Comprehensive Management Accounting Report for Jeffrey and Sons

This report provides a detailed analysis of management accounting principles as applied to Jeffrey and Sons, focusing on the Exquisite product line. The report begins with cost classification, job costing, and the calculation of unit and total job costs. It then delves into absorption costing to determine the cost of Exquisite products, including the allocation of overhead costs across different departments. Task 2 involves the preparation and analysis of a cost report for September, including variance analysis to identify areas for improvement. The report also explores various performance indicators and strategies for cost reduction and quality enhancement. Task 3 covers the budgeting process, including the selection of an appropriate budgeting method and the preparation of different types of budgets, including a cash budget. Finally, Task 4 focuses on variance calculations, identification of causes, and the preparation of an operating statement reconciling budgeted and actual results, with findings and recommendations for the board of directors. The report concludes with a summary of the key findings and recommendations, supported by references.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Different type of cost classification.......................................................................................1
1.2 Calculation of Unit cost and total job cost.............................................................................2
1.3 Calculating cost of Exquisite using absorption costing.........................................................2
1.4 Analyzing cost of Exquisite...................................................................................................6
TASK 2............................................................................................................................................7
2.1 Preparing and analyzing cost report for the month of September.........................................7
2.2 Various performance indicators to identify area for improvement.......................................9
2.3 Ways to reduce cost and enhance quality..............................................................................9
TASK 3..........................................................................................................................................10
3.1 Purpose and nature of budgeting process............................................................................10
3.2 Appropriate budgeting method for organization.................................................................10
3.3 Preparing different type of budgets.....................................................................................11
3.4 Preparing cash budget..........................................................................................................12
TASK 4..........................................................................................................................................16
4.1 Calculating variance and identifying causes........................................................................16
4.2 Preparing operating statement reconciling budgeted...........................................................18
4.3 Findings to the board of directors........................................................................................19
CONCLUSION..............................................................................................................................19
REFERENCES..............................................................................................................................20

INTRODUCTION
Management accounting is associated with the field of accounting through which it is
possible for business to combine norms of budgeting along with cost. By considering different
techniques it is possible for organization to calculate actual cost of production along with
operational activities so that decisions can be taken accordingly. Further, it has become
necessary for enterprise to record actual cost and expenses by considering different methods of
costing (Adler, 2013). Through, this it is possible for company to reduce the level of cost and
profitability level can be enhanced easily. Apart from this every organization has indulged into
practices of maintaining different type of accounts so that overall performance in the market can
be known easily and corrective actions can be taken on the basis of same. For conducting the
present study, organization chosen is Jeffrey and Sons which manufactures many branded
products called Exquisite. Further, business has many departments where major one is service
and production. Various tasks have been covered in the report which involves different type of
cost classification, calculation of job costing etc.
TASK 1
1.1 Different type of cost classification
Cost is considered as the expenses which are incurred by company for conducting overall
operations. Further, main costs associated with the business are segregated into:
 Element: As per this factor cost is divided into direct and indirect. Direct cost are
incurred for carrying out the manufacturing process. Further, main examples of this type
of cost are heating, lightning etc (Young, 2008). Whereas indirect costs are not linked
with the production process and its key example are small tools etc.
 Function: On the basis of function cost can be divided into different type such as
distribution, production, quality check etc.
 Nature: As per the nature of the cost it can be divided into material, labor and overhead.
Material as a cost represents the cost incurred for carrying out manufacturing process.
Labor is associated with wages given to workforce and overhead is associated with cost
of company (Holtzman, 2013).
 Behavior: On the basis of behavior cost can be segregated into fixed, variable and semi
variable. Fixed cost does not change with the level of output, variable keeps on changing
and semi variable contains features of both fixed and variable.
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1.2 Calculation of Unit cost and total job cost
Job cost is considered as one of the most appropriate method through which cost is
calculated in condition where each job is different from other (Steffan, 2008). Further, this
method is developed of undertaking an account where direct along with indirect cost are
undertaken. Computation of unit cost along with total cost of job 444 has been shown below:
Particulars Amount (£)
Direct cost
Direct material 200
Direct labour 270
Indirect cost
Variable production overhead 180
Fixed production overhead 120
Cost per unit 770
Units to be produced 200
Total cost 770*200 154000
Working note
Fixed production overhead (Budgeted overhead / total direct labor hours) *
Direct labor hours used in Job 444
=(£80000 / 20000 hours) * 30 hours
=£120
After doing the above calculations it can be said that per unit cost of job 444 is £3.85 and
total cost of this job will be £770.
1.3 Calculating cost of Exquisite using absorption costing
Production Departments Service Department
Basis of Total Machine Machine Assembly Stores Maintena
nceApportioning Shop X Shop Y
000’s
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Indirect
Wages
Allocated 362 100,000 99,500 92,500 10,000 60,000
Indirect
Materials
Area
occupied
253 100,000 100,000 40,000 4,000 9,000
Lighting
Heating
& Area
Occupied
50 10,000 5,000 15,000 15,000 5,000
Rent Area
Occupied
100 20,000 10,000 30,000 30,000 10,000
Insurance &
Machinery
Book value
of Machinery
15 7,947 4,967 993 497 596
Depreciation
of Machinery
Book value
of Machinery
150 79,470 49,669 9,934 4,967 5,960
Insurance of
Building
Area
Occupied
25 5,000 2,500 7,500
7,500
2,500
Salaries
Works
of No.
employees
of 80 24,000 16,000 24,000 8,000 8,000
Sub Totals 1,035 346,417 287,636 219,927 79,964 101,056
Re-
of service
Stores Dept. 39,982 29,987 9,995 (79,964)
Maintenance 48,507 32,338 20,211 (101,056)
Totals 434,906 349,961 250,133 0 0
Working Note
Lighting & Heating: Machinery X 10/50 x £50,000 — f10,000
Machinery Y 5/50 x £50,000 — £5,000
Assembly 15/50 x £50,000 — f 15,000
Stores 15/50 x £50,000 = £15,000
Maintenance 5/50 x £50,000 = £15,000
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Rent Machinery X 10/50 x £100,000 = f20,000 Machinery Y 5/50 x £100,000 =
£10,000 Assembly 15/50 x £100,000 = £30,000 Stores 15/50 x £100,000= £30,000
Maintenance 5/50 x £100,000 = £10,000
Insurance & Machinery Machinery X 800/1510 x £15,000 = £7,964
Machinery Y 500/1510 x £15,000 — £4,966 Assembly 100/1510 x :E15,000 — £994 Stores
50/1510 x £15,000= f 497 Maintenance 5/1510 x f15,000= £596
Depreciation of Machinery Machinery X 800/1510 x £150,000 = £79,470
Machinery Y 500/1510 x £150,000 = £49,669 Assembly 100/1510 x £150,000 = £9,934 Stores
50/1510 x £150,000 — £497 Maintenance 60/1510 x £150,000 =
£596
Insurance of Buildings Machinery X 15/50 x £25,000 — £5,000
Machinery Y 5/50 x £25,000 = £2,500 Assembly 15/50 x £25,000 = f7,500 Stores 15/50 x
£25,000 — £7,500 Maintenance 5/50 x £25,000 = £2,500
Salaries of works mgmt. Machinery X 3/10 x £80,000 = £24,000
Machinery Y 2/10 x :E80,000 = £16,000 Assembly 3/10 x £80,000 = £24,000 Stores 1/10 x
£80,000 — £8,000 Maintenance1/10 x £80,000 = £8,000
Reappointing workings: based on material issues
Machinery X 400/800* £79,964 = £39,982
Machinery Y 300/800 * £79,964 = £29,987
Assembly 100/800 * £79,964 = £9,9995
Based on time spent
Machinery x 12/25 * £101,056 = £48,507
Machinery y 8/25 * £101,056 = £32,338
Assembly 5/25 * £101,056 = £20,211
Overhead absorption rate workings
Departments = Total / actual machine hours per dept
Machinery X = £ 434,906/ 80,000 = £5.44
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Machinery Y = £349,960/ 60,000 = £5.83
Assembly = £250,134/ 10,000 = £25.01
Overhead absorption rate
Machinery X= 434906/80000=5.44
Machinery Y= 349960/60000= 5.83
Assembly=250134/10000=25.01
Computation of absorption rate
£ £
Materials 8
Labour 15
Overheads
X (0.8*5.44) 4.34
Y (.6*5.83) 3.5
Assembly (.1*25.01) 2.5
Total cost 33.35
Allocation of cost of support departments on the basis of machine hours
Machine shop X Machine shop Y Assembly Total
Store £39,982.00 £29,987.00 £9,995.00 £79,964.00
Maintenance £45,807.00 £32,338.00 £20,211.75 £101,056.00
Total £434,906.00 £349,961.00 £250,133.00
Allocation of criteria of cost
Particulars Description
Indirect wages and supervision As per the provided amount.
Indirect materials As per the provided amount.
Light and heating On the basis of area occupied
Rent On the basis of area occupied
Insurance and machinery On the basis of book value of machine
Depreciation of machinery On the basis of book value of machine
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Insurance of building On the basis of area occupied
Salaries of works management On the basis of number of employees.
Units to be produced
Material cost £400,000.00 £300,000.00 £100,000.00
per unit material 8 8 8
A/B no. of units 50000 37500 12500
Overhead absorption rate
Machinery X 434906/80000=5.44
Machinery Y 349960/60000= 5.83
Assembly 250134/10000=25.01
Computation of absorption rate
Exquisite calculation
£ £
Materials 8
Labour 15
Overheads
X (0.8*5.44) 4.34
Y (.6*5.83) 3.5
Assembly (.1*25.01) 2.5
Total cost 33.35
1.4 Analyzing cost of Exquisite
Calculation of absorption rate on the basis of labor hours
Machinery X 434908/200000= 2.17
Machinery Y 349960/150000= 2.33
Assembly 250134/20000= 2.15
Calculation of Exquisite
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£ £
Materials 8
Labour 15
Overheads
X (2*2.17) 4.34
Y (1.5*2.33) 3.5
Assembly (1*1.25) 1.25
Total cost 32.09
By considering the overall change linked with absorption rate from machine to labor hour
it has been noticed that changes are taking place in the per unit absorption rate of company. By
undertaking the norms of costing technique it has been identified that technique such as
absorption labor hour is appropriate and this can provide long term benefits to business.
TASK 2
2.1 Preparing and analyzing cost report for the month of September
Cost report for the month of September
Budgeted cost Actual cost Variances
Particulars
Units 2000 units 1900 units
Material cost 24000 22800 -1200
Labor cost 18000 19000 1000
Fixed overhead 15000 15000 -
Prime cost 57000 56800 -
Electricity
Fixed portion 500 500 -
Variable portion 7500 7125 375
Maintenance 5000 5000 -
Total production cost 70000 69425
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Calculation of standard budget at 1900 units
Budgeted cost Budgeted cost
Particulars
Units 2000 units 1900 units
Material cost 24000 22800
Labor cost 18000 17100
Fixed overhead 15000 15000
Prime cost 57000 54900
Electricity
Fixed portion 500 500
Variable portion 7500 7125
Maintenance 5000 5000
Total production cost 70000 67525
Calculation of variable cost – electricity change in total cost / change in no of units to be
produced
(8000-5000) (2000-1200)
= £3.75
Computation of stepped cost
The maintenance cost linked with company will not alter as it is occurred on slot of 500.
Further, by considering this aspect decline in 100 units will not bring any kind of difference in
cost.
Analysis of variance
 Labor cost: Cost report of Jeffrey and Sons is showing adverse variance of 1000. Further,
actual variance is 1900 and it has affected labor cost per unit which is 9 and actual labor
cost is 10. So, this is having unfavorable impact on company where management has to
pay amount of 1.
 Material cost: It is highlighting favorable variance where no change has been noticed in
the per unit cost and through this it can be said that proportionate units can be produced
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easily (Houghton, 2007). Further, it will have unfavorable impact on cost of material
which will decline.
 Fixed overhead: It is not representing any type of variance. Further, with the rise or
decline in production level no such alteration has been seen in the amount of fixed
expense (Innes, Mitchell and Sinclair, 2000).
 Electricity: It is of semi variable nature and after computation it has been found that no
such alteration is present in the fixed proportion. Further, amount of variable portion has
been decline significantly.
2.2 Various performance indicators to identify area for improvement
Different performance indicators are present through which Jeffrey and Sons can
determine the area for improvement. Further, such indicators are as follows:
Financial statements: It is possible for company to analyze financial statements such as profit
and loss account, balance sheet etc (Jacob, 2001). Through this profitability level can be known
and it can be ensured whether business performance is improving or not. Apart from this,
company can consider different type of ratios such as gross profit, return on capital employed,
net profit etc. Through this, areas for improvement can be identified easily by business.
Quality of products and services: By determining the present quality of product business can
take corrective measures so as to enhance overall level. For the same, it is necessary for company
to monitor all the operations tasks of company. This will assist management in finding major
areas where improvement can take place (Kee and Schmidt, 2000).
Customer satisfaction: It is also one of the major performance indicators where by knowing
satisfaction level of target market business can enhance overall performance in the market (Key
Performance Indicators, 2014). Further, Jeffrey and Sons can consider views of customers and
products can be modified accordingly.
2.3 Ways to reduce cost and enhance quality
Different ways are present which Jeffrey and Sons can consider for enhance quality level
of its service and it can save overall cost of the business. Such ways are as follows:
Total quality management: This tool is appropriate for business through which quality can be
improved to extent (Kennedy and Affleck-Graves, 2001). Further, it can assist Jeffrey and Sons
to find major areas where quality level can be enhanced. Through this cost can be saved and it
has positive impact on the profitability level of business.
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Management audit: This method is also effective where company can reduce cost through
continuous monitoring and main stress can be on areas where improvement is required. Further,
this technique assists business in carrying out each and every activity as per taste and
requirement of target market (Swarr, 2011).
Kaizen costing: Jeffrey and Sons can undertake technique of Kaizen costing with the motive to
accomplish overall aims of the business. Further, it can assist in enhancing motivation level of
staff members and wastage associated with the production process can be reduced easily which is
one of the main motives of business.
TASK 3
3.1 Purpose and nature of budgeting process
Main purpose of budgeting process is to forecast future operational tasks. Further, it
supports in estimating future expenses along with revenue so that resources can be allocated
properly (Wielicki and et.al., 2002). Jeffrey and Sons has developed budget with the motive to
know expenditure level so that crucial operations can be carried out easily. Apart from this
profitability level or loss can be known easily through budgeting process undertaken by
management.
Nature
By nature entire budgeting process is flexible where actual values of the last accounting
period are undertaken by Jeffrey and Sons. Further, with the help of estimation computation of
actual amount of cash is done from the sales volume which is also beneficial for company
(Zimov, Schuur and Chapin, 2006). Apart from this, all the expenses are considered such as
material, labor and production. Further, expenditure amount is deducted from profit and this
helps in knowing the deficit or surplus amount.
3.2 Appropriate budgeting method for organization
Different budgeting methods are present which Jeffrey and Sons can undertake for
enhancing overall performance of the business. Such methods are as follows:
Operational budget: This type of budget is being prepared by company after considering
separate operational tasks (Al-Omiri and Drury, 2007). Through this budget it is possible for
organization to know income level which is being expected by company and it supports in
knowing the expenditure level of firm. Moreover, operational budget helps in development of
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