Management Accounting Report: ABC Ltd Costing, Budgeting and Variance

This report delves into management accounting, focusing on costing methods, budgeting processes, and variance analysis for ABC Ltd. It begins with an introduction to management accounting and its tools, including costing, budgeting, and variance analysis. Task 1 explores different types of costs (fixed, variable, semi-variable) and various costing methods (job, batch, process, contract). It includes cost calculations using FIFO, LIFO, and AVCO methods. Task 2 covers the preparation and analysis of routine cost reports and performance indicators to identify potential improvements for ABC Ltd. Task 3 examines the purpose and nature of the budgeting process, proposing budgeting methods and preparing budgets, including a cash budget. Task 4 focuses on calculating variances, identifying causes, and providing recommendations, along with an operating statement reconciling budgeted and actual results, and identifying responsibility centers. The report concludes with a summary of findings and recommendations for ABC Ltd.

MANAGEMENT
ACCOUNTING COSTING
AND BUDGETING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Different types of costs.........................................................................................................1
1.2 Various costing methods.......................................................................................................2
1.3 Cost calculation using appropriate techniques......................................................................2
1.4 Analysis of cost data using appropriate techniques..............................................................4
TASK 2............................................................................................................................................4
2.1 Preparation and analysis of routine cost reports...................................................................4
2.2 Performance indicators to identify potential improvements.................................................5
2.3 Suggestion for ABC Ltd to reduce cost and enhance value as well quality of products......6
TASK 3............................................................................................................................................6
3.1 Purpose and nature of budgeting process..............................................................................6
3.2 Budgeting methods for ABC Ltd and its requirements.........................................................7
3.3 Preparation of budget accounting to budgeting method.......................................................7
3.4 Cash budget for ABC Ltd.....................................................................................................9
TASK 4..........................................................................................................................................11
4.1 Calculation of variances and causes behind variances as well recommendation for accurate
action.........................................................................................................................................11
4.2 Operating statement reconciling budgeted and actual results.............................................17
4.3 Finding and identification of responsibility centres............................................................18
CONCLUSION..............................................................................................................................19
REFERENCE.................................................................................................................................20

INDEX OF TABLES
Table 1: Classification of costs........................................................................................................1
Table 2: Different costing methods..................................................................................................2
Table 3: Cost calculation through FIFO, LIFO and AVCO method...............................................3
Table 4: Variance analysis for incurred cost on business operations..............................................5
Table 5: Sales budget for ABC Ltd..................................................................................................8
Table 6: Production budget for ABC Ltd........................................................................................8

ILLUSTRATION INDEX
Illustration 1: Material usage budget for ABC Ltd..........................................................................8
Illustration 2: Material purchase budget for ABC Ltd.....................................................................8
Illustration 3: Cash budget for ABC Ltd........................................................................................10
Illustration 4: Sales variance analysis............................................................................................12
Illustration 5: Material variance analysis.......................................................................................13
Illustration 6: Material usage variance analysis for ABC Ltd.......................................................13
Illustration 7: Summary of material variance analysis..................................................................14
Illustration 8: Direct labour variance analysis...............................................................................14
Illustration 9: Direct labour efficiency variance analysis for ABC Ltd.........................................15
Illustration 10: Time variance analysis..........................................................................................15
Illustration 11: Summary of direct variance analysis....................................................................15
Illustration 12: Overhead variance analysis...................................................................................16
Illustration 13: Variable overhead efficiency variance..................................................................17
Illustration 14: Summary of overhead variance analysis...............................................................17
Illustration 15: statement reconciling budgeted and actual results................................................19
Illustration 16: Actual gross profit for ABC Ltd...........................................................................19

INTRODUCTION
Management accounting is a multidisciplinary approach that is helpful for analysing
organisation's actual performance as well as decision-making process for further operations.
Under this accounting , several tools and systems are involved like; costing, budgeting, variance
analysis, investment appraisal and so on remains helpful for improving its efficiency. The
present report is based on understanding various decision-making tools for ABC Limited for
adequate price determination and preparing strategies to improve its performance. In this regard,
different costing methods including classifications and techniques for setting adequate price is to
be described. However, different ideas for cost effectiveness and enhancing quality value of
product services can be expressed. Including this, objectives and characteristics of budgetary
process is to be determined through this assignment for preparing planning procedure to be
followed on. Along with this, several budgets including cash, purchase, sales, inventory are to be
presented for decision making regarding business operations of ABC Ltd. Apart from this,
variance analysis as difference between expected and actual result involving causes behind them
as well solutions to overcome can be introduced for better quality services of organisation. Thus,
learners are able to understand different tools and aspects of management accounting for
performance evaluation of entity and decision-making process through this report.
TASK 1
1.1 Different types of costs
Cost of product services refers as value of money used for production and distribution of
goods and services provided by entity. However, determination of actual cost of product is
based on expenses incurred in manufacturing and processing system including material and
labour cost and additional overhead (Bhimani and et.al., 2013). There are three kinds of costs
determined such as; fixed, variable and semi-variable. In the given case scenario, each
determinate covers different classification of cost can be expressed as follows: -
Table 1: Classification of costs
Fixed Variable Semi-variable
Purchase of van Direct material Telephone bill
Depreciation Direct labour Rent and rates

Purchase of computer Direct expenses
Insurance Maintenance
Other overhead costs
 Fixed cost: - For this cost classification, expenses incurred on business operation remains
unchanged as they cannot be change with production and distribution of products like;
purchasing van, computer. In this regard, price for operating business activities will be
same. Variable cost: - Fluctuation in costs for production and distribution of product services
for ABC Ltd comes under variable cost classification. For instance; cost incurred on
purchasing direct materials, overhead, labour cost etc (Christ and et.al., 2016). However,
for different manufacturing and production, these prices remain dynamics.
 Semi-variable cost: - Under this cost classification, price is determined between fixed
and variable cost. As telephone bill and rent of office can be fixed as well variable to
operate business activities.
1.2 Various costing methods
There are several methods for costing and determining price of product for production of
goods like; job costing, batch or process and contract as well service costing (Cinquini and
Tenucci, 2010). According to given costs for business operations, costing classifications can be
determined as: -
Table 2: Different costing methods
Job costing Batch costing Process costing Contract costing
Other overhead
costs
Rent and rates Direct material Purchase of van
Maintenance Telephone Direct labour Purchase of computers
Depreciation Direct expenses Insurance

Under job costing method, manufacturing of products and maintenance involved while
for batch or process costing, expenses incurred on production of goods are evolved for further
business operations. However, in contract costing, high level of investment as purchasing heavy
equipment covers as well service costing involves for determining price on providing services.
1.3 Cost calculation using appropriate techniques
Table 3: Cost calculation through FIFO, LIFO and AVCO method
Date Purchase Issues Balance Average
Unit
Cost/ unit
(£) (£) (£)
2nd June 2000 15
6th 800 1200 12800
11th 1000 17
16th 1400 800 25200
19th 1000 19
26th 700 1100
Total cost 4000 2900
FIFO method
Interpretation: - Under FIFO method, it is considered that goods sold at first is
purchased initially. It is beneficial to reduce upcoming losses in business operations also remains
valuable for optimum utilization of resources. It is determined that producing 2000 units on 2nd
June at the rate of £ 15 per unit, £ 800 is gained. In this regard, gained money is estimated as £
1200. However, again producing 1000 units at the rate of £ 17 per unit, £ 1400 units are sold out.
Similarly, by increasing the rate of cost per unit, fluctuation in gained revenue is obtained.
Therefore, through FIFO method, it is identified that on producing 2000 units for ABC Ltd, £
1200 balance of units can be gained that is effective for the organisation. Thus, it will be
effective for proper production and distribution of goods (Management Accounting, 2016).
LIFO Method: -
Interpretation: - It stands for Last-in, first out method used for proper decisions on
production and distribution of goods. According to this method, material prepared at last stage,
sold out at first. It is useful for recent purchases and selling current produced. According to

evaluating cost through LIFO method, 1100 units and balance of revenue will be achieved that
will also be in favour of ABC Ltd. In comparison to FIFO method and producing products
produced at first is quite effective than this value. Therefore, producing units and products
according to FIFO method will be better than of LIFO.
AVCO method: -
Interpretation: - It stands for Average cost of calculation method in which average of
cost per unit is determined. On the basis of which, further decision is made for production of
goods for ABC Ltd. Including this, for producing 2000 units at initial, average of £ 16 as cost per
unit will be resulted to £ 128200. As similar, at the rate of £ 18 as cost per unit, average of
gained units will be £ 25200. Therefore, on behalf of AVCO method, it will be beneficial for
ABC limited to produce and gain proper profit effectively.
1.4 Analysis of cost data using appropriate techniques
Above mentioned techniques are best suitable for cost calculation and producing
effective goods and services of ABC Ltd. In accordance to this, there are three methods
presented for cost calculation like; FIFO, LIFO and AVCO (DRURY, 2013). It is determined
that by producing 2000 units at first on 2nd June, organisation will achieve £ 1200 of sales
revenue that will be effective for its improvement and proper growth. Further, according to LIFO
method, the estimated result will be 1100 units that is less than calculation through FIFO
method. However, in relation to AVCO method, gained result will be 12800 at the rate of 16 cost
per unit as well £ 25200 at £ 18 as cost per unit. Thus, AVCO is the best method for producing
appropriate units and effective results.
TASK 2
2.1 Preparation and analysis of routine cost reports
To
The CEO
ABC Limited
Being management accountant of ABC Limited, evaluation of organisation's performance
is the most preferable that proceed to make decisions for further business operations. Therefore,
different strategies can be formulated and implemented to achieve its improvement. In this

regard, cost expected to be incurred and actual expenses incurred on business operations can be
comprised. However, in the given case scenario, units incurred on operations can be recognized
through following routine cost report that is to mention variance analysis for April 2016: -
Table 4: Variance analysis for incurred cost on business operations
production and sales of product AB Budgeted Actual result variance
Units incurred on operation 2000 3000 -1000
particulars £ £ £
Sales revenue 20000 30000 -10000
Direct material 6000 8500 -2500
Direct labour 4000 8500 -4500
Maintenance 1000 1400 -400
Depreciation 2000 2200 -200
Rents and Rates 1500 1600 -100
Insurance 3600 5000 -1400
Total cost 18100 23200 -5100
Analysis: - variance analysis is a management accounting tool that presents comparison
between actual and expected performance of the entity also several ideas for proper production
of goods. However, analysis of estimated and standard position is created thereby bridge
between the gap can be made. As calculating variance analysis for ABC Ltd, it is gained that
there is large gap between both values of costs. Likewise, overall estimated revenue expected to
£ 20000 while, its actual result is £ 30000. There is difference of £ 10000 which is quite
negative and bad for further business operations. But, for analysing other components of
business organisation, it is evaluated that cost incurred was just different in respect of estimated
and actual position. Thus, it is essential for ABC Ltd to determining causes behind these
variances and preparing strategies to overcome them efficiently.
2.2 Performance indicators to identify potential improvements
Performance evaluation of ABC Ltd involves analysing all factors and operations of
business organisation. In this regard, different ideas are generated for improving services and

providing better-quality services. However, customer satisfaction and demand for different kinds
of kites is identified that leads to make decisions for further business operations (Fullerton,
Kennedy and Widener, 2013). Including this, profit earning capacity of entity is recognized
through this method that influences productivity and profitability of the firm. As per identifying
actual market position and quality services of ABC Ltd, it is recognized that entity required to
focus on all increasing its revenue and utilizing resources and fund in optimum way. It is crucial
for the entity to find out reasons behind variances as well preparing plans to overcome them
efficiently.
2.3 Suggestion for ABC Ltd to reduce cost and enhance value as well quality of products
According to current position of ABC Ltd, it is to suggested that organisation requires to
enhance its revenue and profit earning capacity for competitive advantages and long-term
sustainability. It is needed to create balance of proper production and distribution of kites
produced by the entity (Giovannoni, Maraghini and Riccaboni, 2011). However, for improving
quality services of products and to satisfy customers with them, it is essential to adopt innovative
techniques and enhancing profitability for competitive strategies. Including this, it is crucial for
ABC Ltd to increase profitability through analysing all business operations critically therefore,
actual position of entity can be gained. On the basis of this, several strategies including decision
making can be processed for improving quality services and performance of entity effectively. It
will be helpful for optimum utilization of resources and fund that affects further business
operations to make place in market for long term periodicity.
TASK 3
3.1 Purpose and nature of budgeting process
Nature of budgeting:
 At the time of making budget for company, old and past performance is always
considered by the manager.
 Budget provide data to the ABC Limited regarding net cash balance or surplus and
deficit. On the basis of this effective strategies and business decisions are made (Kaplan
and Anderson, 2013). By this, decisions of raising fund are to be made because it shows that in further year
whether money will be required or not.

Objectives of budgeting:
 Very initial objective of the budgeting is to provide financial data of the next accounting
years to the company in proper manner. After considering this aspect, ABC limited
makes several business decisions to improve its financial health.
 Another purpose is to assess business performance using variance analysis method. The
technique under which expected or forecasted data of budget are compared with the
generated is known as variance analysis.
 Through this, resources are allotted adequately among all the functions and departments
of ABC limited as it was significant for every firm.
 By this, various kinds of functions are coordinated with each other in proper ways which
is sign of effective organisational relationship (Henttu-Aho and Järvinen, 2013).
 In the different responsibility centres like cost, expense, sales or revenue, profit,
investment etc. budgeting has important place.
Moreover, budgeting is one of the highly supportive tool for ABC Limited in order to
achieve financial objectives.
3.2 Budgeting methods for ABC Ltd and its requirements
When the management is going to prepare budget for the firm then there are several kinds
of techniques or methods are undertaken. The various budgeting methods are used like
traditional, zero based, incremental, fixed, activity based etc. Without considering anyone
method manager of ABC limited not able to forecast future financial information. Very effective
and suitable method to frame budget for ABC Limited entity is activity based budgeting process.
With the help of this, management able to assess costing level of every activity and business
process exist within workplace. Very basic requirement of suggested budgeting method is to
identify problems and constraints regarding to every activity in proper ways (Bierman and Smidt,
2014). Further, fruitful decisions can be made which is sign of enhancing business performance
within the market segment. Along with this, firm can easily allot financial resources to each
business activity adequately.
3.3 Preparation of budget accounting to budgeting method
Sales budget: -
Table 5: Sales budget for ABC Ltd

Product Sales unit
Selling price per
unit
Budgeted sales
revenue
X kite 4000 60 240000
Y kite 12000 80 960000
Z kite 3000 120 360000
Production budget: -
Table 6: Production budget for ABC Ltd
X kite Y kite Z kite
Forecast unit sales 4000 12000 3000
(+) planned ending inventory
units 400 700 350
Inventories 4400 12700 3350
(-) Beginning F/G inventory 150 500 120
Product to be manufactured 4250 12200 3230
Material usage budget: -
Material purchase budget: -
Illustration 1: Material usage budget for ABC Ltd