Management Accounting and Performance Indicators

This assignment delves into the crucial role of management accounting in organizational success by examining cost classification systems and their impact on identifying key performance indicators. It analyzes various types of costs, the importance of accurate cost allocation, and the application of performance measurement tools like KPIs for evaluating operational efficiency and making informed business decisions. The text emphasizes the dynamic nature of management accounting in a digital age and its evolving role in shaping organizational strategies.

Question Answer
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Table of Contents
INTRODUCTION................................................................................................................................4
TASK 1.................................................................................................................................................4
1.1 Cost types..................................................................................................................................4
1.2 Costing methods........................................................................................................................6
1.3 Calculation of cost of goods sold...............................................................................................6
1.4 Analysis data using appropriate technique.................................................................................7
TASK 2.................................................................................................................................................9
2.1 Cost reports................................................................................................................................9
2.2 Use performance indicators to identify improvements..............................................................9
2.3 Suggest improvement to minimize cost and maximize value and quality...............................11
TASK 3...............................................................................................................................................14
3.1 Nature and purpose of budgeting process................................................................................14
3.2 Appropriate method of budgeting............................................................................................15
3.3 Budget preparation...................................................................................................................16
3.4 Cash budget..............................................................................................................................16
TASK 4...............................................................................................................................................18
4.1 Calculation of variances, reasons and remedial actions..........................................................18
4.2 Operating statement reconciling the budgeted and actual results............................................20
4.3 Presenting report to the management.......................................................................................20
CONCLUSION..................................................................................................................................21
REFERENCES...................................................................................................................................22
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Table of index
Table 1 Inventory valuation through FIFO...........................................................................................6
Table 2 Inventory valuation through FIFO...........................................................................................7
Table 3 Inventory valuation through weighted average method..........................................................7
Table 4 Schedule for expected cash collection for September...........................................................15
Table 5 Expected cash disbursement schedule...................................................................................16
Table 6 Cash budget of Calgon Products for the month of September..............................................16
Table 7 Calculation of variances........................................................................................................18
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INTRODUCTION
In the present era of competitive age, all the companies either commercial or service-
rendering needs to formulate effective strategies, set policies and targets and make decisions to
sustain in the market. The aim of present assignment is to identify various costs and its accounting
practices to determine total cost. Moreover, the report will present the role of budgetary framework
like production, purchase and cash budget to achieve success. In addition to this, various inventory
valuation techniques like LIFO, FIFO and weighted average will be applied for the valuation of
ending stock. At the end, variance analysis technique will be opted to determine deviations and
make remedial actions to drive success.
TASK 1
1.1 Cost types
The amount of money that G. Chemical Company pays to manufacture, produce and sell its
goods and services into the market is called cost. In other words, cost is the value of sacrifice that
company made to acquire specific quantity of goods in the business (Kaplan. and Atkinson, 2015).
There are different types of costs which can be classified or grouped on different basis,
demonstrated below:
Cost elements: There are three elements of cost, material, labour and overheads, segregated into
two components direct or indirect.
(Source: Cost classification. 2015)
Material: Principle item or substances that G. Chemical Company uses in its production
process to transform it into finished good is called material. Out of this, cost of material that can be
traced easily to each unit of production is regarded as direct material; however, material that cannot
be assignable on each unit is called indirect material (Quattrone, 2016). For instance, in furniture
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industry, wood will be a direct material, however, screw, bolt, glue will be the part of indirect
material.
Labour: Financial reward for the physical or mental effort put by the labourers to produce a
specified item is called cost of labour (Pettinger, 2012). People who are directly involved in the
manufacturing process is called direct labour, like machine operators. In contrast to this, payments
to labourers that are not directly engaged in production process are known as indirect labour such as
remuneration to supervisor.
Factory Overheads: It includes all the cost pool that G. Chemical Company used to
accumulate indirect material, labour and all the indirect expenses (overheads) which cannot be
traced to specific product such as depreciation, insurance, non-manufacturing overheads, factory
lighting, rent and so on.
Cost behaviour:
Fixed cost: Expenditures that remains constant or do not volatile with the change in output
is called fixed cost, however, with the higher production level, its allocation to each unit got
decreases (Strumickas. and Valanciene, 2015). For instance, insurance, depreciation, office rent and
so on.
Semi-variable cost: Cost of items which represents a minimum fees upto a fixed output and
beyond that level, cost goes increase with the more quantity of production is called semi-variable
cost. For instance, telephone and electricity charges
Variable cost: It directly moves with the same direction of changes in production level is
called variable cost (Cost classification, 2015). For instance, in order to produce more quantity of
item, G. Chemical Company will be require to purchase more material as a variable cost.
Step cost: Cost which fixed proportion rises abruptly at different level of activity is called
step cost. For instance, with the increase in number of subordinates, supervisor will demand more
salary for additional work and increase business cost.
Cost function: In this, expenditures are grouped according to the activity performed, enumerated
hereunder:
Production/manufacturing cost: It consist of expenditures paid for manufacturing a
specified item includes direct material, labour and factory overhead (Messner, 2016).
Administration cost: Payment made by G. Chemical Company to direct, control and
operate regular functioning is called office/administration cost. For instance, staff salary, manager
remuneration, printing, stationery etc.
Marketing: Expenditures which incur by the firm to promote and encourage consumers to
make excessive quantity of purchase is called marketing cost i.e. advertisement and promotional
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activities.
1.2 Costing methods
Costing methods: Cost accounting refers to the process of measuring production cost so as
to report accurate amount in the financial statements. It aids in making effective business decisions
to control expenditures and maximizing profitability (Tappura. and et.al., 2015). There is variety of
costing techniques and methods available to G. Chemcial Company to determine their production
cost that are enumerated below:
Job costing: This method is generally used by those organizations who work on number of
jobs and each has unique specification and scope. This method is helpful to measure cost of each
job by accumulating fixed as well as variable expenses. For instance, car repairers and decorators
measure cost by applying this method.
Contract costing: Companies who perform big jobs and require huge money to complete
the contract within a longer period use this method to measure their cost, also called terminal
costing. Constructors who construct bridges, roads, railway platform, apartment and building use
this method.
Batch costing: This method is used to determine the cost of each batch which is uniform in
both the terms of design and nature (Abdelaty. and et.al., 2016). In this, each batch is treated as
separate unit and covering a number of units. For instance, pharmaceutical firms often use this
technique to determine the cost of every batch.
Process costing: Business units in which production of finish goods go through number of
processes used this costing method to examine the cost of each process and transfer it to the next
one to determine their total cost. For instance, clothing industry includes number of stages or
processes like spinning, weaving and converting applied this method.
Unit costing: Organizations which carry out production activities consistently throughout
the year and produce also identical goods prefer unit costing to determine cost of each unit such as
mines and cement works.
1.3 Calculation of cost of goods sold
In manufacturing industry, companies produce goods and services on their own basis and
distribute it into the market to meet their client expectation (Aksenov. and et.al., 2015). Cost of
goods sold includes only the direct expenditures paid for manufacturing a specified quantity of
items, calculated here as under:
COGS = Beginning/opening inventory + purchase – closing inventory
Alternatively, we can say, COGS = Purchase of direct material – purchase return + direct expenses
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(Octroi, customer duty, carriage inward)
For instance,
Opening stock – 25,000
Purchase – 100,000
Closing stock – 30000
COGS = 25,000 + 100,000 – 30,000
= 95,000
It is important for the company to measure COGS so as to determine gross margin by
subtracting it from the total turnover. G. Chemcial Company needs to execute effective control over
direct spending so as to maximize their gross profit.
1.4 Analysis data using appropriate technique
LIFO (Last-in-First-Out): Under this method, firm sold that inventory item first which
purchased in the last. As a result, residual inventory items will be the part of initial inventory items
or goods (López. and et.al., 2015).
Table 1 Inventory valuation through FIFO
last-in-first out
Date Purchase Sales inventory balance
Unit Price
per unit
Total
amount
Unit Per
unit
price
Amount Unit Cost
1/1/2016
(Opening
balance)
4000 12 48000
5-Mar 6000 16 96000 10000 144000
17-Apr 6000 16 96000
1000 12 12000 3000 36000
7-Sep 8000 17 136000 11000 172000
11-Nov 6000 17 102000
Closing
inventory
5000 70000
FIFO (First-in-First-Out): It is complete opposite to the earlier method, as in this
technique, G. Chemcial Company will sell first bought item earlier over others, henceforth, closing
stock will be the part of last merchandized items.
Table 2 Inventory valuation through FIFO
First-in-first out
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Date Purchase Sales Inventory balance
Unit Price per
unit
Total
amount
Unit Per
unit
pric
e
Amou
nt
Unit Cost
1/1/2016
(Opening
balance)
4000 12 48000
5-Mar 6000 16 96000 10000 144000
17-Apr 4000 12 48000
3000 16 48000 3000 48000
7-Sep 8000 17 136000 11000 184000
11-Nov 3000 16 48000
3000 17 51000
Closing
inventory
5000 85000
Weighted Average method: This inventory method is considered more suitable and
appropriate as this method consider all the quantity purchased along with their respective prices and
use weighted cost per unit for inventory valuation (Duan. and Ding, 2016).
Table 3 Inventory valuation through weighted average method
Weighted average method
Date Purchase Sales Inventory
balance
Unit Price
per
unit
Total
amount
Unit Per
unit
price
Amount Unit WACC
per unit
Weighted
average cost
1/1/2016
(Opening
balance)
4000 12 48000
5-Mar 6000 16 96000 10000 14.4 144000
17-Apr 7000 14.4 100800 3000 14.4 43200
7-Sep 8000 17 136000 11000 16.29 179200
11-Nov 6000 16.29 97745.45
Closing inventory 5000 34.84 174200
TASK 2
2.1 Cost reports
Cost reports represent a summary of key statistics about different types of variable and
fixed cost such as material, labour, variable and fixed overheads, prepared underneath:
Particular Budgeted cost Actual cost Variance Type
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Material 25000 26000 -1000 Unfavourable
Labour 13000 10500 2500 Favourable
Other variable
overheads
5000 6700 -1700 Unfavourable
Fixed Overhead 8000 8500 -500 Unfavourable
Total 51000 57000 -6000 Unfavourable
Material: From the above presented report, it can be seen that actual cost of material is
comparatively higher by £1,000 as compare to the set target cost. Excessive prices of material
charged by suppliers and ineffective use are the two main factors responsible for adverse results
(Perry, Bader-El-Den. and Cooper, 2015). In order to remove this, Z Company can be recommended
to obtain quality material at cheaper prices and use it effectively in the production process.
Labour: It is positive may be due to availability of skilled and talented labourers at an
acceptable wages rate, helps to reduce actual cost of labour by £2500.
Variable overheads: Z Company managers set targets of £5,000; however, actual overheads
were only £6,700 resulted in adverse variance of £1700. High idle time, ineffective managerial
monitoring, use of business resources for personal uses are the reasons for wasteful spending
(Niemeyer. and et.al., 2016). It only can be controlled by keeping strong control over regular
business activities and functions.
Fixed overheads: Target overhead set worth £8,000 whilst actually Z Company incurred
excessive overheads worth £8500 resulted adverse variance of £500. In order to eliminate this,
manager can be advised to continue monitor and regulate business practices and control high level
of spending to reach targets.
2.2 Use performance indicators to identify improvements
Every business organization needs to measure their performance so as to examine their
results whether they are performing well or not. Key Performance Indicators (KPIs) are the best
way that can be used by Z Company to assess and evaluate their performance and take decisions for
the bringing out necessary improvements, described here as under:
Financial metrics:
Revenue: Corporate sell is an effective measure to examine the result of business
performance. With reference to Z Company, it delivers air conditioning to the commercial
buildings, henceforth, maximum sales is a sign of more customer base and excessive quantity of
sale or vice-versa (Ahrens. and Ferry, 2015). It is important for the firm to deliver top-value to the
customers to meet their expectations and thereby maximize total turnover to strengthen its revenue
stream.
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Cost: Total corporate spending or expenditures for producing, distributing and marketing the
goods or services is regarded as business cost. Continuous cost increase without any increase in
production volume or slightly improvement is a sign of poor performance; however, effective
control is a sign of stronger managerial control.
Profitability: Surplus remains after subtracting total cost from the revenue generated is also
an effective measure (Parmenter, 2015). Rapid growth is considered good as it indicates that Z
Company is carrying out their regular functioning in well manner and acquiring better yield or vice-
versa.
Customer Metrics:
Customer satisfaction and retention rate: Every company operates in the market to satisfy
their target customer demand and thereby gain maximum return. Regular buying, repetitive
purchasing and customer loyalty deliberately indicates that use group are satisfied. It help firm to
retain their existing consumer base for a longer duration and attract potential clients as well.
Consumer lifetime value: CLV helps to measure total worth to establish a long-term
relationship with the target audiences (Johnes, 2016). It facilitates managers to gain loyal
customers at best prices.
Number of customers: It is a straightforward indicator that can be used by Z Company to
determine their target customers. Rising or rapid growth in domestic as well as foreign customers is
a sign of performance improvement, however, in case of declined customer base; managers need to
make better policies and decisions for enhancing their user group.
People Metrics:
Employee Turnover rate: Employees are the base of business success as they drive more
customers by delivering excellent and top quality services (Feiz, and et.al., 2015). High turnover is
a negative indicator towards performance makes it essential for the business unit to examine their
workplace culture, staff salary, motivation practices and individual behaviour so as to eliminate
adverse situations.
Employee satisfaction: Highly-motivated and committed workers work hard and put their
increased efforts to complete assigned duties in the best possible manner. Satisfied employees work
with greater efficiency and have capability to render best services to the final users. Thus, it
becomes essential for the Z Company to satisfy their workers to drive stronger revenue stream by
offering them better salary, motivation, training and welfare activities.
Process Metrics:
Product defects: Rising consumer complaints about defective items and worst quality of
goods is an indicator of poor performance (Podgórski, 2015). However, minimizing defect rate
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helps to increase satisfaction level of the users and meet people desires and expectations.
Technological advancement: Better and advanced use of technological equipments,
machinery and other helps to maximize operational efficiency and minimize cost.
2.3 Suggest improvement to minimize cost and maximize value and quality
Looking at the modern era of changing market conditions and intense competitive edge,
companies like Z Company and other requires reducing their business cost and improving quality
and worth to sustain in the market.
Ways to minimize cost:
 One of the best ways to curtail business cost is to execute effective managerial control and
monitoring over regular business activities and operations (Bahadur, and et.al., 2016). With
the help of this, managers can easily identify the responsible reasons for higher cost and take
immediate actions to mitigate the same.
 Z Company’s purchase departmental manager should search for suppliers either domestic or
international so as to bought material at cheaper rates.
 Company also can be advised to recruit highly-committed, motivated, talented and capable
workforce to deliver best value to the customers at an affordable cost of wages.
 Technological advancement is also an effective way to maximize operational efficiency and
reduce cost (Bieńkowska, Kral. and Zabłocka-Kluczka, 201).
 Managers need to effectively allocate their business resource in various functional areas and
also execute effective control to manage it.
 Recycling wastage and scrap by reuse also helps to eliminate excessive wastage and curtail
cost. Various cost-management strategies can be used such as increasing the level of output helps
to reduce allocation of cost to each unit and maximize return on each item.
Ways to maximize value and quality: Investment in training: Z Company’s executives and directors can conduct training and
development sessions for maximizing their workers skills and competency level and thereby
deliver top-quality value to the users. Quality improvement techniques: Firm can opt for Total Quality Management (TQM)
approach, in which, it can focuses on each activity, production process and functions and
bring significant level of improvements to improve quality. Moreover, quality circles and six
sigma techniques are also some alternatives available to the firm to remove defects and
perform quality work to meet people demand.
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 Maximize yield: Loyal customers are willing to pay higher or premium charges for the
supplied goods and services and help Z Company to maximize their net earnings. With the
help of getting more and more return, entities will be able to deliver improved return to the
investors and satisfying their expectation about return. Product differentiation, strong
revenue stream, controlled cost, existence into foreign market, introduction of unique
product and services are the best strategies available to company to enhance their net yield
or earnings (Lanis. and Richardson, 2016).
 Competitive advantage, strategic capabilities and sustainable benefits also assist business
unit to fulfill investors’ expectations by delivering them increased value and worth.
Estimation of cost using high-low method
As per the scenario, Z Company which wholesale custom-built air conditioning units to
commercial buildings measured significant fluctuations in its shipping expenditure over the
monthly duration. High-low costing method is an easy way to bifurcate total shipping cost into
fixed and variable portion by taking into account extreme activity level along with their
associated cost, applied here as under:
Month Units shipped Total shipping expense
January 4 $ 2,200
February 7 $ 3,100
March 5 $ 2,600
April 2 $ 1,500
May 3 $ 2,200
June 6 $ 3,000
July 10 $ 4,200
High-low costing formula
Variable cost per unit = (Y2 – Y1)/(X2-X1)
Here, Y2 – Total cost at highest level of output, $4,200
Y1 – TC at lowest level of output, $1,500
X2 – Highest volume, 10 Unit shipped
X1 – Lowest volume, 2 Unit shipped
= ($4,200 - $1,500)/(10 – 2) Units shipped
= ($2,700)/8
= $337.5
Total fixed cost (TFC) = Y2 – bx2 = Y1 – bx1
= ($4,200 – ($337.5*10) = ($1,500 – ($337.5*2)
= ($4,200 - $3,375) = ($1,500 - $675)
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= $825 = $825
After taking into account both the results of fixed and variable cost per unit, following cost volume
formula can be prepared:
Cost-volume formula – Y = $825 + $337.5x
Here, x represent number of unit shipped
For instance, if Z Company shipped 12 units in future period, than its total shipping expenditures
will be as follows:
Y = $825 + ($337.5*12)
= $825 + $4050
= $4875
In the cited scenario, it has been stated that Z Company’s president does not believe on this
concept and not have enough confident on its application. Henceforth, in order to measure future
movement, scatter diagram with presenting trend line has been prepared below:
Cost estimation = Y = 316.1x + 1014
= ($316.1* 12) + $1014
= ($3,793.2 + $1,014
= $4,807.2
Taking into account the results of both the method, little difference can be seen as high-low
method estimated cost worth $4875, in contrast, scatter diagram predicted that cost will be $4807.2.
It is just because high-low method consider only maximum and minimum output level with the
associated cost data, however, scatter diagram take into account all the historical results.
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TASK 3
3.1 Nature and purpose of budgeting process
In the process of financial planning, manager also has to predict future trends and volatility
in their operations and budget are considered as the best way to anticipate results of forthcoming
years. Budget is a monetary or financial plan that assists Calgon Product to measure the amount of
potential revenue and gives an idea towards future expenditures that it will incur in upcoming
period (Messner, 2016). In other words, budget refers to structured or summarized statement that
helps to predict future of the organization and considers helpful to prevent itself from the sudden
financial shocks. Moreover, budgets are also important to integrate and coordinate wide range of
functional areas so as to produce desirable outcome.
Purpose: The main important of budgeting framework are demonstrated hereunder:
 Prediction or anticipation about potential revenues and expenses which provides an idea
about future return
 It helps Calgon Products’s financial manager to make better and effective financial decisions
at right time.
 It facilitates manager to compare the actual performance with the set standard or targets
mentioned in budget.
Nature:
 At the inaugural stage, manager needs to estimate revenues or amount of cash that may be
generated from the future activities.
 Thereafter, Calgon Products’s executives have to predict potential spending or cash outgoing
to carry out normal course of activities.
 Subtraction of total expenditures from the generated income helps corporations to anticipate
net budgeted deficit or surplus.
 At the last stage, budget committee has to review ones again drafted budget and submit it to
the directors for approval.
 After approval, target needs to be communicated to all the departments like HR, sales,
purchase, marketing and so on.
3.2 Appropriate method of budgeting
Companies like Calgon Product and other can prepare budget through employing different
budgeting methods and techniques that are enumerated underneath:
Incremental budgeting: It is considered as a simplest method of budgeting because every
year, budgets are just prepared by taking into account some incremental amount either on current
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year’s set targets or actual performance. Revenues and expenditures like sales and purchase are
adjusted for the inflation, price volatility and market fluctuation (Management accounting. 2014).
The biggest drawback of this method is that Calgon Products’s manager adjusts income and
spending regardless actual market conditions and external forces. In other words, it can be stated
that unrealistic assumption or adjustment as per executive desires is the limitation of this budgeting
method. Small or medium-sized retailers like Nisa use this method to estimate future through
constructing budget.
Zero-base budgeting: An alternative available to IB is ZBB, in which, every period budgets
are prepared by considering actual market conditions and assessing its impact on regular activities
(Aksenov. and et.al., 2015). As name implies, managers use zero as a base and prepare budgets by
making realistic assumptions on the basis of external business environment such as changes in
demand, price alternation, competition level, technological obsolescence and so on. Maximum and
optimal allocation of resources, elimination of market challenges and quick respond to business
environment are the benefits of it. In contrast to this, time-consuming and high level of dependency
upon managerial skills and capability in making realistic assumptions are several drawbacks. Large-
scale companies like Sainsbury use ZBB to make realistic targets.
Methods Pros Cons
IB  Simple and easy to construct budget
 Consistent way
 Better and effective co-ordination
 Avoid impact of external
volatility
 No incentive for innovation
and advancement
 Encourage expenditures
ZBB  Best allocation of resources
 Cost-reduction ways to curtail
expenses
 Eliminate or avoid wasteful business
spending
 Time –consuming process
 Require to train workers via
T&D initiatives
 Internal conflicts among
departments due to resources
allocation
Fixed budgeting: Budget which produce results at a fixed or specified volume of output is
called fixed budgeting. However, in the changing era, actual production often varies from the set
targets, in such situations; it becomes very tough for the managers to compare actual results with
the set budgeted or standard targets (López. and et.al., 2015). As a result, it does not help executives
to take remedial actions for performance improvement.
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Flexible budgeting: Budget that can be easily altered according to the change in production
level or actual volume is called flexible budgeting. It offers huge assistance to the managers to
compare actual results with targets and take corrective actions to eliminate unfavourable results for
success.
3.3 Budget preparation
Production budget provides an idea about the number of units which Calgon Products
require to manufacture to ensure regular or continuous supply of their goods and services. It
helps business unit to prevent threats as ineffective supply of the items may lead to result in
loss of customers as they can go to the competitor and make buy.
Particulars Units
Total business sales 47,400
Less: Beginning or opening inventory 3000
44,400
Add: Closing or ending inventory 5000
Total Production required 39,400
Interpretation: Taking into account the results of production budget, it can be interpreted
that Calgon Products must manufacture at least 39,400 units to assure regular supply of the goods
(Perry, Bader-El-Den. and Cooper, 2015). Moreover, management decided to maintain 5000 units in
the warehouse as closing stock so as to prevent itself from the sudden increase in consumer
demand.
3.4 Cash budget
In business planning, managers often need to predict results of future course of activities on
the basis of past occurrence or results. Cash budget considers as one of the important tool that assist
entity to anticipate future cash collection and its disposal or uses in regular functions. According to
the budget, Calgon Products manager can identify the amount of cash inflow and its disbursement
in business operations and assess that whether company will have enough surplus or not to manage
their liquidity or creditworthiness.
Table 4 Schedule for expected cash collection for September
Items Calculations September
Cash sales Given $7,400.00
10% of credit sale of September received in same month (40000*10%) $4,000.00
80% of credit sale of August received in following month (30000*80%) $24,000.00
7% of credit sale of July received in second month following sales (20000*7%) $1,400.00
Total sales on account $29,400.00
Total cash collection (7400+29400) $36,800.00
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Table 5 Expected cash disbursement schedule
Expected cash disbursement schedule
Items Calculations September
Cash purchase (25000*20%) $5,000.00
Credit purchase of previous month paid in current year Given $16,000.00
Total amount of inventory purchase (5000+16000) $21,000.00
Table 6 Cash budget of Calgon Products for the month of September
Cash budget
Particulars September
Cash balance $11,000.00
Cash sales $7,400.00
Sales on account $29,400.00
Cash available for use $47,800.00
Cash outflows
Purchase of inventory (20% cash) $5,000.00
Accounts payable of August paid in September $16,000.00
Selling and administrative expenses (exclude depreciation) $9,000.00
Equipment purchase (CAPEX) $18,000.00
Dividend payment $3,000.00
Total cash disbursement $51,000.00
Net cash balance -$3,200.00
Financing section:
Add: Line of credit $8,200.00
Minimum cash balance $5,000.00
From the derived results, it can be seen that in September, Calgon Products will have less
cash money available for use to $47,800 as compare to the cash outgoing as it has been predicted to
$51,000. As a result, company will bear a deficit or unfavorable balance of $3,200. Thus, in order to
maintain minimum cash balance of $5000, firm will need to finance the business through obtaining
line of credit amounted to $8,200.
Reasons for negative/adverse net cash flow
 Less proportion of sales on cash basis and high credit period extended to the customers
resulted in less cash incoming in the business.
 Supplying goods and services to bad or poor credit rating debtors resulted in 3% bad debts
of sales for account. In short, ineffective debtor policy is a reason for less cash inflow
(Niemeyer. and et.al., 2016).
 High accounts payable of previous month to $16,000 which Calgon Products need to pay in
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current month.
 Capital expenditures worth $18,000 to purchase equipment for the business use. Ineffective and poor managerial control over selling and administration expenditures.
Ways to combat deficit issues
 Take better credit decisions, in which, Calgon Product’s manger should minimize the credit
duration for debtors and made excessive sales on prompt basis to generate cash earlier.
Moreover, cash discounts can be offered in order to encourage debtors to make purchase on
cash basis.
 Company can buy equipment on hire purchase basis rather than buying in cash. With the
help of this, they can manage their cash outgoing as company just have to initial money and
remaining in equal periodical installments (Ernst, 2015).
 Company can also expand their payment days by negotiating with the suppliers to reduce
their cash outflow.
 All the departmental managers need to put their strong control over operations to curtail
their spending and assure enough surplus money.
TASK 4
4.1 Calculation of variances, reasons and remedial actions
Organizations not only require preparing budget, but also have to analyze it with the actual
outcome or performance so as to measure variances or deviations includes both favourable/positive
and unfavourable/negative (SSAP 13 Accounting for research and development. 2016).
Material price variance (MPV): It measure actual price of material with the standard or
target price and identify variances.
Material Usage variance (MUV): It compares actual usage of material quantity with the
standard quantity of material usage for the production.
Labour rate variance (LRV): It identify deviations by comparing actual wages rate with the
set targeted wages rate and determine deviations.
Labour efficiency variances (LEV): This variance analyze efficiency of labourers by
comparing actual hours used with the set budgeted or standard hours.
Sales volume variance: It indicates differences between targeted quantity of unit sold with
the actual sales quantity.
Sales price variance: It measure deviation or differences between actual selling price per
unit with the set selling price.
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Table 7 Calculation of variances
Particul
ars
Formula Calculation Net variance
SVV ( -50*1.04) -520 (Unfavourable)
SPV ( 14000 - 13820) 180 (Favourable)
MPV (standard price – actual price)* actual
quantity of material used
1425(£2.4 - £2.4) Nil
MUV Standard price per unit (Standard
quantity – actual quantity)
[( 3500 *£0.4)-(1425)*
(£2.40)]
60(Unfavourable)
MCV 60 (Unfavourable)
Labour
LRV Budgeted labour hours (standard rate-
actual wages rate)
[(£8-£7.8)*350] 70 (Favourable)
LEV Standard hours*(SLH-ALH) [(3500*£0.1)-(345)]* £8 40(Favourable)
FOEV (BFO-AFO) £4800 - £4900 100 (Unfavourable)
Variance Identify causes Recommend corrective actions
Material High quantity of material usage as compare
to target.
Ineffective control of production
departmental managers
Defective items
Use of raw material for personal usage
Production department and quality
team should verify supplied item at
the time of purchase to eliminate
possibility of defectives.
Execute effective control and regular
monitoring to eliminate stolen
activities.
Labour It is favourable because of skilled labour
and cheaper wages rate.
No need to take any remedial actions
as it incurred lower cost than set
targeted.
Overheads Poor and worst departmental manager
control over functional areas like office
expenses, production expenses, marketing
Departmental managers need to keep
eye on business functioning to reduce
excessive overheads via keeping
19

and so on. closure control and monitoring.
4.2 Operating statement reconciling the budgeted and actual results
4.3 Presenting report to the management
To, Board of directors
Date: 18th November 2016
From: Management accountant
Taking into account derived results, it can be said that production/manufacturing
departmental manager should monitor production activities and keep their eye on workers to
eliminate stolen activities of raw material. Furthermore, purchasing departmental manger also can
be recommended to purchase quality items and inspect it properly to eliminate defective goods. By
keeping effective control over business functions, they can manage fixed overheads up to the set
target level and curtail cost. On the other hand, in order to drive more revenue, sales manager
should be advised to increase offer rate to maximize revenues and achieve target. Moreover, trade
discount and cash discount can be offered to customers to maximize total sales quantity and
generate promptly from the debtors.
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CONCLUSION
Report concluded that managers has to use best cost accounting method and management
accounting technique or models so as to reach success. Report identified weighted average cost as
the most effective way for G. Chemical Company to value closing stock. However, Z Company’s
managers have been suggested to find out suppliers to minimize material cost and control spending
to curtail cost and reach goals. Moreover, Calgon Products has been advised to make sales on
prompt basis and offer attractive discounts to maximize cash incoming and curtail cost so as to
ensure positive or surplus money. In the end, report identified that firm should offer trade and cash
discount to maximize revenue and control regular production activities to eliminate stolen activities,
increase optimum utilization and reduce overheads.
21

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