Accounting for Managers Assignment Report: Cost Analysis

This report, prepared for an Accounting for Managers assignment, provides a detailed analysis of budgeting, cost structures, and budget variances. Part A focuses on the preparation of a master budget. Part B explores the impact of cost structures, including the potential use of alternative energy sources and the implementation of an automated manufacturing facility. Part C examines budgeted versus actual outcomes, analyzing deviations in direct material, direct labor costs, and sales figures. The report identifies causes for these variances and suggests improvements. Part D discusses participative budgeting, comparing it to imposed budgeting and highlighting its benefits for accuracy, motivation, and responsibility. The report concludes with references to relevant academic sources and a final discussion on participative budgeting.

ACCOUNTING FOR MANAGERS ASSIGNMENT

1
By student name
Professor
University
Date: 13 October 2017.
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Contents
Part A.............…………………………………………………………………………………………….......3
Part B.............…………………………………………………………………………………………….......7
Introduction.............………………………………………………………………..............7
Analysis & Outcome.........………………………………………………………….…........7
Conclusion......……………………………………………………………………………….......8
Part C.............……………………………………………………………………………………………......9
Introduction.............………………………………………………………………..............9
Analysis and causes of the deviations………………………………………….…......9
Conclusion......……………………………………………………………………………….......10
Part D……………………………………………………………….……………………..……………………...11
Refrences.....……………………………………………………………….......................................13
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Part A: Preparation of the Master Budget
All the relevant budgets as asked in the question has been presented below:
Jan Feb Mar Total
Expected sales in units 76,060 60,840 68,450 205,350
Selling price per unit 7,400.00$ 7,400.00$ 7,400.00$ 7,400.00$
Total Budgeted Sales 562,844,000$ 450,216,000$ 506,530,000$ 1,519,590,000$
Jan Feb Mar
Current month sales 68% 382,733,920$ 306,146,880$ 344,440,400$
Prior month's sales 30% 180,110,000 168,853,200 135,064,800
Total cash collections 562,843,920$ 475,000,080$ 479,505,200$
Schedule of Expected Cash Collections
Sales Budget
Wittgenstein Pty Ltd.
Jan Feb Mar Total Apr
Budgeted sales in units 76,060 60,840 68,450 205,350 91,270
Add desired ending inventory of
finished goods 36,504 41,070 54,762
Total needs 112,564 101,910 123,212
Less beginning inventory of finished
goods 48,700 36,504 41,070
Required production 63,864 65,406 82,142
Production Budget
Jan Feb Mar
Units to be produced 63,864 65,406 82,142
Raw Materials needed per unit 5 6 5 6 5 6
Production needs 319,320 383,184 327,030 392,436 410,710 492,852
Add desired ending inventory 304,200 365,040 342,250 410,700 456,350 547,620
Total needs 623,520 748,224 669,280 803,136 867,060 1,040,472
Less beginning inventory 380,300 456,360 319,320 383,184 327,030 392,436
Raw materials to be purchased 243,220 291,864 349,960 419,952 540,030 648,036 Units
Cost of SAA per kilogram 91.00$ 122.00$ 91.00$ 122.00$ 91.00$ 122.00$
Total cost of purchases of SAA 22,133,020$ 35,607,408$ 31,846,360$ 51,234,144$ 49,142,730$ 79,060,392$
Direct Material Purchases Budget
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Jan Feb Mar
Units to be Produced 63,864 65,406 82,142
Direct Labour time per unit (hours) 9.00 9.00 9.00
Total hours of direct labour time
needed 574,776 588,654 739,278
Direct Labour cost per hour 50.00$ 50.00$ 50.00$
Total direct labour cost 28,738,800$ 29,432,700$ 36,963,900$
Direct Labour Budget
Jan Feb Mar
Production in Units 63,864 65,406 82,142
Direct Labour time per unit (hours) 9.00 9.00 9.00
Total hours of direct labour time
needed 574,776 588,654 739,278
Indrect Labour per direct labour hr 63.89 63.89 63.89
Pow er per direct labour hr 6.08 6.08 6.08
Maintenance Cost per direct labour
hr 60.55$ 60.55$ 60.55$
Variable manufacturing overhead 75,019,764$ 76,831,120$ 96,490,565$
Fixed manufacturing overhead:
Supervision 42,590,800 42,590,800 42,590,800
Depreciation 3,802,800 3,802,800 3,802,800
Rates & Utilities 3,142,600 3,142,600 3,142,600
Others - Fixed 15,211,000 15,211,000 15,211,000
Others - Hourly Basis @ $ 45.63 per DL Hr.26,227,029 26,860,282 33,733,255
Total fixed manuf acturing OH 90,974,229 91,607,482 98,480,455
Total manufacturing OH 165,993,992 168,438,602 194,971,020
Less Depreciation 3,802,800 3,802,800 3,802,800
Cash disbursements f or manufacturing
OH 162,191,192$ 164,635,802$ 191,168,220$
Manufacturing Overhead Budget
Labour Hrs. Maintenance cost
Actual 1,467,900 90,049,100 61.35
Actual 1,673,200 97,806,700 58.45
Actual 1,536,300 92,635,000 60.30
Actual 1,399,400 87,463,300 62.50
Average 6,076,800 367,954,100 60.55
Maintenance cost per labour hour as per recent statistical data
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Item Quantity Cost/unit Total
Production cost per unit:
Direct materials:
Part 714 5.00 kg. 91.00 455.00
Part 502 6.00 kg. 122.00 732.00
Direct Labour 9.00 hr 50.00 450.00
Manufacturing overhead 1.00 unit 2,599.18 2,599.18
Unit product cost 4,236.18
Budgeted finished goods inventory:
Ending finished goods inventory in units 54,762
Unit product costs (see above) 4,236.18$
Ending finished goods inventory in dollars 231,981,656$
Budgeted cost of goods sold:
Beginning finished goods inventory 148,048,000
Plus cost of goods manufactured 895,579,157
Less: ending inventory 231,981,656
Budgeted cost of goods sold in dollars: 811,645,501
Ending Finished Goods Inventory Budget (Absorption Costing)
Ending Finished Goods Inventory Budget & Cost of goods sold budget
Sales 1,519,590,000$
Cost of goods sold 811,645,501
Gross Margin 707,944,499
Less:
Selling & administrative expenses 301,863,900
Net operating income 406,080,599
Less: Interest expense -
Net income before taxes 406,080,599
Income taxes -
Net Income 406,080,599$
Wittgenstein Pty Ltd.
Budgeted Income Statement
-
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Jan Feb Mar Total
Cash balance, beginning 3,802,800$ 16,169,900$ 85,036,174$
Add receipts:
Collections from customers 562,843,920 475,000,080 479,505,200 1,517,349,200
Total cash available before financing 566,646,720 491,169,980 564,541,374 1,622,358,073
Less disbursements:
Direct materials 57,740,428 83,080,504 128,203,122 269,024,054
Direct labour 28,738,800 29,432,700 36,963,900 95,135,400
Manufacturing overhead 162,191,192 164,635,802 191,168,220 517,995,214
Selling and administrative expenses 111,806,400 89,436,200 100,621,300 301,863,900
Capital asset purchases - Land - 39,548,600 - 39,548,600
Dividend payment 190,000,000 - - 190,000,000
Total disbursements 550,476,820 406,133,806 456,956,542 1,413,567,168
Excess (deficiency) of cash available
over disbursements 16,169,900 85,036,174 107,584,832
Financing:
Borrow ing (at the beginning of the month)
Repayment (at the end of the month)
Interest expense (paid monthly) - - -
Total financing - - -
Cash balance, ending 16,169,900$ 85,036,174$ 107,584,832$
Running total - - -
Cash Budget
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PartB: Report on the impact of Cost Structures
Introduction
In the given question, two issues have been highlighted namely the possibility of the use of
alternative sources of energy generation under the new government when the elections would be over
and the 2nd issue being introduction and building of the highly automated manufacturing facility on the
land in the future which will cut short the direct labour hours and direct material by 25% but will
increase the fixed manufacturing overheads by 50% due to the increase in the manufacturing
production capacity. Both the situations have been analaysed using relevant circumstanaces and option.
(Alexander, 2016)
Analysis and Outcome
The sales manager is skeptic regarding the use of the alternative sources of energy and power
generation equipment since the current market itself is extremely volatile an the results of the election
in case the new government is chosen will make the market even adverse and negative towards the use
of it. Political instability always is one of the major factors when we are introducing the new kind of
technological development. Further, it is generally opposed as since it would be away from the normal
and would result in killing the employemnet of the general people and moving towards automation
which warrants for minimal use of manual labour. In terms of costing, this would further add to the cost
in the beginning as it requires advanced technologies and would result in losses upfront however, going
forward, this may break even in the long run. (Belton, 2017) Besides the above mentioned factors of
political instability, these power generation equipment have a fixed maximum capacity however, the
demand of the energy and power may be multifold at times, so it may be difficult for the company to
cater the demands at that time. Rita Arthurs, being the sales manager is concerned since the sales of the
equipment may come down on account of all these factors but in order to convince the particular set of
market, she needs to do the cost benefit analysis and come out with the positive NPV and >1
profitability index in order to make her sales be in line with the target.
Going further, the production manager Paulo farmer who is planning of building a highly
automated assembling equipment needs to be aware that this should noyt exceed the costs in terms of
the manufacturing overheads such that the company results in losseson account of indirect costs.
(Abbott & Kantor, 2017) These costs needs to be miinimised and he has to ensure that the economic life
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of the asset is long such that the depreciation benefit can be enjoyed by the company when the taxes
are computed.
Direct materials: Actual (in $) Reduction/increase Planned
Part 714 5.00 kg. 91.00 455.00 -25% 341.25
Part 502 6.00 kg. 122.00 732.00 -25% 549.00
Direct Labour 9.00 hr 50.00 450.00 -25% 337.50
Manufacturing overhead - Var 1.00 unit 1,174.68 1,174.68 -25% 881.01
Manufacturing overhead - Fixed 1.00 unit 1,424.50 1,424.50 +50% 2,136.75
Unit product cost 4,236.18 4,245.51
Production cost per unit:
From the costs given in part A, we can see thar the earlier cost per unit was $ 4236.18, however, with
the decrease in the direact material cost, direct labour cost and the variable manufacturing overhead
and with the increase in the fixed manufacturing overhead of 50%, the amount per unit has jumped up
to $ 4245.51, i.e., an increase of $ 9, which means that the automation is resulting in increase in the per
unit cost and the company’s management may not accept the same considering the cost benefit
analysis, even though in the future the investment may break even. (Boccia & Leonardi, 2016)
Conclusion:
From the above 2 situations and various factors discussed, it can be concluded that the
automated systems and machineries and other alternative sources of power generation will only be
lucrative and implemented if they fit well in the business scenario and is profitable for the company.
Political instability, environmental issues and other factors come later on in the scenario analysis.
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Part C: Report on the Budgeted versus Actual Outcomes
Introduction
On close review of the actual expenditure on direct material and direct labour costs, Mr. Paulo farmer,
the production manager has come across many discrepancies and major differences of the actual
numbers from the budgeted figures. (Bromwich & Scapens, 2016) Even though it is well considered and
constructed budget but the differences might come on account of the sudden change in market price of
the material and the ditrect labour, the inefficiency of the labour, low productivity of the machines,
higher overhead costs, abrupt planning and many other causes.
Analysis and causes of the deviations:
In the given case, data of budget and the actual against it has been taken from part A of question and
the variations and the percentage of variations have been computed considering budgeted as the base.
Particulars Budgeted Actual Variance % of variance
Actual Sales Volume for the quarter in units 205,350 227,900 (22,550) -11%
The actual volume of direct materials used during the quarter
Part 714 in units 1,133,210 1,310,200 (176,990) -16%
Part 502 in units 1,359,852 1,221,300 138,552 10%
The actual cost of the direct materials used during the quarter
Part 714 in $ 103,122,110 143,073,840 (39,951,730) -39%
Part 502 in $ 165,901,944 97,767,120 68,134,824 41%
Per unit cost of Raw Material
Part 714 in $ 91 109 (18) -20%
Part 502 in $ 122 80 42 34%
The actual direct labour hours used during the quarter in hrs 1,902,708 2,611,020 (708,312) -37%
The actual cost of direct labour used during the quarter in $ 95,135,400 150,133,700 (54,998,300) -58%
Variances of Actual from the budgeted figures
From the above table, it is clear that the the management’s estimate of the sales itself was not correct
based on the past data. (Félix, 2017) The actual sales were higher than expected by 11% and that might
be on account of quality goods being delivered by the company or the market being good enough during
the period. The part 714 raw material was over utilised by 16% which might be attributed to the
increase in sales and therefore increase in the production units whereas part 502 was underutilised by
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10% even after the increase in the production units by 11% which shows the management’s inefficiency
in forecasting the units of raw material being required to produce a particular unit of the finished good.
This may have 2 reasons, i.e., either the company has become efficient in utilising the raw material and
are using it considerably less to produce finished goods or else in the past, the company has been
inefficient and has been overutilising it. Further more, the company has gone terribly wrong in the
estimation of the cost of the raw materials. The per unit cost of part 714 was 109 as compared to 91,
which is a 20% increase and the cost of the part 502 was 80 as compared to budgeted 122 which is 34%
down. Due to this, the company’s direct material cost has gone up by 39% for part 714 and has
decreased for material 502 by 41% on a overall basis. This indicates that the quote for the material were
not taken adequately by the management while preparing the budget and it has changed significantly
during the year having an impact on the profitability of the company. (Goldmann, 2016) The other
reasons might be wastage of the material during production or lower production capacity being given by
the machines. Finally, on account of direct labour hours being used for per unit, the budgeted cost was
$50 per hour as compared to the actual $ 57 per hour which has further hit the profitability. The direct
labour being utilised in actual has increased by 37% and the cost of direct labour has increased by 57%.
This means that besides the increase in the per hour labour cost, the labour hours being required per
unit has also increased quite significantly. This might be on account of increase in non productive labour
hours or non efficiency of labours. Considering the steep increase in labour price, automation is
warranted. (Gooley, 2016)
Conclusion:
From the above analysis, it is quite clear that the management has gone wrong in estimating the per
unit requirement of raw material, direct labour hours and the cost per unit and per hour respectively for
a number of reasons. This might have an adverse impact on the projected profitability, therefore the
company needs to prepare a more flexible budget based on the requirement so that the variances can
be dropped below 10%.
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Part C: Discussion on Participative Budgeting
Budgeting is the base on which the management and the labours of the company work towards
achieving the actual goals of the company. The more effective it is, the more will be the profitability and
less will be the slack. (Jones, 2017) It is the blueprint of the management’s plan and serves as the target
and control table for the lower management. To achieve the correct actual vs budget, human resource is
required.
Budgets may be imposed or participative. The imposed budgets generally come from the top
management and there is always the risk that the lower management may resent against it and later on
tell that the same was unrealistic and unachieveable. Th eapproachh in which the managers prepare
their own budgets estimates is called the participative budgeting and is one of the best forms of the
budgeting and it is prepared in close coordination of all the levels of the managers, be it top level,
middle level or the lower level of management. It generally flows from the bottom to the top and
includes the sense of realistic numbers and the lower management will be the one who is aware of the
ground reality of the costs rather than those at the top. (Visinescu, et al., 2017) Once it is prepared by
the lower levels, the same must be reviewed by the managers to avoid the chances that it is loosely
prepared or to allow budgetary slack. However, in this case too, the top management should give the
overall strategic plan as they would have the proper view of the entire company. Participative budgeting
helps to fix responsibility on the managers against which their actual performance can be measured and
they can be held responsible for the deviations. Further, it has other advantages in the form of being
more accurate and reliable, being motivational from the ground staff and lower level to work as it is
more realistic, and it embeds the sense of participation and inclusiveness in the organization. There are
disadvantages too of participative budgeting like it is costly, time consuming and may result in wrong
use of budgets through slack. (Raiborn, et al., 2016)
With reference to part C of the question, Paulo Farmer would have rebudgeted the figures for
Quarter 2 for the company has the imposed budgeting been used. Further, it would have been difficult
for him to impose the responsibility of the slack and the deviations and variations of the individual
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