Management Accounting Report: Budgeting, Variance, and Cost Analysis

This management accounting report provides a comprehensive analysis of cost accounting principles and their application within Jeffrey and Son's. The report begins by classifying different types of costs, including direct, indirect, fixed, variable, and opportunity costs, and then proceeds to calculate unit costs and total job costs. It includes a detailed analysis of the cost of Exquisite Product AB, including overhead allocation and calculation of overhead absorption rates. The report further examines cost reports, identifying key performance indicators such as profit, cost, sales, customer satisfaction, and ratio analysis to improve business performance. The report also covers budgeting, including the preparation of production, material purchase, and cash budgets. Finally, it analyzes different variances, such as material, labor, and sales variances, and provides recommendations for cost reduction and performance improvement, culminating in a reconciliation statement and reporting of findings to management. This report provides a detailed overview of management accounting practices and their application within a business context.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................2
1.1 Different types of cost......................................................................................................2
1.2 Calculation of unit cost and total job cost........................................................................4
1.3 Calculation of cost of Exquisite Product AB...................................................................1
1.4 Analysis of Cost of Exquisite...........................................................................................1
TASK 2............................................................................................................................................1
2.1 Analysis of Cost report.....................................................................................................1
2.2 Performance indicators used to identify areas for potential improvements.....................1
2.3 Ways to reduce costs, enhance value and quality.............................................................2
TASK 3............................................................................................................................................1
3.1 Purpose and nature of the budgeting process...................................................................1
3.2 Budgeting methods for the organisation and its needs.....................................................2
3.3 Preparation of Production Budget and Material Purchase Budget...................................3
3.4 Preparation of Cash Budget..............................................................................................1
TASK 4............................................................................................................................................1
4.1 Calculation of Different Variances and their causes and recommendations....................1
4.2 Reconciliation statement..................................................................................................1
4.3 Reporting the Findings to management............................................................................2
CONCLUSION................................................................................................................................2
REFERENCES................................................................................................................................3

LIST OF TABLES
Table 1: Calculation of Unit Cost and Total Job Cost.....................................................................2
Table 2: Production Budget (In Units)..........................................................................................11
Table 3: Raw Material Purchase Budget.......................................................................................11
Table 4: Cash Budget.....................................................................................................................12
Table 5: Material Variance............................................................................................................13
Table 6: Labour Variance..............................................................................................................14
Table 7: Sales Variance.................................................................................................................15
Table 8: Fixed Overhead Variances..............................................................................................15
Table 9: Reconciliation Statement.................................................................................................17

INTRODUCTION
Management accounting is also known as cost or managerial accounting. This involves
providing statistical and financial information to the manager. On the basis of this information,
manager takes decisions for the short term and long term period. Management accounting helps
manager in getting actual information about cash in hand, accounts payables & receivable, sales
revenue, etc. These information help manager in analysing cost related information of the
organisation. Management accounting at Jeffrey and Son's helps its manager in identifying the
methods of cost reduction and enhance value. It also provides guidelines about the preparation of
budgets. These help in monitoring organisation's performance against the planed budget. So that,
manager can identify variation in the actual and planned process.
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TASK 1
1.1 Different types of cost
Cost involve in every activity of business. So, this can divided according to its work:
On the basic of element:
 Marginal cost
 Opportunity cost
 Normal cost
 Sunk cost
 Differential cost
On the basis of nature:
 Labour cost
 Material cost
 Overhead cost
On the basis of behaviour:
 Fixed cost
 Variable cost
 Semi-variable cost
On the basis of functions:
 Process cost
 operation cost
 Joint cost
Following are the costs which can use by Jeffrey and Son's for getting actual information about
business position.
On the basis of nature Direct cost – It is the cost which is directly related with the unit of operation. These costs
vary with the variation in manufacturing of products (Kaplan and Atkinson, 2015). For
example, direct cost for a car manufacturing company is wages of workers who build car
and cost of parts which are used to build the car. Indirect cost – These include all the costs which are not directly related with the
manufacturing of a product. Indirect cost is related to both type such as fixed and
variable. For example, Electricity expense for a car manufacturing company is indirect
cost.
On the basis of behaviour Fixed cost – Fixed cost does not vary with the number of products and services. These
remain same when there are changes in the output of products. For example, A company
must pay rent to its land owner in both conditions either they manufacture or not.
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 Variable cost – variable cost changes at every level of production as output changes
(Hansen, Mowen and Guan, 2007). These are related with every single unit of output. For
example, A phone manufacturing company must pack its product before sending into the
market. So, as company's production increases, its packaging cost also increases and
vice-versa. Semi-variable cost – Semi-variable cost includes both variable and fixed costs. These are
also known as mixed cost. In these cost, fixed element remains constant with production
and variable elements are changed with the volume of production.
On the basis of element
 Opportunity cost – These are focused on net revenue that could be generated by the
best uses of its resources. These also treat as an alternative cost for the organisation.
 Sunk Cost – It is a cost which has already been incurred and cannot be recovered.
For instance bad food from a restaurant, bad movie, training and development of
employees etc are kind of sunk costs.
On the basis of functions
 Process cost – It is used in the industry where mass production of similar products
occurs. The costs is associated with individual units of output which cannot be
differentiated from each other. For example costs related to designing department,
production department, conversion department etc.
 Operation cost – It is a cost related to the day to day operations of the business. For
example, stationary expenses, transportation expenses etc are operational in nature.
1.2 Calculation of unit cost and total job cost
Table 1: Calculation of Unit Cost and Total Job Cost
3

PARTICULARS AMOUNT
D.M. 50kg @ £4 200
D.L. 30hrs. @ £9 270
Var. Prod. O/h 30hrs. @ £6 180
Fixed Prod. O/h (W.N 1) 30hrs. @ £4 120
Total Unit cost 770
Total Job cost 200 units @ £770 £ 154000
W.N.1 Fixed Prod. O/h per unit =
Total Fixed
Production
overhead/ Total
direct labour hours
= £80000/20000
= £ 4
4

1.3 Calculation of cost of Exquisite Product AB
(A)
Table 2: Allocation of overheads to the production department
Basis of
allocation
Machine
shop X
Machin
e shop
Y
Assembl
y
Stores Mainten
ance
Indirect wages
and
supervision
Allocated £100,000.
00
£99,500
.00
£92,500.
00
£10,000
.00
£60,000.
00
Indirect
materials
Allocated £100,000.
00
£100,00
0.00
£40,000.
00
£4,000.
00
£9,000.0
0
Light and
heating
Area occupied £10,000.0
0
£5,000.
00
£15,000.
00
£15,000
.00
£5,000.0
0
Rent Area Occupied £20,000.0
0
£10,000
.00
£30,000.
00
£30,000
.00
£10,000.
00
Insurance and
machinery
Machinery
book value
£7,947.02 £4,966.
89
£993.38 £496.69 £596.03
Depreciation
of machinery
Machinery
book value
£79,470.2
0
£49,668
.87
£9,933.7
7
£4,966.
89
£5,960.2
6
Insurance of
building
Area occupied £5,000.00 £2,500.
00
£7,500.0
0
£7,500.
00
£2,500.0
0
Salaries of
works
management
Number of
employees
£24,000.0
0
£16,000
.00
£24,000.
00
£8,000.
00
£8,000.0
0
Total cost of
overhead
£346,417.
02
£287,63
6.00
£219,927
.00
£79,964
.00
£101,056
.00
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(B)
Table 3: Reapportioning the service or support department costs to the production departments
Particular Basis Machine X Machine Y Assembly
Primary
Distribution
As Stated
Earlier
346417.02£ 287636£ 219927£
Stores
Department
Direct material
(4:3:1)
39982£ 29987£ 9995£
Maintenance
Department
Maintenance
machine hours
(12:8:5)
48506.88£ 32337.92£ 20211.2£
Total cost 434905.9£ 349960.92£ 250133.2£
(C)
OAR = Total cost/Actual machine hours
Table 4: Calculation of Overhead Absorption Rates
Particular Machine X Machine Y Assembly
Total cost 434905.9£ 349960.92£ 250133.2£
Actual machine
hours
80000 60000 10000
OAR 5.44£ 5.83£ 25.01£
(D)
Table 5: Calculation of overhead charge
Items Calculation Per unit cost
Material 8£
Labour 2 hours*7.50£ 15£
Production Department
Overheads
2

Machine X 0.8 hours*5.44£ 4.35£
Machine Y 0.6 hours*5.83£ 3.5£
Assembly 0.1 hours*25.01£ 2.5£
Total cost 33.35£
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1.4 Analysis of Cost of Exquisite
Overhead Absorption rate = Total cost/direct labour hours
Table 6: Calculation of overhead absorption rates using labour hours as a basis
Particular Machine X Machine Y Assembly
Total cost 434905.9£ 349960.92£ 250133.2£
Labour hours 200000 150000 200000
OAR 2.17£ 2.33£ 1.25£
In the given scenario, the finance director of the organization is not satisfied with the
existing basis of calculating OAR. Hence company should absorb overheads on the basis of
direct labour hours.
Table 7: Calculation of cost
Items Calculation Per unit cost
Material 8£
Labour 2 hours*7.50£ 15£
Machine X 2*2.17£ 4.34£
Machine Y 1.5*2.33£ 3.5£
Assembly 1*1.25£ 1.25£
Total cost 32.09£
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TASK 2
2.1 Analysis of Cost report
Budgeted
cost Actual cost
Varian
ce
2000 units 1900 units
Material £24,000 £22800 1200
Labour £18,000 £19000 -1000
Fixed overheads £15,000 15000 0
Electricity
Variable £8,000 £7125 375
Fixed £500
Maintenance £5,000 £4800 1200
Total £70,000 69225 775
Actual Cost information In £
Material cost 12
Labour Cost 10
Electricity Cost (W.N. 1) 3.75
Total Variable cost Per unit 25.75
W.N.1 Semi variable cost
Variable Element 3.75
Fixed Element
Total variable Cost (3.75*2000) 7500
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