Management Accounting Report: Jeffery & Sons Cost Analysis & Budgeting

This management accounting report examines the financial activities of Jeffery & Sons. It classifies different types of costs (material, labor, overhead, fixed, variable), calculates unit and total job costs for Job 444, and computes the cost of Exquisite using the absorption technique. The report analyzes cost data, prepares and analyzes a cost report, and identifies key performance indicators for improvement. It also covers budgeting, including setting up production and material purchase budgets, and preparing a cash budget. Furthermore, the report calculates variances, identifies their causes, and recommends actions, culminating in an operating statement and reporting findings to management. The analysis emphasizes cost reduction, value enhancement, and the importance of budgeting in business operations.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Classifying different types of cost.........................................................................................1
1.2 Calculating unit cost and total job cost for Job 444..............................................................2
1.3 Computing the cost of Exquisite by using absorption technique..........................................4
1.4 Analyzing cost data of Exquisite for Jeffery & Sons..........................................................10
TASK 2..........................................................................................................................................11
2.1 Preparing and analyzing the cost report..............................................................................11
2.2 Stating the performance indicators which help in assessing the areas for potential
improvements............................................................................................................................12
2.3 Ways through which Jeffery & Sons can reduce cost and thereby enhance value or quality
...................................................................................................................................................12
TASK 3..........................................................................................................................................13
3.1 Purpose and nature of budgeting process ...........................................................................13
3.2 Selecting the appropriate budgeting method for Jeffery & Sons........................................14
3.3 Setting up production and material purchase budget for the month of July, August and
September..................................................................................................................................14
3.4 Preparing cash budget.........................................................................................................16
TASK 4..........................................................................................................................................18
4.1 Calculating variances, identifying causes and recommending actions...............................18
4.2 Preparing operating statement reconciling budget..............................................................20
4.3 Reporting the findings to management...............................................................................21
CONCLUSION..............................................................................................................................22
REFERENCES..............................................................................................................................23

INTRODUCTION
Management accounting is the most effective financial tool or technique which helps
organization in evaluating monetary activities which are performed by the firm during the
financial year (Management accounting, 2014). For this purpose, manager makes use of the
provisions of accounting information to derive the best result of their decision. This field of
accounting provides assistance to the manager in making the most effectual short term decision
by taking into consideration both financial and statistical performance. It also provides deeper
insight into firm about the areas on which organization needs to make control namely cost,
expenditure etc. All these aspects of management accounting aid in the sales and gross margin of
the firm.
This report will examine the different types of cost which organization has to incur to
produce the product or services. Besides this, this report will also helps in understanding the
ways through which Jeffery & Sons can reduce cost and thereby enhance the quality or value of
the product which are offered by them. In this report, importance of budgeting process to the
business organization will also be analyzed. Further, this report will help in understanding the
significance of different responsibility centres in the cost and performance control.
TASK 1
1.1 Classifying different types of cost
Cost includes all the expenditures which are incurred by Jeffery & Sons in manufacturing
and selling & distribution of Exquisite. For instance: material labor, overhead, manufacturing
etc.
Different types of cost are enumerated below:
Type of cost Features
On the basis of elements and nature
Material It refers to the cost of raw material or semi-finished goods which are
incurred by the firm to manufacture finished foods.
Labor Cost of labor is sum of all the wages and salaries which are paid by the
business organization to their employees.
Overhead It consists of all the costs except material and labor cost. Overhead
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expenses include insurance, advertisement, legal and other office expenses
which organization has to incur for smooth functioning of the business
activities and operations (Kaplan and Atkinson, 2015).
On the basis of functions
Production cost It is the cost which is paid by firm during the production of product or
services such as material, labor etc. It provides assistance to the firm in
calculating per unit cost of the product and price as well.
Selling and
distribution cost
This cost entails the amount which are incurred by Jeffery & Sons in the
selling and distribution of Exquisite product
Research and
development
In the strategic business environment, company has to conduct research to
evaluate the taste and preferences of the customers. It also imposes
financial cost in front of the firm.
On the basis of behavior
Fixed cost This is a cost which has to pay by the organization irrespective of the
business activities. Fixed costs include salary of the employees, rent of the
building etc. which does not change when changes take place in unit of
output produced.
Variable cost This cost is highly associated with the volume produced by Jeffery & Sons.
It varies with an increase or decrease in the level of output produced (Otley
and Emmanuel, 2013). It increases as volume of production increases or
vice versa.
Semi-variable cost It is the summation of fixed and variable expenditures which are paid by
the corporation for the manufacturing of product or services (Cost
Accounting - Classification of Cost, 2016). Wages, electricity expenses, etc
are fixed to some extent and become variable as level of production
exceeds.
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1.2 Calculating unit cost and total job cost for Job 444
Unit cost may be defined as expenditure which is paid by the firm in the manufacturing
of per unit of product or service (Fullerton, Kennedy and Widener, 2014). One can easily assess
the unit cost by dividing the total cost of production from number of units which are produced by
the firm.
Unit and total cost which are incurred by Jeffery & Sons in the manufacturing of product are as
follows:
On the basis of the above mentioned calculation, it has been identified that Jeffery &
Sons has to incur £770 to manufacture per unit of exquisite.
1.3 Computing the cost of Exquisite by using absorption technique
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a.) Allocation and apportion of overhead to the production department of machine X. Y
and assembly
b. Reapportion of the cost of service and support department to the production department
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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
Depreciation of Machinery
Machinery X: 800/1510 x £150,000 = £79,470
Machinery Y: 500/1510 x £150,000 = £49,669
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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
Assembly £250,134/ 10,000 = £25.01
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Overhead absorption rate
Machinery X £ 434,906/ 80,000 = £5.44
Machinery Y £349,960/ 60,000 = £5.83
Assembly £250,134/ 10,000 = £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:
Machinery Shop X 346417 + 39982 + 48506.88/80000
= 434905.88/80000
= £5.44
Machinery 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
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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
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
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£ £
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 data of Exquisite for Jeffery & Sons
By using both labor and machine hour it has been analyzing by the firm that profitability
aspect of Jeffery & Sons is negatively affects if firm make use of machine hours to absorb their
overhead expenses. Thus, company needs to absorb their overhead expenditure on the basis of
labor hours which aid in the profitability aspect of the firm.
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TASK 2
2.1 Preparing and analyzing the cost report
Calculation of variable cost – electricity = change in total cost / change in no of units to be
produced
= (8000-5000) (2000-1200)
= £3.75
On the basis of above cost sheet it has been identifying that company have product 1900
whereas it needs to manufacture 2000 units according to the budget. Due to this aspect positive
variance is occurred in the performance of the firm. Thus, company needs to undertake
promotional campaign to push up the sales of firm. Further, variance of £1000 is recorded in
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