Management Accounting and Budgeting Assignment
Added on 2019-12-28
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Management Accounting
TABLE OF CONTENTSIntroduction......................................................................................................................................4Task 1...............................................................................................................................................4A) Importance of budgeting for the businesses...........................................................................4B) Administrative procedures used in Budgeting process...........................................................5C) Stages of budgeting process....................................................................................................5Task 2...............................................................................................................................................6A) Classification of costs.............................................................................................................6B) Calculate fixed and variable costs...........................................................................................7Task 3...............................................................................................................................................8A) Effect of absorption and marginal costing on inventory valuation and profit determination.8B) Differentiate between various costing methods......................................................................8c) Preparation of profit and loss statement on the basis of Absorption costing ..........................9d) Preparation of profit and loss statement for South Area on the basis of Marginal costing . .10TASK 4..........................................................................................................................................10a) Advice to KBC Ltd................................................................................................................10b) Calculation of BEP, contribution to sales and required units to earn target profit................11b) (1) Contribution to sales ratio, based on sales mix of the four products...............................11(2) Break-even point in £000.....................................................................................................12(3) Required sales to earn profit of £90000...............................................................................12c) Calculation of profits at £10 labour rate with restricted 66000 labour hours........................12d) Calculation of profits for further 6000 hours.........................................................................12TASK 5..........................................................................................................................................12a) Types of budgeting methods..................................................................................................12
b) Cash budget...........................................................................................................................141) Calculation of amounts of direct material purchases.............................................................142) Preparation of cash budgets for July, August and September................................................143) Advantages of cash budget....................................................................................................154) Advise the Board for the cash flow variances.......................................................................15Task 6.............................................................................................................................................15(i) Prepare Flexed Budget and compute variance......................................................................15(ii) Variance Analysis.................................................................................................................16(iii) Report findings....................................................................................................................17TASK 7..........................................................................................................................................17a) Calculation of BEP and Margin of Safety.............................................................................17b) Calculation of profit/Loss at 26500 pair of shoes..................................................................18c) Calculation of number of units to earn desired profit of £240100 at £2 per unit salescommission................................................................................................................................19e) Calculation of BEP units to reach at fixed advertisement cost of £20000 and increase........19selling price by 15%...................................................................................................................19e) Recommendation with justification.......................................................................................19Conclusion.....................................................................................................................................20References......................................................................................................................................21
INTRODUCTIONManagement accounting is fundamental in strategic planning. When a business is lookingto make a strategic decision, for example, whether to develop a new product line, acquire anotherbusiness or expand into other countries, the CIMA trained management accountant can provideadvice. They can use a number of tools to assist decision-making. Management accountants lookahead - they focus on forecasting and decision-making (Islam and Dellaportas, 2011). They useinformation to advice on how the business can move forward, for example, should a companybuy another, should it invest in new equipment. Management accounting involves using theinternal financial information available to managers, as well as that information whichcompanies must publish by law (Lindholm and Suomala, 2007). This contributes to forwardplanning, reviewing and analyzing the performance of the business. In the present report,Management Accountant has been appointed for KBC Ltd to evaluate importance of budgetingand budgetary control mechanism. Along with this, provide the clear understanding of the costimplications in order to help management of KBC Ltd in classifying the costs. Further,accountant will assist in computing BEP for making short term management decisions. Lastly,concepts and significance of different types of budgeting has been focused on to enhance theunderstanding of management of KBC Ltd.TASK 1A) Importance of budgeting for the businessesBudgeting is considered as the critical part of the business planning process. However, itis the responsibility of business owners and managers to predict whether business will makeprofit of not. The main purpose of behind budgeting is that it assist the managers of organisationto forecast the financial functioning of business (Maelah and et. al, 2012). According to thepresent given scenario, management of KBC Ltd is facing various issues in managing costs thus,accounting is focusing on providing information regarding the importance of budgeting inmitigating the same problem. However, budgeting is considered as the decision making tool by providing financialframework to managerial level people. Through the means of this, managers can easily control ormaintain the level of expenditure or outflow on the basis of inflow. In addition to it, KBC Ltdcan make use of different types of budgeting techniques to monitor the performance of business(Gupta, Sharma and Ahuja, 2012). However, it’s one of the major advantages is that budgeting4
assist in enabling the measuring of actual business performance against the estimated businessperformance so that potential measures can be employed to minimize the variances. B) Administrative procedures used in Budgeting processIn general administrative procedures can be defined as the method or approachesdetermined by the government to prepare the budgets in accurate and appropriate manner. Theseprocedures are system of rules that govern the process of managing the activities of the businessenterprise. The main purpose of administrative procedures is that it assist in establishingefficiency, consistency responsibility and accountability (Harrison and Lock, 2004). There arevarious budget management standards that top level management of KBC Ltd has to undertake inorder to carry out the budgeting process as per the guidelines or procedures of administrative. The total estimated amounts proposed for each expenditure during the reportingyear should be in terms maximum expended value for that fiscal year and it mustauthorized by the board of trustees or members (Administrative Procedure, 2014). On the basis of budget and accounting manual, the term major classificationshould refers to the major code of classification.Funds should be transferred only form the available reserves to any unwantedexpenditure or uncertainties in terms of written resolution and must be approved by 2/3vote of the Board of Members of KBC Ltd. Further, the additional transfer of money in the same major classification of accountsdoes not require prior board approval. C) Stages of budgeting process In accounting terms, budget is prepared with the aim of determining the expectations forrevenues and expenses in the near future. Thus, to prepare a budget it is important for financemanager of KBC Ltd to abide and follow all the regulations so that completed budget is ready touse for fiscal year. Following are the various stages involved in budgeting process thatmanagement of KBC Ltd should consider while preparing the budget:Determining the details of budget policy and guideline to the committee members: Underthis stage top level management of cited organisation should provide detailed informationand guidelines document to the people who are responsible for preparing the budget.However, by abiding these guidelines and regulations committee members can prepareeffective and reliable budget (Hill, 2003). 5
Determining the factors that restricts output and taking corrective actions to solve theproblems: During this stage, people responsible for preparing the budgets will makeefforts to identify and evaluate all the factors that are affecting the course of sales andmanufacturing process of the company so that desired projections can be made andrealistic estimations can be proposed. Preparation of sales budget: Once the factors are identified and keeping those in mindmanagers can prepare sales budget and communicated to the sales department so thatthey can execute their functioning accordingly. Initial preparation of various budgets: Once the Board of Directors of KBC Ltd approvesthe projections of budget value so that further it can be divided into different budges sothat allocation of funds can be done on effective basis (Davis and Davis, 2012). Negotiation of budgets with superiors: After preparing all the budgets for differentdepartments, committee members consults with superiors of each department and ifrequired changes are made. Coordination and review of budgets: In this section, defined changes will take place andreviewed once again for the final approval. Final acceptance of budgets: This is the last stage of budgeting process in which budgetsfor different departments are accepted by the top level managers and accordingly flow ofmoney is managed and controlled (Ezeoha, 2011). TASK 2A) Classification of costsCosts in general can be defined as the amount of money spent by the firm to produce asingle unit of product or service. Further, costs can be classified on several basis which are asfollows:Function: Costs related to production (factory lighting and rent, unproductive wages),administrative (stationery, postage etc.), selling and distribution departments(advertisement, marketing and free samples) are considered as the function based costsclassification (Galloway and Deakins, 2012). Looking the functioning of KBC Ltd, it isimportant for the managers to maintain costs related to all the defined department so thatbetter financial position can be achieved. 6
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