such decision is that under this basis, cost per unit gets declined to 32.09£. This is
beneficial for the company to reduce product cost.
TASK 2
AC 2.1 Preparation and analysis of cost report and determine variances
According to the given scenario, managers forecasted the business expenditures for
producing 2000 units. Expenditures involve the material, labour and fixed as well as variable
overheads. Thus, cost report is prepared through determination of actual cost for producing
1900 units and the variances.
Calculation of actual cost
Name of Item Calculation Actual cost
Material 12£*1900 units 22800£
Labour 10£*1900 units 19000£
Fixed overhead Unchanged 15000£
Electricity (Variable) 3000£/800 units*1900 units 7125£
Electricity (Fixed) 8000£ - (3.75*2000 units) 500£
Total electricity cost 7125£ + 500£ 7625£
Maintenance 5000£-(1000£/500*100) 4800£
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Calculation of difference total cost of electricity due to changing the number of units
Units Total cost
Highest 2000 8000£
Lowest 1200 5000£
Difference 800 3000£
Cost report
Elements Budgeted cost Actual cost Variance
2000 units 1900 units
Material 24000£ 22800£ 1200£
Labour 18000£ 19000£ (1000£)
Fixed Overhead 15000£ 15000£ 0
Electricity 8000£ 7625£ 375£
Maintenance 5000£ 4800£ 200£
Total 70000£ 69225£ 775£
As per the above calculated variances, it becomes clear that material, electricity and
maintenance variances affect the profits positively. However, Labour cost indicates negative
variances impact on company's profitability. One of the most important reason for the above
variances are reduction in the company's production volume as it get decreased from 2000
units to 1900 units. Actual material cost changes because of decline in total business
production while the material prices remains unchanged from the budget. Negative labour
variance of 1000£ arises due to higher labour rate which is 10£. Electricity is a semi variable
cost that remains constant up to 500£ and after that it gets changes according to the
alternation in volume. Variance of 375£ arises because of decrease in the volume up to 1900
units. The scenario stated that maintenance is a stepped cost that increases by 1000£ for
producing 500 extra units and vice versa. Thus, actual cost decreases up to 4800£ due to
reduce in production by 1000 units. Therefore, it becomes necessary for the Jeffrey & Son's
managers to frame necessary policies that help to mitigate the computed variances.
Furthermore, increasing the labour cost inclined the total cost. Thus, management should
motivate the labour so as to improve their working efficiency and productivity (Paul, 2012).
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AC 2.2 Performance indicator that helps to find the areas for potential improvements
Present competitive environment enable the businesses to identify their performance
on a regular basis. Performance indicators support organization to determine the areas at
which company require to make improvement that helps to compete effectively at the market.
Business revenue is one of the most significant indicator through which managers can
determine the performance (Kipp and et. al., 2012). Jeffrey & Son's generate revenues
through selling the exquisite products to the customers. Increase in business sales indicates
that the market performance of the company is good. Along with the sales, cost is also very
important component. Increasing the business cost without rising sales indicate that business
has to maintain effective control over the costs. Further, when the sales and cost both are
increasing but the costs are increases at higher rate than it reduce the business profit margin.
Thus, it is clear that along with the sales increase, company also need to control business cost
through regular monitoring. Furthermore, profits indicate the operational results. Higher
profitability shows good business performance and vice versa.
AC 2.3 Ways that helps to reduce cost, improve quality and enhance value to the business
Total Quality Management (TQM) is a most effective way that will help Jeffery &
Son's to reduce its business cost and improve their quality. The process helps to improve the
organization's competitiveness, effectiveness, productivity and its efficiency to a great extent.
The term ''Total'' involves all the operating activities of the business. However, ‘Quality’
refers to meeting customer demands and the term '' Management'' explains that managers
need to manage quality. The process bring number of benefits for the organization which
mainly includes higher customer satisfaction, meeting of customer demands at right time,
reduction of products and services cost, effective training of employees, and reduction in
waiting time of customers to get the product and service (Hochbaum and Wagner, 2015).
Thus, it can be said that successful implication of the process will maintain the costs and
improve quality. Moreover, using innovative and advanced technology, quality can be
improved to a great extent.
Apart from this, business value can be enhanced through increasing the business
profits. Moreover, great position, larger investment, effective development plans and business
expansions also enhance value to the business. This in turn provides enterprise with benefits
of growth, business development and long term surveillance.
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TASK 3
AC 3.1 budgeting process: Nature and Purpose to the budget holders of Jeffery & Son's
Purpose of budgeting process: All the businesses organizations whether small or
large, estimate business revenues and expenses that can be occur in future period. Budget is a
monetary tool that combines the probable business incomes and expenses related to operating
functions of all the business departments. It mainly aims at forecasting the future business
profits which can be determined through subtracting total expenditures from the total
incomes. Moreover, it aims at providing significant information to the managers that helps in
their decision making process (DRURY, 2013). Furthermore, the purpose of budgets is to
determine variances or deviations through comparing budgeted and actual outputs.
Nature of budgeting process: Budget can be prepared on the basis of budget of last
year. Jeffrey & Son's Company managers can identify the possible incomes from their sales
operations and other activities. However, under the expenditures cost of material, labour and
all the overheads need to be estimated. Thereafter, the excess of company's incomes over the
expenses are termed as cash surplus. However, in case of higher cash expenses than incomes,
the balance will be called deficit. At last, the managers have to revise and review all the
estimates and submit it to all the departments to achieve the budgeted targets. At ending the
budget period, actual yields must be compared with the decided targets to consider variances
and take appropriate decisions and corrective actions to eliminate them.
AC 3.2 Appropriate budgeting methods for Jeffrey & Son's and its need
Budget must be prepare by using appropriate techniques as inappropriate methods
may give incorrect information and cannot help to take effective managerial decisions.
According to the given scenario, Jeffrey & Son's started work on preparing budget for
upcoming year. The scenario said that volatile market conditions and market forces makes
difficult for the business to plan ahead. However, survival of the company is greatly depends
on taking right decisions at right time with right cost.
As per the scenario, Jeffrey & Son's budget manual indicated that sales volume is the
most important component under the budgeting process. Another, according to the company's
marketing manager; paramount is the basis for managing the coordination need in the
budgeting process. Thus, it is clear that budget is preparing on the basis of incremental
budgeting technique. Under this technique, previous year budget is taken as a basis for
estimating future year results in terms of revenues and expenses (Adah and Mamman, 2013).
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Therefore, the marketing manager as a budget holder will face many queries. The reason
behind this is under this budgeting method manager added a certain amount in all the
incomes and revenues without examining the future need of the business operations.
Therefore, it can be suggested to Jeffrey & Son's to prepare budget through adopting
Zero base budgeting technique. Under such method, all the previous years’ operating
activities are identified and their importance and need will be examining with the future
context (Glass, Stefanova and Prinzivalli, 2014). Unnecessary operating functions will not
carry out in the future period and excluded from the budget. This in turn, helps to reduce the
business cost and increase profitability. Moreover, the need of this method is that the incomes
are allocated under different business activities in an efficient manner. This in turn, helps to
ensure optimum allocation and maximum uses of resources.
AC 3.3 Preparation of production and Material purchase budget
(a) Production budget of Jeffrey & Son's
Production budget: The number of units that need to be manufacture can be
determined through preparing production budget (Needles and Crosson, 2013). Sales forecast
is the basis of preparation of production budget. As per the scenario, estimated monthly sales
for July, August and September are 105000, 90000 and 105000 units. Moreover, it is
mentioned that company maintain finished stock equal to 15% of next month budgeted sales.
Opening inventory for the month of July is given to 11000 units. Thereafter, it will be equal
to the previous month closing inventory. Thus, the production budget of Jeffrey & Son's is
prepared by adding the opening inventory to the budgeted sales and subtracted with the
closing inventory.
Particulars July August September
Budgeted Sales 105000 90000 105000
Inventory at the beginning period 11000 13500 15750
(Sales – opening inventory) 94000 76500 89250
Inventory at the ending period 13500 15750 16500
Required Production 107500 92250 105750
Inventory July August September
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Closing Inventory 90000*15%
= 13500
105000*15%
= 15750
110000*15%
=16500
(b) Material purchase budget of Jeffrey & Son's
Material purchase budget: After preparing the production budget, Jeffrey & Son's
company needs to identify the quantity of material that will be require for production purpose
(Budgeting and budgetary control, n.d.). Jeffrey & Son's company as a manufacturing
organization, purchase material for producing its branded products Exquisite. Required
quantity of material can be determined through adding the total budgeted consumption of
material with the ending inventory and opening inventory will be deducted.
As per the scenario, 52000 kg of raw material is opening inventory for the month of
July. However, closing inventory is maintained at 25% of the required quantity for the next
month's production. Thus, the material purchase budget can be prepared as under:
Particular July August September
Material Consumption 215000 184500 211500
Less- Opening inventory of material 52000 45000 52500
Material consumption-Opening stock 163000 139500 159000
Add- Closing inventory 45000 52500 55000
Budgeted material purchases 208000 192000 214000
Particular July August September
Material
consumption
107500*2 Kg
= 215000 kg
92250 units*2 Kg
= 184500 Kg
105750 units*2 Kg
=211500 Kg
Closing
inventory
90000units*2kg*25%
= 45000 kg
105000units*2Kg*25%
=52500 kg
110000units*2Kg*25%
= 55000 kg
AC 3.4 Preparation of cash budget
Cash budget: Along with the production and material purchase budget, Jeffrey &
Son's company is also need to prepare cash budget. It can be prepared through combining the
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estimating probable future cash inflows and cash outflows for an identified period (Needles,
Powers and Crosson, 2012). The purpose of this budget is to determine the cash availability
at the end of the period as larger availability of cash left in unproductive capacity is not
profitable for the businesses. Moreover, inadequate cash availability will affect the operative
functions in an adverse manner. Therefore, the managers have to maintain a significant
balance between the cash inflows and outflows so as to have sufficient cash availability.
Proper administration of funds, allocation of resources in an effective way and regular
monitoring and controlling helps to fulfil this purpose. The cash budget for Jeffrey & Son's is
prepared here as under:
Particulars July August September
Cash Receipts
Cash sales 900000 821250 864000
Total cash Income 900000 821250 864000
Cash Expenditures
Material Purchase 364000 336000 374500
Direct wages 322500 276750 317250
Variable overhead 110500 99550 103270
Fixed Overhead 75000 87500 87500
Bad debts 47250 40500 47250
Total cash expenses 919250 840300 929770
Net cash balance -19250 -19050 -65770
Opening Cash balance 16000 -3250 -22300
Cash at the end of the month -3250 -22300 -88070
As per the prepared cash budget, in all the subsequent months, Jeffrey & Son's
budgeted revenues are lower than its expenditures resulted in deficit balance of cash. The
deficit net cash balance are 19250£, 19050£ and 65770£ while at the end of the month,
available negative cash balances are 3250£, 22300£ and 88070£. Therefore, company need to
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maintain an effective control over the expenses so as to reduce its costs. Moreover, through
inclining the total sales, cash balance can be change favourably. Furthermore, it can be
advised to the business that through reducing the credit sales, expenditures can be minimized
to a great extent. The reason behind this is under the cash budget, bad debts are one of the
significant factors that highly increase the expenditures. In addition, competent strategies and
effective planning and controlling techniques can be applied in order to eliminate negative
balance of cash.
TASK 4
AC 4.1 Identify variances, its causes and taking corrective actions
The scenario stated budgeted data for producing 4000 units at 4£ per unit selling
price. Further, the budgeted material, labour and fixed overheads are decided by the
company.
Variance: The distinguish between the budgeted and actual cost, sales revenue and
operating profit is called variances (Pilleboue and et. al., 2015).
Particular Calculation Variance
Sales revenue (4000*4£)-13820£ 2180£
Material (4000*0.4*2.40£)-3420£ 420£
Labour (4000*8£*6/60)-2690 510£
Fixed overhead (4800£-4900£) -100£
Total cost (11840£-11010£) 830£
Operating profit (4160£-2810£) 1350£
Possible causes of variances: According to the given data, the first and foremost
reason of all the variances is different production volume. The budgeted values are calculated
for 4000 units while the actual sales made by the company are 3500 units. Moreover, the
company made sales at the rate 3.94£ per unit. Material variances arise because of using
higher the quantity of material. For producing 3500 units of product, the budgeted material
requirement is 1400 kg while actual quantity is 1425 kg. Labour variance amounted to 510£
arises due to varying the labour hours from 350 to 345 and labour rate from 8£ to 7.797£. The
cost and sales variances results in a rising profits variances of 1350£.
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Corrective actions to eliminate variances: Through increasing the productive
capacity, encouraging and motivating workforce, increasing the sales price and reducing the
material wastage both the sales and cost variance can be eliminated (Mondal and Percival,
2012). This in turn, Jeffrey & Son's will be able to have actual profits equivalent to the
budgeted profits.
AC 4.2 Preparation of operating statement through combining budgeted and actual
results
Particular Per unit
Budgeted
(4000 Units) Per unit
Actual
(3500) Variance
Sales 4 16000 3.94 13820 -2180
Material 0.96 3840 0.97 3420 420
labour 0.8 3200 0.77 2690 510
Fixed
Overhead 4800 4900 -100
Total 2.96 11840 3.14 11010 830
Operating
profit 1.04 4160 0.8 2810 1350
AC 4.3 Report the findings to the management along in accordance with the responsibility
Centres
On the basis of above computed variances, it should be reported to the Jeffrey & Son's
managers that all the responsibility centres are not performing effectively. The revenue
centres has the responsibility to achieve target business sales in terms of both value and units.
As per the scenario, Jeffrey & Son's actual and budgeted revenues show a significant
difference. Therefore, managers require communicating with the centre managers and
identifying the reasons. Therefore, they should make policies and take appropriate business
decisions. However, the responsibility of making effective cost control implied on the cost
centre (Kaplan and Atkinson, 2015). Thus, Jeffrey and Son's cost centres needed to monitor
the operating activities continuously in order to maintain effective control. Through
improving the performance of both the centres, managers can meet the set targets.
CONCLUSION
The given project report concluded that good quality of managerial decisions will
greatly contributes towards the business growth. The report explained that numerous
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management tools and techniques play a vital role in the business success. The techniques
help the organizations through reducing cost, monitoring the business spending and
eliminating the variances. Furthermore, the management accounting gives required financial
information to the managers that give appropriate advices so as to take strategic decisions.
This in turn, it eliminates and reduces the negative financial consequences for running a
successful business.
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