LSME505 Business Finance: Costing, Budgeting, and Variance Analysis

This business finance assignment explores cost management, budgeting, and variance analysis. Part A focuses on cost classification (fixed, variable, semi-variable), break-even analysis, and the importance of cost classification in pricing decisions. The report includes calculations for contribution per unit, break-even points, and margin of safety. It also presents marginal and absorption costing statements and discusses their differences. Part B delves into budgeting, its role in controlling business operations, and various budgetary techniques like variance analysis, responsibility accounting, fund adjustment, and zero-based budgeting. The assignment provides calculations for material price and usage variance, labor rate and efficiency variances, and fixed overhead expenditure variance. Finally, it includes a budget for controlling operations, including direct material, direct labor, and overhead budgets.

BUSINESS FINANCE

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Part A...............................................................................................................................................3
Part B...............................................................................................................................................6
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
The file is about cost management and budgeting. The analysis of different types of costs and
relevance to pricing decisions is illustrated. The absorption and marginal costing statements have
been demonstrated and reconciliation of profits has been done. The budget and its role in
controlling the business operations have been emphasised. The different types of budgetary
methods which help in controlling operations have been discussed.
Part A
Q1.) a) Contribution per unit=Sales per unit – Variable cost per unit=100-(45+30)/100=0.25.
Q2.) Break even point(units)= Fixed costs/(sales per unit-variable cost per unit)=125000/(100-
(45+30)=125000/25=5000.
Break even point (sales)= Fixed costs/contribution margin=125000/0.25=500000.
Q3.) Margin of Safety= Current sales level-Break even point/Current sales level=
(60000*100-500000)*100/60000*100=450000000/6000000=75%
Q4.) Let the break even units be taken as ‘x’.
Sales 100x
Less: Variable cost(45+30) 75x
Contribution 25x
Less: Fixed cost 125000
Expected profit 100000
By solving the equation,
25x-125000=100000
x=9000 units
Break even units required=9000 units.
Q5.) Importance of classifying a fixed cost, variable cost and Semi-variable costs and relevance
to pricing decisions

Costs which are appropriately classified into variable, fixed and semi-variable components help
present financial model appropriately and result in sound decision-making. Speaking of fixed
costs, they are those which remain fixed unaffected by the company’s sales volume and increase
in production level (Panfilova and et.al., 2020). The fixed costs include cost expenses such as
rent, insurance, equipment lease, depreciation, management salaries, marketing and advertising
etc.
Variable costs are those which increase or decrease with the business activities. The examples
are direct materials, production supply, costs of shipping, merchant fees and wages billable. The
other variable costs which are associated are direct labour, packaging supplies etc.
Semi-variable costs consist of both fixed and variable costs. In it part of the cost stays constant
and part of it fluctuates with the business activity. The examples can include commission
payments and overage charges.
Classification of these costs help company in cost administration and also in cost cutting
measures.
Marginal and Absorption costing
Particulars Absorption costing
Sales (75*2200) 165000
Expenses
-Materials (18*2200)39600
Labour (8*2200)17600
Variable overheads (5*2200)11000
Fixed overheads (7*2200)15400
83600
Add:
Opening stock 0
Less:
Closing stock 0
83600
Gross profit 83600
Operating expenses -
Net Income 83600

Calculation:
Fixed overheads= 5000/2500=2 per unit
Total cost=Variable cost+ Fixed cost=5+2=7 per unit
Particulars Marginal costing
Sales (75*2200) 165000
Expenses
-Materials (18*2200)39600
Labour (8*2200)17600
Variable overheads (5*2200)11000
Total 68200
Add:
Opening stock 0
Less:
Closing stock 0
68200
Gross profit 68200
Less: Fixed overheads 5000
Net Income 63200
Marginal Costing
Marginal costing is change in cost occurring on production of an incremental or additional unit.
It is the cost associated of production of an extra unit after the company achieves its break-even.
The impact of variable costs is judged on production. Fixed costs are not considered. It involves
the direct expenses (Panfilova and et.al., 2020).

Absorption Costing
Total absorption cost accounting is a methodology of accounting price that entails the total price
of producing or providing a service. TAC includes not simply the prices of materials and labour,
however conjointly of all producing overheads. The price value of every cost center may be
direct or indirect.
It can be seen that marginal costing does not focus on fixed overhead costing on per unit basis
while absorption costing does. The key variations between marginal and absorption cost
accounting are: marginal cost accounting allows short term making of decisions and absorption
cost accounting calculates the value of output in addition as providing the closing inventory
valuation for inclusion within the monetary statements.
Part B
Q1.) Use of Budgets in controlling the operations of business
Planning: Budget helps management to forecast the future. It requires managers to signify
different departmental, operational and managerial objectives where the available resources are
allocated efficiently to achieve the objectives (Talmon and Faliszewski, 2019).
Communication: The budget is one means where all departments agree to the goals of the
organisation. It is a means to coordinate different operational functions of departments.
Responsibility: Budget assigns responsibility for utilising allocated financial resources to
achieve the operational objectives. The budget is a monetary tool by which managers compare
different costs and benefits of various activities and this helps them in allocation of various
resources appropriately.
Appraisal: The actual organizational results against the budget are compared through which
performance of manager can be evaluated. The departments which could achieve the targets
within budgetary constraints are analysed and determined and the source of variances are also
analysed for the departments which could not do so.

Monitoring: The budget supports the efforts of manager to monitor operations with
identification of variances and take corrective action where necessary. It allows evaluation of
activities which contribute towards organisational objectives.
Resource Allocation: The budget supports efficient allocation in a way that controls the volume
of goods and services that can be produced. The budget is used to plan the cost of output which
is produced (Talmon and Faliszewski, 2019).
Budgeting is a very important part within the planning and management method. Planning
provides a framework that helps management to develop a thought of action, to estimate future
revenues and prices, to anticipate future events, to scale back uncertainty concerning the longer
term and to extend the possibilities of achieving the goals and objectives of the organisation
through coordination of plans. Control is the method of utilising feedback on actual
performances and results, comparison of the actual results with the plans, taking measurement of
its deviations from set ups and policies and at last taking corrective actions to bring all future
activities in line with the plan.
Budgetary control is basically a method wherever the particular results i.e. actual revenues and
expenses square measure compared with the budget planned before the beginning of the fiscal
year. It highlights the requirement for adjustment of the performance, if needed. It conjointly
shows however well the managers have controlled prices in operations in an accounting period.
BUDGETARY TECHNIQUES
For the aim of fund management, varied techniques are used that are explained as follows
1. Variance Analysis: In the following analysis, Budget is prepared for every and each
department. Further, a comparison is created between the actual and estimated accounting
figures. With the assistance of this system, variances can be found. The variances square
measure any divided into Favorable and Unfavorable Variances. For instance, the distinction
between actual cost and calculable cost are going to be denoted by production variance. This
technique helps in reducing price and is usually used for fund management.
Advantages:

a) It helps in measure of performances of assorted departments and ascertain the
explanations if they have not performed up to the mark.
b) Material variances are identified wherever prices differ from actual costs.
Disadvantages:
a) Departments might not be guilty for deviation as generally the cause could also be rise in
market costs that it doesn't soak up thought.
b) It can happen that wrong costs are set as normal costs by errors in calculation.
2. Responsibility Accounting: It is thought of to be an honest technique for fund management. In
this, three centres specifically price Centre, Profit Centre and Investment Centre is made. All
these centres are just like the department of the organization and workers are classified on the
idea of those centres. The performance of the staff is manually recorded and their responsibility
is fastened concerning sure goals that may be quantitative or qualitative. This system helps to
require call concerning promotion or change based on employee’s performance.
Advantages:
a) Provides the way to take care of a wide-ranging organisation because it is split in centres.
b)Provides incentives to managers furthermore as staff as per their performance and motivates
for future.
Disadvantages:
a) A sound organisational structure is obligatory for it to be enforced.
b) It needs analysis of the classical technique which might be tedious and time intense.
3. Adjustment of funds: Under this system, top management takes selections concerning
adjustment of funds from one project to a different project. For instance, if a brand new project
started by organisation wants cash and there's surplus cash allotted to an already existing project,
then the excess funds is adjusted against new project for its initial setup. This system facilitates
correct allocation and adjustment of funds and prevents misuse (Miller, Hildreth and Rabin,
2018).
Advantages:
a) It helps in right usage of funds wherever there's a surplus.

b) It helps in saving the capital for more wants by doing changes of surplus money as
adjustments.
Disadvantages:
a) The adjustment of funds might prove wrong if the project from which funds are adjusted
needs funds in long run.
b) The accounting entries need to be done rigorously of adjustment of funds as discrepancies can
occur afterward.
4. Zero based Budgeting: Another technique that is vastly followed and is standard lately is zero
based budgeting. Beneath this system, budget of next year is taken into account as nil which
might be solely attainable if calculable revenue is adequate to calculable expenses. At that point,
distinction between calculable revenue and calculable expenses are going to be zero. Any excess
quantity of cash is going to be adjusted. This system helps in managing over every and each
quantity of cash spent throughout the year (Nikulina, 2019).
Advantages: a) Accuracy: the tactic is correct in shrewd prices and forming budget because it
focuses on things line by line and uses the present wants of budget allocation for every product.
b)Efficiency: It's economical in allocation of finance because it doesn't concentrate on historical
knowledge and focuses on actual knowledge.
Disadvantages: a) It's time taking process because it takes in account all line expense of
commodities.
b) There's a demand of high manpower to form the budget from scratch therefore seizing time
and value for creating the budget.
Q2.) Material Price Variance=Actual Quantity*(Standard price-Actual price)
=12000*(39-35) =48000. This is favourable as the actual price is less than standard price.

Material Usage Variance= (standard quantity of material used for production – actual quantity
used) × standard price per unit of material) = (6-5)*3=3.
The standard quantity of material is more than the actual thus making the variance favourable.
Labour Rate Variance=Actual hours*actual rate-actual hours*standard rate=2*3-2*5=-4
The labour rate variance is not favourable as the variance is negative.
Labour efficiency variance= (standard hours-actual hours)*standard rate per direct labour
hours=(3-2)*5=5
Fixed overhead expenditure variance=Actual fixed overhead cost-Budgeted fixed overhead
cost=13000-15000=2000.
The variance is favourable as the actual cost is less than budgeted cost.
Q3.) Budget for controlling operations
Particulars Per unit Total
Direct material 18 18*12000=216000
Direct Labour 15 15*12000=180000
Price cost 33 396000
Add: Factory Overheads 15000
Total cost 411000
Direct Materials Budget
Particulars Amount
Production Target 12000 units
Required direct material per unit 6 kg
Desired closing inventory -
Opening Inventory 18
Cost per unit 18
Total Raw materials budget 216000

Direct Labour Budget
Particulars Amount
Units to be produced 12000
Direct labour hours per unit 2
Total direct labour hours required 3
Labour cost per hour 5
Total Direct Labour cost 15
Variable overhead unit
Particulars Amount
Budgeted production units 12000
Variable factory overhead rate 6
Budgeted variable overhead 48000
Total variable overhead 48000
Fixed overhead expenditure budget
Particulars Amount
Budgeted production units 12000
Fixed factory overhead rate 13000
Budgeted fixed overhead 15000
CONCLUSION
It can be concluded that an organisation has to determine various costs and analyse whether it
has been favourable for them or not. A company which can effectively control operating costs
can only register profits after the departments being able to perform as per budgetary constraints.
A company which can achieve the budgetary guidelines can effectively plan for the future with
the capital generated. The role of budgeting has evolved in many new methods been highlighted

and it shows the efficiency of various budgetary tools that can guide to make a perfect budget for
the company. The different formats of budget have been highlighted.