Management Accounting Report: ABC and Budgeting Analysis

This report provides an executive summary focusing on the application and advantages of activity-based costing (ABC) and budgeting in management accounting. The report is divided into two parts: Part A focuses on ABC, explaining its advantages over traditional cost allocation methods and calculating per-unit costs for various activities, including the preparation of a bill of activities for Lamington. Part B focuses on budgeting, discussing the impact of a new fee structure and membership plan on sales revenue and evaluating the plan's effectiveness. The report includes computations of receipts from membership and court fees, both before and after the implementation of the new plan, as well as an evaluation of the new membership plan, considering factors like the reduction in administrative costs and the importance of budget preparation for achieving goals. The conclusion summarizes the benefits of ABC and budgeting for effective cost allocation and financial planning.

Running head: MANAGEMENT ACCOUNTING
Management accounting
Name of the student
Name of the university
Author note

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Executive summary
The main objective of the report is to focus on the applicability and advantages of activity
based costing and budgeting. Unlike the traditional cost allocation method that allocates the
cost based on the machine hours or labour hours, ABC systems segregates the activities based
on the batch level, activity level, product level and sustaining activity of the company. On the
other hand, budget assists in projecting the future expenses and revenues which in turn assist
the company to achieve the target.

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Table of Contents
Part A – Activity based costing..................................................................................................3
a. Computation of per unit cost for the listed activities......................................................3
b. Preparation of the bill of activities for Lamington and determination of the per unit
cost 4
c. Other costs.......................................................................................................................4
Part B – Budgeting.....................................................................................................................5
a. New fee structure and membership plan.........................................................................5
b. Impact of the sales revenue.............................................................................................5
c. Evaluating the plan of new membership and the structure of fees.................................7
Conclusion..................................................................................................................................7
Reference....................................................................................................................................8

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Part A – Activity based costing
Activity based costing popularly known as ABC is the system under which all the
activities of the firm related to manufacturing of product are recognized and then the indirect
costs are allocated to the product (Fathi and Elham 2015). Unlike the traditional cost
allocation method that allocates the cost based on the machine hours or labour hours, ABC
systems segregates the activities based on the batch level, activity level, product level and
sustaining activity of the company. Using the ABC method, the company can gain various
advantages like the company can identify the costs that are to be allocated. Further, it helps to
measure the activity drivers for allocating the overheads. Further, through this method the
entities can focus on the corporate strategies as the costs can be identified in efficient way.
The ABC approach can assist the employees to get clear idea regarding various categories of
cost and analysing the costs that can be used to add the values. In this way, the entire cost
allocation process can be improved which in turn can lead into higher performance (Linassi,
Alberton and Marinho 2016). Further, it can contribute to the strategic development along
with the better calculations for prices. Though it requires lot of times initially for
implementation, once it is implemented, it can be of great use for the entity. Therefore,
implementation of the ABC system can be proved as the great opportunity for the company to
identify the cost and allocate the overheads to appropriate heads.
a. Computation of per unit cost for the listed activities
Activity Total activity cost Activity driver Quantity of
activity driver
Cost per unit
of activity
Prepare annual accounts $ 5,000.00 None available
Process receivables $ 15,000.00 No. of invoices 5000 $ 3.00
Process payables $ 25,000.00 No. of purchase
orders 2500 $ 10.00
Program production $ 28,000.00 No. of production
schedules 1000 $ 28.00

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Process sales order $ 40,000.00 No. of sales
orders 4000 $ 10.00
Dispatch sales order $ 30,000.00 No. of dispatches 2500 $ 12.00
Develop and test
products $ 60,000.00 Assigned directly
to product
Load mixers $ 14,050.00 No. of batches 1000 $ 14.05
Operate mixers $ 45,900.00 No. of kilograms 200000 $ 0.23
Clean mixers $ 6,900.00 No. of trays 1000 $ 6.90
Move mixers to filling $ 3,450.00 No. of cakes /
Pastries 200000 $ 0.02
Clean trays $ 20,000.00 No. of trays 16000 $ 1.25
Fill trays $ 16,000.00 No. of cakes /
Pastries 800000 $ 0.02
Move to baking $ 8,000.00 No. of trays 16000 $ 0.50
Set up ovens $ 50,000.00 No. of batches 1000 $ 50.00
Bake cakes / Pastries $ 130,000.00 No. of batches 1000 $ 130.00
Move to packing $ 40,000.00 No. of trays 16000 $ 2.50
Pack cakes / pastries $ 80,000.00 No. of cakes /
Pastries 800000 $ 0.10
Inspect pastries $ 2,500.00 No. of pastries 50000 $ 0.05
b. Preparation of the bill of activities for Lamington and determination of the per
unit cost
Activity Cost per unit of
activity
Annual
quantit
y
Total cost per
activity
Process receivables $ 3.00 500 $ 1,500.00
Process payables $ 10.00 200 $ 2,000.00
Program production $ 28.00 100 $ 2,800.00
Process sales order $ 10.00 400 $ 4,000.00
Load mixers $ 14.05 100 $ 1,405.00
Operate mixers $ 0.23 30000 $ 6,885.00
Clean mixers $ 6.90 100 $ 690.00
Move mixers to filling $ 0.02 30000 $ 517.50
Clean trays $ 1.25 2000 $ 2,500.00
Fill trays $ 0.02 100000 $ 2,000.00
Move to baking $ 0.50 2000 $ 1,000.00
Set up ovens $ 50.00 100 $ 5,000.00
Bake cakes / Pastries $ 130.00 100 $ 13,000.00
Move to packing $ 2.50 2000 $ 5,000.00
Pack cakes / pastries $ 0.10 100000 $ 10,000.00
Dispatch sales order $ 12.00 500 $ 6,000.00

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Develop and test product $ 600.00
Total $ 64,897.50
c. Other costs
Other costs that can be considered while calculating the cost of product for Lamington
are the operational cost, material cost, labour cost and inspection cost of product.

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Part B – Budgeting
Budgets are used by the companies for facilitating the control and planning within the
company for managing the financial aspects of the business and planning for the expansion of
new product. It also assists in the performance evaluation of the companies under the
planning process. Budget represents the projection of revenues and expenses for the
particular time period. It is started with the assumptions regarding the projected sales and
projected expenses. Generally the company 1st prepares the sales budget and thereafter the
expenses budgets are prepared. For different departments different budgets are prepared
(Lidia 2014). Master budget is prepared based on the size of the firm. The budget generally
has 2 parts, the financial budget and the operating budget. The financial budget records the
outflows and inflows of cash and other relevant items to state the financial position of the
company. The cash outflow and cash inflows are represented through the cash budget. On the
other hand, the operating budget records the company’s income generating activities that
includes the expenses and revenues.
a. New fee structure and membership plan
Two major factors have impact on the cash receipts of HLW that is the annual
membership fees and hourly court fees. HLW charges annual membership fees that is direct
with fixed fees and are collected annually. Thus the constant and fixed factor is the annual
membership fees collected by HLW. On the other hand, the court fees ranges from $ 8 to $ 12
and it is transacted on each day. Total price will also be different as per the difference in time
spent, prime time of the day or non-prime time of the day and customer numbers. Therefore,
the cash flow generation from the hourly court fees are fixed and cannot be predicted.
With new membership plan the cash receipts can be planned with the improvement in
drafting better plan for future and cash flow management and improvement in the eliminating

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the circumstance of shortages of cash. This can be done as the money received from hourly
fees are taken out and the annual membership fees are left with the club (McVay 2015). With
implementation of new plan possibilities of cash loss associated with the hourly court fees
can be removed. However, the new fee structure will not affect the club’s overall profit.
Thus, the new plan implementation will enhance the HLW’s ability to manage the cash.
However, the new structure will not affect the club’s overall profit. However, it may
increase the earning of the club with reduction of the financial obligations. Further, with the
new plan the cash receipts can be controlled and planned in effective way and with proper
planning the management will be able to avoid cash shortages so that the short-term
obligations can be met efficiently (Guerrero-Baena, Gómez-Limón and Fruet Cardozo 2013).
Therefore, with the new fee structure, the club will be able to manage therir cash efficiently
and meet their financial obligation comfortably.
b. Impact of the sales revenue
Receipts from the membership fees
Particulars Amount
Individual $ 22,500.00
Student $ 15,000.00
Family $ 100,000.00
Total $ 137,500.00
Receipts from court fees
Particulars Amount
Prime time $ 86,400.00
Non-prime time $ 56,000.00
Off season $ 21,600.00
Total $ 164,000.00
Total receipts from 2 sources of fees = ($ 137,500 + $ 164, 000) = $ 301,500.
Computation of receipts after new plan implementation –

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Receipts from membership fees –
New members = (2000 / 70%) = 1400 members
Under the campaign
Particulars Amount
Family $ 141,750.00
Individual $ 78,750.00
Total $ 220,500.00
Receipts in case of no campaign
Particulars Amount
Family $ 192,500.00
Individual $ 115,500.00
Total $ 308,000.00
Total receipts under new plan implementation
Particulars Amount
Under campaign $ 220,500.00
Under no-campaign $ 308,000.00
Total receipts $ 528,500.00
Thus, changing the plan in collecting the fees or new membership plan will be
effective and positive with regard to the processing and will result in increasing the revenue
as it will generate incremental revenue amounting to ($ 528,500 - $ 301,500) = $ 227,000
c. Evaluating the plan of new membership and the structure of fees
For adopting or rejecting the project, major factors recognized by HLW are as follows –
Management can recognize the reduction in administration cost if the new
membership plan is implemented as the preparation of regular record for collecting the
revenue will not be required. Various issues may be faced by the company initially after new
plan implementation as the payments will be received by the management for the
membership (Weygandt, Kimmel and Kieso 2015). Moreover, onetime advance payments

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will adversely affect the number of members. The management also recognised the
importance of preparing the budget for achieving the goals. They also prepare the cash flow
statement to manage and control the available liquid funds.
For gaining complete understanding of the new plan HLW carried out various
evaluations in financial aspects. For instance, they must compute the liquidity ratio to analyse
the liquidity status and make the efficient use of the working capital. HLW shall also prepare
and evaluate the cash flow statement to analyse and keep track of cash outflows and cash
inflows. The company may prepare the cash budget for proper utilization of their cash
balances however, adequate cash shall be there to meet the short-term obligation and
maintain the liquidity. Moreover, preparing the budget can help the management of HLW to
fix their target and compare the achievement with the target.
Conclusion
It is concluded from the above discussion that the ABC systems segregates the
activities based on the batch level, activity level, product level and sustaining activity of the
company and assists in proper allocation of overheads. On the other hand, budget represents
the projection of revenues and expenses for the particular time period. With new membership
plan of HLW, the cash receipts can be planned with the improvement in drafting better plan
for future cash flow. Though the new fee structure will not affect the club’s overall profit, it
will enhance the HLW’s ability to manage the cash.

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Reference
Fathi, Z. and Elham Sadat M. D. 2015, A survey of activity-based costing in hotel industry,
Management Science Letters, vol. 5, no. 9, pp. 855-860.
Guerrero-Baena, M.D., Gómez-Limón, J.A. and Fruet Cardozo, J.V. 2013, "The capital
budgeting process: A methodological approach based on financial and intellectual value
creation", Intangible Capital, vol. 9, no. 4.
Lidia, T.G. 2014, Difficulties of the Budgeting Process and Factors Leading to the Decision
to Implement this Management Tool, Procedia Economics and Finance, vol. 15, pp. 466-473.
Linassi, R., Alberton, A. & Marinho, S.V. 2016, "Menu engineering and activity-based
costing: An improved method of menu planning", International Journal of Contemporary
Hospitality Management, vol. 28, no. 7, pp. 1417-1440.
McVay, G.J. 2015, "The effects of compensation scheme, source credibility, and receiver
involvement on the organizational budgeting process", Academy of Accounting and Financial
Studies Journal, vol. 19, no. 3, pp. 217.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting.
John Wiley & Sons.