Management Accounting Report: Jeffrey & Sons Case Study and Analysis

This report provides a comprehensive analysis of management accounting principles, using the case study of Jeffrey & Sons, a manufacturing company. It begins by exploring different types of cost classification, including behavior, nature, and function, followed by the calculation of unit costs using the unit costing method. The report then delves into absorption costing to determine the cost of exquisite products. Furthermore, it prepares and analyzes cost reports for September, including variance analysis, and identifies areas for potential improvements using performance indicators. The report also discusses ways to reduce costs, enhance value and quality, and examines the budgeting process for Jeffrey & Sons, including the use of appropriate budgeting techniques, preparation of production and material budgets, and cash budgets. Finally, the report calculates variances, identifies possible causes, and recommends corrective actions, including operating statements with budgeted and actual results, and identified responsibility centers. This report uses management accounting as a tool to increase the value of business so as to attain organizational goals, with the inclusion of cost sheets and operating statements, and various calculations based on the given figures and case scenario.

Management Accounting
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Table of Contents
INTRODUCTION ..........................................................................................................................3
TASK 1............................................................................................................................................3
P 1.1 Different types of cost classification..................................................................................3
P 1.2 Calculation of Unit cost by using unit costing method.......................................................4
P 1.3 Cost of exquisite using absorption cost..............................................................................5
P 1.4 Cost data of exquisite using appropriate techniques...........................................................7
TASK 2............................................................................................................................................8
P 2.1 Preparation and analysis of cost report for the month of September and variance analysis
......................................................................................................................................................8
P 2.2 Various ares of potential improvements using performance indicators ............................9
P 2.3 Ways to reduce cost and and enhancing value and quality ..............................................9
TASK 3..........................................................................................................................................10
P 3.1 Purpose and nature of budgeting process for Jeffery and Son's Ltd...............................10
P 3.2 Use of appropriate budgeting technique...........................................................................11
P 3.3 Preparation of production and material budgets .............................................................12
P 3.4 Preparation of cash Budget ..............................................................................................13
TASK 4..........................................................................................................................................14
P 4.1 Calculation of variances, identify possible causes and recommend corrective actions. . .14
P 4.2 Operating statements includes both budgeted and actual results......................................16
P 4.3 Identified responsibility center.........................................................................................16
CONCLUSION .............................................................................................................................17
REFERENCES .............................................................................................................................18
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INTRODUCTION
Management accounting is also known as managerial accounting which is used by
managers as a tool to collect data and for the better use of accounting information so as to decide
matters within the organization as well as to make optimal decisions. In today's competitive era,
management accounting is a unit that plays a crucial role in business (Mohamed and Lashine,
2003). The present report is going to discuss about the different types of cost and their
calculations along with explaining the ways to reduce the cost and to enhance the level of value
as well as quality. This report is based on the case scenario of Jeffrey & Sons, a leading
manufacturing company that manufactures different kinds of products. The unit discusses about
various management tools such as budgets and variance analysis techniques for Jeffrey & Son's
so as to predict future causes of actions. In this report, management accounting is used as a tool
to increase the value of business so as to attain organizational goals. In addition to that, cost
sheet as well as operating statement are prepared to clarify the scenario. At last, various
calculations are quoted in respect with the given figurers and case scenario.
TASK 1
P 1.1 Different types of cost classification
Cost is a type of expense that a manufacturing company bears at the time of producing
goods or services. However, cost of production varies as per the volume of production. The cost
is classified on the basis of elements, behaviors, nature and function which are shown in below
points.
Behavior of Cost: Behavior of cost generally refers to the volume of production, it
means the cost changes as per the number of products that are to be produced for a specific time
period. On the basis of behavior, cost is divided into three areas such as Fixed Cost, Variable
Cost and Semi-variable Cost. Fixed cost includes those kinds of cost which do not change at any
volume of production (Cohen and Kaimenaki, 2011). On the other hand, cost which changes as
per the single change in the volume of production is known as variable cost. Nonetheless, Semi-
variable cost includes characteristics of fixed as well as variable cost, it means to a specific level.
This kind of cost remains unchanged with production level but after a certain changes in
production volume it become variable.
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Nature of Expense: According to the nature of expenses, cost is classified into material,
labor and expenses. Labor is the cost that is incurred by the manufacturing company in the form
of remuneration paid to the employees or workers. Material cost is one which is applicable to
the raw material that is used by the organization for the production purpose. However, expenses
are the costs of services provided by the company (Burns, Hopper and Yazdifar, 2004).
Functions / Activities: On the basis of functions and activities, cost is classified as per
the specific activities and functions of different departments of the company. Such kind of cost
include Production cost, Administration cost, Selling cost, Distribution cost, R&D cost and so
on.
Elements of cost : There are three major elements of cost that are divided into Material ,
Labor and Expenses. These elements are further divided into direct and indirect forms, for
example: direct cost and indirect cost (Hirsch, 2000).
P 1.2 Calculation of Unit cost by using unit costing method
Particulars Total cost
Direct Material
50Kg* £4* 200 units £40000
Direct Labour
30 hours * £9 *200 units £54000
Variable production overhead
£6 * 6000 hours £36000
Fixed production overheads
(£80,000/20,000 hour) * 6000 hour £24000
Total cost for Job 444 £154000
Unit cost £770
From the above table, it can be said that units cost for the product is £770 which has
been acquired after adding direct Material direct Labour and variable production overhead.
However fixed expenses have also been added for calculating total cost for Job 444. At the end,
per unit cost for Job 444 is £770.
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P 1.3 Cost of exquisite using absorption cost
Particular
Basis of
allocatio
n
Total
Production Service
department
Machine X Machine Y Assembly Stores Maintenance
Indirect
Wages And
Supervision
£362,000 £100,000 £99,500 £92,500
Indirect
Material £253,000 £100,000 £100,000 £40,000
Light And
Heating
Machine
hours £50,000 £26,666.67 £20,000 £3,333.33
Rent
Area
occupie
d
£100,000 £20,000 £10,000 £30,000 £30,000 £10,000
Insurance
And
Machinery
Book
value of
machine
ry
£15,000 £3,529.40 £2,205.90 £4,411.80 £2,205.90 £2,647.06
Depreciatio
n
Book
value of
machine
ry
£150,000 £35,294.12 £22,058.80 £44,117.65 £22,058.80 £26,470.59
Insurance
Of Building
Area
occupie
d
£25,000 £5,000 £2,500 £7,500 £7,500 £2,500
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Salaries Of
Work
Managemen
t
No. of
employe
es
£80,000 £24,000 £16,000 £24,000 £8,000 £8,000
Total Cost £1,035,00
0
£314,490.1
9
£272,264.7
0
£245,862.7
8 £69,764.70 £49,617.65
Particular Production
Basis of
allocation Total in Machine X Machine Y Assembly
Primary
distribution (From
above table) £1035000
£314,490.19 £272,264.70 £245,862.78
Stores
Direct
material
£34,882.35 £26,161.76 £8,720.59
Maintenance
Machine
hours
£23,816.47 £15,877.65 £9,923.53
Total £373,189.01 £314,304.11 £264,506.90
c) The calculation of overhead absorption rate for every manufacturing department X, Y
and assembly
Overhead absorption rate Fixed overhead/ machine hours
Overhead absorption rate
Department X 14490.19+ 26161.76+ 15877.65/80000
= 373189/80000
= £4.66
Department Y 272264.70+ 26161.76 +15877.65/ 60000
= 314304.11/60000
= £5.24
Assembly 45862.78+ 8720.59+ 9923.53/10000
= 264506.90/10000
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= £4.41
The above tables are aiming at calculating the cost of exquisite using absorption cost. To
calculate the cost, various kind expenses are included in the total cost (Kinney and Raiborn,
2012). However, the The calculation of overhead absorption rate for every manufacturing
department X, Y and assembly are shown in the next section.
P 1.4 Cost data of exquisite using appropriate techniques
Particular
Basis of
allocation Total Production
Machine X Machine Y Assembly 1
Primary
Distribution £1035000 £314,490.19 £272,264.70 £245,862.78
Stores
Direct
material £34,882.35 £26,161.76 £8,720.59
Maintenance Labour hours 2:1.5:1 £22,052.29 £16,539.22 £11,026.14
Total Cost £371,424.83 £314,965.68 £265,609.51
Computation of overhead absorption rates on the basis of labour hours
Machine X 371424.83/ (2hr *100000 units) £1.86
Machine Y 314965.68/ (1.5 hr *100000 units) £2.10
Assembly 265609.51/ (1hr *100000 units) £2.66
The calculation of overhead absorption rates is done on the basis of labour hours for Machine
X, Machine Y and Assembly. The calculation is shown in the following section:
Machine X = 371424.83£/ (2hours*100000units) = 1.86£
Machine Y = 314965.68£/ (1.5 hour*100000 units) = 2.10£
Assembly = 265609.51£/ (1hour*100000 units) = 2.66£
There is seen a expect difference between the calculation of overhead absorption rate. It
was seen that the calculation of overhead absorption rate on the basis of machine hour rate the
rates were found to be 4.66£, 5.24£ and 4.41£ respectively. Nevertheless, while using labour
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hour rate the production department were seen continuously increasing i.e 1.86£, 2.10£ and
2.66£ respectively. The major reason is seen that total labour hours are higher than Machine
hours.
TASK 2
P 2.1 Preparation and analysis of cost report for the month of September and variance analysis
Jeffrey & Son's job cost sheet is prepared as under:
Budgeted Output Actual Output
Budgeted -
Actual
2000 Units 1900 Units
Particular Per unit cost Total cost Per unit cost Total cost
Material £12 £24,000 £12 £22,800 £1,200
Labour £9 £18,000 £10 £19,000 -£1,000
Fixed Overhead £15,000 £15,000 £0
Electricity £8,000 £7,625 £375
Maintenance £5,000 £4,800 £200
Total £35 £70,000 £36 £69,225 £775
Working note:
Particular Calculation Cost
Material 12 * 1900 Units £22800
Labour cost 10 * 1900 Units £19000
Variable cost - Electricity 8000-5000/2000-800 £3.75 per unit
Fixed electricity 8000 - 3.75*2000 £500
Variable cost 3.75 * 1900 units £7125
Maintenance cost 5000 - 200 £4800
Working note
Material 12£*1900 Units = 22800£
Labour cost 10£ * 1900 Units = 19000£
Variable cost
Fixed electricity = 8000£ - 3.75*2000 = 500£
Variable cost = 3.75£*1900 units =
7125£
Electricity =8000£-5000£/2000-800 = 3.75 per
unit
Maintenance cost 5000£ - 200£ = 4800£
Variance analysis
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From the above calculation , it has been witnessed that material variance raised to £1200.
The major reason for increased variance is that the production volume is charged and the
material price per unit remained same to £12. To a further extend , it was seen that the labour
cost variance is also raised to 1000£ as the labour rate is increased by £1. in respect with the
budgeted electricity expenditures it was found that it was seen to be £8000 which is greater than
the actual figures of electricity expenditures (£7625). It has been witnessed that per unit variable
electricity charges were remained same at £3.75 so it is considered to be the fixed cost.
Furthermore. it was witnessed that the other fixed cost remained unchanged with any level of
production. However, it can be said that a negative variance is seen in the areas of labour rate
variance and total material cost variance. This negative variance had impacted the function and
operation of manufacturing unit. From the calculation and in-depth analysis, it can be said that
the company should reduce their material and labour costs as to eliminate the negative impacts
of operations of company (Kont, 2012).
P 2.2 Various ares of potential improvements using performance indicators
In order to accomplish desired goals every business sets target and this in turn supports in
enhancing overall performance. Further, it is required for management to ensure success of its
entity on continuous basis. Large numbers of factors are present in the firm to identify potential
improvement. Turnover is regarded as one of the most significant factor which assist in
measuring business performance. Business which is capable enough in earning higher sales than
others will make high improvement. Moreover, cost as a factor is also considered as crucial as in
case when cost associated with organization is rapidly rising without growth in sales then
improvement is not at all possible (Lucey, 2003). Apart from this profitability level of the
organization also supports in knowing the level of improvement and growth in same shows
improvement and vice versa. Overall financial performance of organization also highlights how
healthy organization is and increasing overall assets of firm shows improvement in business
performance and vice versa. On the other hand other factors are also present through which
overall performance of business can be known easily such as level of customer satisfaction,
technology employed for producing goods, competitive position of the company etc. Therefore,
in this way with the help of performance indicator potential improvement is possible (Ward,
2012).
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P 2.3 Ways to reduce cost and and enhancing value and quality
Different effective ways are present with the help of which it is possible to reduce cost
and enhance value of products along with quality.
Reducing cost: For reduction of cost better technology can be employed along with large
scale production, recycling of wastage, optimum utilization of available resources etc. All these
techniques are regarded to be effective for business and reduction of cost leads to rise in
profitability level which is one of the main aims of company(Lukka, 2007).
Quality: For enhancing quality level business can use new techniques, better use of
material and can implement quality measurement tool with the aim to offer quality products to
target market. This can lead to favorable outcomes such as rise in level of customer satisfaction
along with rise in sales volume along with profitability of the business.
Enhancing value: For delivering better value business can increase its earnings along
with stability in the operations. Further, by enhancing sales value but not the sale price it is
possible for organization to deliver better value. Further, with the help of diversification of
customers and industry organization can accomplish this objective. By lowering down the
overall cost business enterprise can easily develop a base against its competitors (Hansen
Mowen, and Guan,2007).
TASK 3
P 3.1 Purpose and nature of budgeting process for Jeffery and Son's Ltd
Budget is generally refers to a monetary plan of a specific department in an organization
that determines the possible expenses and income of future. Main purpose of budget is to
estimate probable income and expenditure for a company to a specific point of time (Burns,
Hopper and Yazdifar, 2004). Furthermore, major purposes of budget are shown in the below
points:
To estimate future income, expenditure and profitability of the company (Ahrens and Chapman,
2007).
To provide a financial framework to the managers for helping in effective decision-making.
To help production managers in the comparison of estimated output with actual performance.
Major purpose of Jeffrey & Son’s budget is to find out business revenues and
expenditures for a given period of time.
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Nature of budgeting process
Budgeting process is a major tool that is used to set anticipations for revenues and
expenses for the near future. Going through the process, company can estimates the availability
of cash in the organization as well as company can make control over the expenditures and can
get rid of the negative variance as well. The nature of budgeting process is shown in following
table:
To estimate the financial situation on the basis of last budget (Budgetary control. 2011).
To discover the future amount of cash that is going to be generated from sales and other
activities.
To define the necessary expenditure i.e. raw materials, labor, production overheads and
promotions.
Then subtracting estimated expenses from foretasted revenues so as to determine surplus or
deficit.
Review and revise of prepared budget.
At last, comparison of budgeting outcome with actual outcome (Budgetary control. 2011).
Variance analysis.
In respect with the given case scenario, Jeffrey & Son's managers prepare budgets by
forecasting future income and expenses in respect with the upcoming years. Manager pays
attention to sales volume and tries to enhance the sales along with reducing cost so that profits
can be increased. However, it is required to have an effective coordination in budgeting process.
As per the in-depth investigation into budget preparation of the mentioned company, it has been
noticed that incremental budgeting technique is used by the organization to prepare budget. At
last, the actual results are compared with the budgeted figures so as to determine the variance
along with taking necessary decisions to remove the negative variance (Sokolov, and Giniatullin,
2015).
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P 3.2 Use of appropriate budgeting technique
The present case is given in the respect with Jeffrey & Son's manufacturing company and
investigation and applied concept of management accounting show that company is going to
prepare budgets while making use of incremental budgeting system. However, some problems
are associated with the use of mentioned budgeting system. The major problem associated with
such kind of budgeting system is that volatility in the market as well as the significant impact of
volatility are being negated by the management at the time of preparing budget. This is going to
put a great impact on the budgeted incomes and expenditures of the company in respect with
actual outcomes (Datar and et. al., 2013.). As an effect of such negligence, Jeffrey & Son's
manufacturing company fails to meet the actual figures and positive variance. There is a specific
need for the organization to change the budgeting method that is previously adopted i.e.
incremental budgeting system. By looking over the current scenario of company and future
budgeting needs, company can make use of “ Zero base budgeting” as a method to prepare
budget (Kotas, 2014).
While making use of the mentioned budgeting practices or methods, company can
overcome the limitations of incremental budgeting and can successfully meet the positive
variance. Furthermore, applications of “Zero base budgeting” enable aforesaid company to
estimate the entire operational cost as well as the anticipated revenues in respect with the proper
market behaviour. Organization can come closer to the accurate actual figures of budgets through
using this method. However, significant market changes can be analysed and budget will be
prepared through considering the impact of market volatility. At last, it can be said that Jeffrey
& Son's manufacturing company can remove or reduce the impact of market uncertainties from
the budgets by using “Zero base budgeting”.
P 3.3 Preparation of production and material budgets
According to given details in the company, the production and material purchase budget
for the organization has been designed to asses the anticipated experience made on production
and material. The production budget help in identifying the level of future production on the
other hand materiel budget represents the material used for future period.
Production Budget
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