Management Accounting Report: Analyzing Costs for Jeffery & Sons

This report provides a comprehensive analysis of management accounting principles, using the case of Jeffery & Sons. It begins by classifying different types of costs, calculates unit and total job costs for a specific job (Job 444), and applies absorption costing techniques to determine the cost of Exquisite products. The report then delves into cost data analysis, including the allocation and apportionment of overhead costs across production departments. Furthermore, it includes the preparation of a cost report with variance analysis, performance indicators, and recommendations for cost reduction and quality enhancement. The report also covers the budgeting process, including the preparation of production, material purchase, and cash budgets. Finally, it addresses variance calculations, corrective measures, and the preparation of an operating statement to reconcile budgeted and actual results, along with a discussion of responsibility centers.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Classifying the different types of cost..............................................................................1
1.2 Calculating the unit cost and total job cost for job 444....................................................3
1.3 Calculating the cost of Exquisite by using absorption costing technique........................4
1.4 Analyzing the cost data of Exquisite by using appropriate techniques............................6
TASK 2............................................................................................................................................7
2.1 Preparation of the cost report by analyzing the variances................................................7
2.2 Using performance indicator to assess the areas for potential improvements..................8
2.3 Recommending ways to reduce costs, enhance value and quality...................................9
TASK 3............................................................................................................................................9
3.1 Stating the purpose and nature of the budgeting process to the budget holders of Jeffery &
Son's........................................................................................................................................9
3.2 Opt the suitable budgeting method for the company along with its needs.....................10
3.3 Preparation of the production and material purchase budget.........................................10
3.4 Preparation of cash budget.............................................................................................12
TASK 4..........................................................................................................................................12
4.1 Calculating variances, assessment of causes and recommending the corrective measures
..............................................................................................................................................12
4.2 Preparing the operating statement which reconcile both the budgeted and actual results14
4.3 Responsibility centers.....................................................................................................14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting may be defined as a systematic record of business transactions
and activities which are made during the accounting year. Management accounting helps finance
manager in making effective decisions (Mongiello, 2015). It provides an idea to an organization
about their financial and statistical performance. Through this, company is able to undertake
effective measures which facilitate control over the costs that are incurred by an organization. It
helps organization in enhancing the productivity and profitability of an organization.
This project report is based upon the case scenario of Jeffery & Sons. It is most popular
manufacturing company who produces popular and branded products which are termed as
Exquisite. The present report will develop understanding about the different types of costs as
well as the use of different types of costing methods. Besides this, it will shed light on the ways
through which one can prepare or analyze the cost reports. Further, it depicts the nature and
purpose of budgeting process in the business organization.
TASK 1
1.1 Classifying the different types of cost
Cost refers to the summation of several expenses which are incurred by an organization
in order to manufacture the products or services (Alaa-Aldin, 2007).
Classification of the cost: Jeffery & Son's can classify on the different basis which are
enumerated blow:
On the basis of nature
Costs Features
Material
It consists of the cost which organization
incurs to access raw material for the production
of finished goods.
Labor
Labor cost refers to those which are highly
associated with the human resources of an
organization (Gibassier and Schaltegger,
2015). It includes the wages of worker, tax
benefits and their insurance.
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Overhead
These costs are also termed as operating cost
which is incurred by an organization to run
business activities and functions.
On the basis of changes take place in activity or volume
Costs Features
Fixed cost
It may defined as those which remain
unchanged as changes take place in the number
of unit produced. For instance: factory rent,
salary of the workers.
Semi-variable cost
In this, cost of the output remains fixed to the
certain level of production. Besides this, such
cost becomes variable when predetermined
level of output exceeds (Chan and Chan,
2004). For instance: Wages of workers,
advertisement expenses etc.
Variable cost
It refers to those which increase or decrease as
changes take place in the level of output
produced. It includes electricity expenses etc.
On the basis of functions
Costs Features
Production cost
It represents the cost which is incurred by
Jeffery & Son's in manufacturing of product.
Commercial cost Commercial cost includes administration as
well as selling and distribution cost. Such cost
refers to the operational expenses which firm
has to incur in order to run business operations
and functions in an effective manner (McLean,
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McGovern and Davie, 2015).
1.2 Calculating the unit cost and total job cost for job 444
Cost sheet and unit cost: Cost sheet is the document which provides deeper insight to the
manager about the cost which they require to incur on the different types of projects. Along with
it, job costing may be defined as a process in which producer assigns manufacturing cost to an an
individual product. Besides this, unit cost refers to the cost which is incurred by Jeffery & Son's
in order to produce one unit of product or service.
Job cost sheet for Job no. 444
Particulars Total cost
Direct material 40000
Direct Labor 54000
Fixed production overhead 24000
variable production overhead 36000
Total cost 154000
Unit cost 770
Working note:
Direct material cost
Material cost = Quantity * price per kg.
= 50kg* 4£ per kg.*200 units= 400000£
Direct labor cost
Labor cost = Total working hours * rate per hour
Labor hours = 30 hours per unit*200 Units = 6000 Hours
Overhead
Fixed overhead = Total fixed production overhead/Total budgeted labor hours*Labor hours for
job
Fixed overhead = = 80000£/20000 hours* 6000 hours
= 24000£
Variable production overhead = Total hours* rate per hour
Variable overhead = = 6£ per hour * 6000 hours
= 36000£
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Unit cost = Total cost/ number of units
= = 154000£/200 Units = 770£ cost per unit
Thus, Jeffery & Son's has to incur 770£ in order to produce per unit of product or service.
1.3 Calculating the cost of Exquisite by using absorption costing technique
a.) Allocation and apportion of overhead to the production department of machine X. Y and
assembly
Production department
Service
department
Particulars
Basis of
allocation
Total
in (£)
Machine
X (£)
Machi
ne Y
(£)
Assembly
1 (£)
Stores
(£)
Mainte
nance
(£)
Indirect wages and
supervision
362000.
00 100000.00
99500.0
0 92500.00
Indirect material
253000.
00 100000.00
100000.
00 40000.00
light and heating
Machine
hours
50000.0
0 50000.00 10000 5000 15000 15000
rent
Area
occupied
100000.
00 20000.00
10000.0
0 30000.00
30000.0
0
10000.0
0
insurance and
machinery
Book value
of
machinery
15000.0
0 3529.40 2205.90 4411.80 2205.90 2647.06
depreciation
Book value
of
machinery 15000 7947.02 4966.89 993.38 496.69 596.03
Insurance of building
Area
occupied
25000.0
0 5000.00 2500.00 7500.00 7500.00 2500.00
salaries of work
management
No. of
employees
80000.0
0 24000.00
16000.0
0 24000.00 8000.00 8000.00
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Total cost
103500
0.00 346417 287636 219927 79964 101056
b. Reapportion of the cost of service and support department to the production department
Particulars Production
Basis of
allocation
Total in
(£) Machine X Machine Y (£) Assembly 1 (£)
Primary
distribution
(Earlier table)
103500
0.00 346417 287636 219927
Stores Direct material 79964 39982 29987 9995
Maintenance Machine hours 101056 48506.88 32337.92 20211.2
Total
121602
0 434905.88 349960.92 250133.2
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
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
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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 Building
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 management
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
Maintenance 1/10 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
Machinery Y = £349,960/ 60,000 = £5.83
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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
c. Deducing the overhead absorption rate for Machine X, Y and assembly by using the machine
hours
Rate of overhead absorption = Total production department overhead/ machine hours
Calculation of the overhead absorption rate for each of the production department is as follows:
Machine shop X = 346417 + 39982 + 48506.88/80000
= 434905.88/80000
= £5.44
Machine shop Y = 287636+29987+32337.92/ 60000
= 349960.92/60000
= £5.83
Assembly = 219927 + 9995+ 20211.2/10000
= 250133.2/10000
= £25.01
d. Calculating the overhead charge to the product by using the absorption rate
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
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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
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
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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 the cost data of Exquisite by using appropriate techniques
Inculcation 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
£ £
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
On the basis of the above mentioned calculation it has been analyzing that absorption rate
of overhead is high if organization undertakes machine hours rather than labor hours. According
to the costing method company needs to undertake absorption from labor hours which proves to
be more profitable for an organization in near future.
TASK 2
2.1 Preparation of the cost report by analyzing the variances
Cost report for the month of September
Budgeted cost Actual cost Variances
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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
Calculation of standard budget at 1900 units
Budgeted cost Actual 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
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