HND Business - Management Accounting: Costing and Budgeting Report

This report provides a comprehensive analysis of management accounting principles, focusing on cost analysis, costing methods, and budgeting techniques. The report examines different types of costs, including fixed, variable, direct, and indirect costs, as well as various costing methods such as unit costing, job costing, and process costing. It further analyzes cost data, comparing variable and absorption costing methods under different production and sales scenarios. The report also delves into performance indicators, ways to reduce costs, enhance value and quality, and the purpose and nature of the budgeting process. It includes a detailed cash budget for Antonio Ltd, variance calculations, and an operating statement to deduce budget profit. Finally, it provides recommendations for corrective actions and presents findings to management, offering valuable insights into financial accounting and reporting.

Management Accounting

Table of Contents
INTRODUCTION ..........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Different types of costs.........................................................................................................1
1.2 Different types of costing methods.......................................................................................2
1.3 Costing techniques................................................................................................................2
1.4 Analyse the cost data.............................................................................................................3
TASK 2............................................................................................................................................5
2.1 Cost report and analysis........................................................................................................5
2.2 Various performance indicators used to identify potential improvements...........................6
2.3 Ways to reduce costs, enhance value and quality.................................................................6
TASK 3 ...........................................................................................................................................7
3.1 Purpose and nature of budgeting process..............................................................................7
3.2 Budgeting method and its need.............................................................................................8
3.3 Budget preparation................................................................................................................9
3.4 Preparation of cash budget for Antonio Ltd........................................................................10
TASK 4..........................................................................................................................................11
4.1 Variance calculation, identify possible causes and recommend corrective actions............11
4.2 Operating statement to deduce budget profit for the month of May...................................12
1.3 Report the findings to management....................................................................................13
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................15

Index of Tables
Table 1: Variable costing for Bittern Ltd.........................................................................................3
Table 2: Absorption costing for Bittern Ltd....................................................................................3
Table 3: Variable costing for Bittern Ltd.........................................................................................4
Table 4: Absorption costing for Bittern Ltd....................................................................................4
Table 5: Variable costing for Bittern Ltd.........................................................................................5
Table 6: Absorption costing for Bittern Ltd....................................................................................5
Table 7: Material purchase budget...................................................................................................9
Table 8: Trade payable budgets.......................................................................................................9
Table 9: Cash budget of Antonio for six months...........................................................................10
Table 10: Standard and actual results............................................................................................11
Table 11: Calculation of variances................................................................................................11
Table 12: Operating statement to deduce budget profit for May...................................................12

INTRODUCTION
Cost accounting is a process of analysing and evaluating other alternatives in a business.
It provides detailed information about a product which can be used by the management for
making decisions. It can be helpful in managing and controlling cost in the organisation. In cost
accounting, the activities are generally classified on the basis of products, process and functions
(Costing methods, 2015). The report is based on cost accounting system of Bittern Ltd. The
company has decided to review its system and improve the profitability of their business.
Furthermore, analysis of cost information, methods to reduce costs, forecasting, budgeting and
monitoring techniques used by Bittern Ltd has also been included in the report.
TASK 1
1.1 Different types of costs
The costs can be classified into different categories:
Fixed and variable costs: Fixed costs remain same even if the production increases or
decreases. For example, rent, salaries, insurgence etc. While variable costs change according to
the change in the production volume (DRURY, 2013). It includes wages, inventory, packaging
costs etc. Bittern Ltd. is a manufacturing company so they have to consider both the costs
because it may affect price of the product.
Direct and indirect costs: The costs which can be directly associated to the product,
project or department are called direct costs (Kaplan and Atkinson, 2015). On the other hand,
indirect costs cannot be directly associated to any cost object. For example, salaries, quality
control costs, depreciation etc.
Material, labour and overhead costs: The cost to buy raw material for Bittern Ltd is
called as material cost. On the other hand the cost of labour includes wages, payrolls and other
benefits of the employees (Ellul and et.al., 2015). Overhead costs include all the other costs apart
from material and labour costs. For example, legal fees, taxes, repairs, utilities and travel
expenditures.
Production, administration and distribution costs: The costs which are related to
production of goods are called as the production costs. On the other hand, administration
expenses include cost of management and their activities like stationery, telephone etc (Salako
and Yusuf, 2016). Distribution costs include all the cost which is incurred to sell the product. For
example, discounts, market research and commission.
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1.2 Different types of costing methods
The different types of costing methods which can be used by Bittern Ltd are as follows:
Unit costing: It is helpful in calculating the price of a unit which are produced by the
continuous activity (Passarini and et.al., 2014). It is also known as a method of single output
costing.
Job costing: Under job costing, the cost is ascertained according to the job. These jobs
are different from each other in terms of specification, scope and requirements (Wagner, 2015).
Contract costing: Contract costing involves jobs which require huge investments and are
for the long time frame. It is generally used by those companies which are involved in
construction projects (Christ and Burritt, 2015). These projects require more than one accounting
period for the completion.
Batch costing: It is used when the products are manufactured in batches. These batches
have units which are similar in nature and design.
Process costing: Those products which go through many processes in the company are
calculated by using the process costing method (Kielbowicz, 2015). It takes into consideration all
the processes in the production. Bittern Ltd can use process costing in their business as it will
help them to ascertain cost at each level of production.
Multiple costing: Multiple costing is used for the products which has assembled parts.
These products include televisions, electronic gadgets and cars. The cost is ascertained to each
component as well as the final output (Rieckhof, Bergmann and Guenther, 2013).
1.3 Costing techniques
The main types of costing techniques are:
Uniform costing: All the companies in an industry use same accounting and costing
techniques. This standardized system helps in comparing with various companies (Scott, 2014).
Marginal costing: It is very useful for manufacturing companies as the costs are
allocated only to the factors of production (Kinney and Raiborn, 2012). For example, material,
direct expenses, labour and variable overheads. It gives clear picture as all the relevant expenses
of the business are taken into account.
Standard costing: In standard costing, the costs are determined in advance through
budgets and it is compared with the actual performance of the business (Waters, 2015). The
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deviation from the budgeted figures is identified and suitable actions are taken to remove it.
Bittern Ltd can use standard costing for their company.
Historical costing: Historical costing includes post and continuous costing. It compares
the actual costs with the previous year’s data (Schmidt and Nakajima, 2013).
Direct costing: It includes all the direct costs which have incurred in production and
other functions. It does not take into consideration the indirect costs that have been incurred.
Absorption costing: In absorption costing, all the variable and fixed costs are used to
find out the value of the product. It is also known as full costing technique (Boyns, Anderson and
Edwards, 2014).
1.4 Analyse the cost data
1. Stable unit levels of production, sales and inventory
Table 1: Variable costing for Bittern Ltd
Variable costing t1 t2 t3
Sales 25000 25000 25000
Production material 10000 10000 10000
Distribution costs 1000 1000 1000
Labour (Variable csts) 2000 2000 2000
Total costs 13000 13000 13000
Profitability 12000 12000 12000
Cost per unit 13 13 13
Closing stock (Units) 100 100 100
Closing stock (in value) 1300 1300 1300
Table 2: Absorption costing for Bittern Ltd
Absorption costing t1 t2 t3
Sales 25000 25000 25000
Production material 10000 10000 10000
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Distribution costs 1000 1000 1000
Labour 7000 7000 7000
Overheads 4000 4000 4000
Total costs 22000 22000 22000
Profitability 3000 3000 3000
Cost per unit 22 22 22
Closing stock (Units) 100 100 100
Closing stock (in value) 2200 2200 2200
2. Stable unit level of sales, but fluctuating unit levels of production and inventory
Table 3: Variable costing for Bittern Ltd
Variable costing t1 t2 t3
Sales 20000 20000 20000
Production material 15000 8000 7000
Distribution costs 1000 1000 1000
Labour 3000 1600 1400
Total costs 19000 10600 9400
Profitability 1000 9400 10600
Cost per unit 12.6666666667 13.25 13.4285714286
Closing stock (Units) 600 400 100
Closing stock (in value) 7600 5300 1342.8571428572
Table 4: Absorption costing for Bittern Ltd
Absorption costing t1 t2 t3
Sales 20000 20000 20000
4

Production material 15000 8000 7000
Distribution costs 1000 1000 1000
Labour 8000 6600 6400
Overheads 4000 4000 4000
Total costs 28000 19600 18400
Profitability -8000 400 1600
Cost per unit
18.66666666
67 24.5
26.28571428
57
Closing stock (Units) 600 400 100
Closing stock (in value) 11200 9800
2628.571428
5714
3. Stable unit level of production, but fluctuating unit levels of sales and Inventory
Table 5: Variable costing for Bittern Ltd
Variable costing t1 t2 t3
Sales 10000 24000 26000
Production material 10000 10000 10000
Distribution costs 600 400 100
Labour 2000 2000 2000
Total costs 12600 12400 12100
Profitability -2600 11600 13900
Cost per unit 12.6 12.4 12.1
Closing stock (Units) 600 400 100
Closing stock (in value) 7560 4960 1210
Table 6: Absorption costing for Bittern Ltd
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Absorption costing t1 t2 t3
Sales 10000 24000 26000
Production material 10000 10000 10000
Distribution costs 600 400 100
Labour 7000 7000 7000
Overheads 4000 4000 4000
Total costs 21600 21400 21100
Profitability -11600 2600 4900
Cost per unit 21.6 21.4 21.1
Closing stock (Units) 600 400 100
Closing stock (in value) 12960 8560 2110
TASK 2
Enclosed in power point presentation.
2.1 Cost report and analysis
John Lewis is a departmental store which is operating in throughout UK. It sells sports,
home ware, fashion and electrical items. The steps to prepare cost report are:
 John Lewis company has to gather all the information about the different costs that bare
associated with the business.
 All the costs have to be segregated into into different categories like production,
administration, distribution, material, labour etc (Hopper, 2013).
 The next step is to decide profit margins. Pricing decisions can be taken with the help of
cost reports.
 The management has to prepare a report which has all the costs related to the product
(Sulong, Sulaiman and Norhayati, 2015). It will help them to find out the total cost of the
product and the contribution by each element.
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 The cost report can be used to compare the data from the previous reports or from the
standard budgets (Kamala and et.al., 2015). If the actual figures of the company is less
than the budgets, it shows that John Lewis company has been efficient in their operations.
2.2 Various performance indicators used to identify potential improvements
Some of the performance indicators which can be used by John Lewis company are:
Profitability: Cost accounting and budgeting can increase the performance of the
company (García-Unanue, Felipe and Gallardo, 2015). it can be an indication for John Lewis
company that they have been performing well.
Costs: John Lewis company can identify the different costs that are associated to the
product. Fixed costs will continue to incur even if there is no production. So, it is important for
the company to compare the cost of their product to find out the difference.
Efficiency: John Lewis company can compare the efficiency of their company from their
previous data. The labour costs and the output difference can be evaluated to see the difference
in performance. Efficiency can be a useful measure of performance for John Lewis company
(Hocke, Meyer and Lorscheid, 2015).
Productivity: Budgeting and standard costing helps a company to keep a track of their
productivity. It ensures that the factors of production yield the maximum results with least of
wastage. If the labour is not productive then it will affect the revenues. So, productivity has to
be maintained to ensure growth of the business (Costing methods, 2015).
Employee satisfaction: If employees are satisfied then they will perform to the best of
their abilities. Costing can allow management to take important decisions about the labour cost.
2.3 Ways to reduce costs, enhance value and quality
A company cannot grow if they are unable to reduce their costs. They have to
continuously develop and grow their business (How to reduce costs, 2015). The quality of the
products have to be maintained and carefully monitored. It is for the same reason that many
companies have Quality control system in their organisation.
Ways to reduce costs:
 Ensuring that the sales volume reach to its break even. At this stage the fixed costs starts
declining. It will increase the profits and cost of the products will reduce.
 Refining and taking cost cutting decisions in the company (Sulong, Sulaiman and
Norhayati, 2015).
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 Rearranging the asset allocation
 Budgeting and using standard costing to compare the performance of the business.
 The factors of production like material, labour and overheads have to controlled.
 Better utilization of manpower, material and machines. It will help the company to
reduce its cost (Rieckhof, Bergmann and Guenther, 2013).
Ways to enhance quality and value:
 Maintaining the same standard of products
 Implementation of quality control and budgetary system in the company (Kinney and
Raiborn, 2012).
 Use of advanced techniques and technologies for the improving quality of the products.
 Effective monitoring and control system should be developed.
 Improvements in the efficiency and productivity of the employees.
These steps will allow an organisation to improve their quality, value and their costs will
reduce (Schmidt and Nakajima, 2013). Cost reports can give essential details to the management
so that they can make changes in the policies and functions of the business.
TASK 3
3.1 Purpose and nature of budgeting process
Budgeting process allows a business to set standards for revenues and costs for the future.
It has financial goal for the company which they have to achieve in the next one year (Kaplan
and Atkinson, 2015). The major purpose for preparation of budgets by Antonio Ltd are as
follows:
 It helps in decision making and management of resources.
 Budgets can be used to monitor the performance of the business. The actual expenditure
is compared with the budgeted data to measure the performance (Hocke, Meyer and
Lorscheid, 2015). It allows the company to take decisions against the variations in the
actual performance.
 It can be used for financial planning.
 It allows the business to forecast their revenues, sales and expenses in the future.
Nature of budgeting process:
 Budgeting is a continuous process. It has to be done every year.
 It is used to forecast the future revenues and expenses.
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 It is prepared on annual basis (García-Unanue, Felipe and Gallardo, 2015).
 Budgets are flexible in nature. They can be altered according to the changes in the
business.
 It shows deficits and surplus from the actual expenditure.
 Budgets are used as standards of performance.
3.2 Budgeting method and its need
Antonio Ltd can use the following budgeting methods for their company:
Zero based budgeting: Managers considers all the different alternatives to perform an
activity. It requires in depth analysis and evaluation. A manager has to study all the processes of
the business and compare it with other alternatives (Comparing budgeting techniques, 2015).
Many new techniques and methods are introduced with the help of Zero based budgeting. The
main activities in Zero based budgeting are:
 Defining an objective
 Analysis of cost of various activities
 Finding out the alternatives to reach the objective
 Formulating the measure of performance
 Monitoring and control
Antonio Ltd can use it to make changes in the organisation and start evaluation from a
zero base. They can remove the obsolete and efficient techniques to improve the performance of
the company (Hopper, 2013). Zero based budgeting takes into consideration the changes in the
business environment every year.
Incremental budgeting method: It is a traditional budgeting method. The budgets are
prepared taking the data of the current year's performance and incremental amounts are added to
it. It takes into consideration inflation, planned growth, reductions in costs and expenses.
Incremental budgets are easy to prepare and understand (Boyns, Anderson and Edwards, 2014).
They need less time to prepare and are less expensive than other budgeting process. It is needed
to compare the performance of the business from its past. They give standards of performance
which ensures quality of the products throughout their lives.
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3.3 Budget preparation
Material budget is used to forecast the requirements of raw materiel, time period and the
quantity needed (Wagner, 2015). It ensures that the business has adequate inventory throughout
the year.
Table 7: Material purchase budget
Material purchase budget June July August September October November
Material required in units 400 500 600 600 700 750
Add: Closing inventory 500 500 500 500 500 500
900 1000 1100 1100 1200 1250
Less: Opening inventory 500 500 500 500 500 500
Material quantity need to
be purchased 400 500 600 600 700 750
Material price 8 8 8 8 8 8
Total material value 3200 4000 4800 4800 5600 6000
Trade payables helps a company to prepare funds for the payment.
Table 8: Trade payable budgets
Particulars June July August September October November
Trade payable for
material 3200 4000 4800 4800 5600 6000
Trade payable for
production overheads 280 320 320 320 320 400
Total trade payables 3480 4320 5120 5120 5920 6400
3.4 Preparation of cash budget for Antonio Ltd
Cash budgets helps a company to manage the inflow and outflows of the cash. It helps
them to maintain a liquidity position and to avoid cash crunch situations (Passarini and et.al.,
2014). It gives an idea about the cash position of a company. All the organisations have to
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maintain certain level of liquidity. Too little cash or too much cash can affect the regular
working of the business.
Table 9: Cash budget of Antonio for six months
Particulars July August September October November December
Opening cash at
bank 7500 13840 27680 53560 104620 208220
Cash inflow
Cash sales 4800 6000 7200 7800 8400 9600
Credit sales for
two months 2800 3200 3200 4000 4800 5200
Total cash
inflow 7600 9200 10400 11800 13200 14800
Total cash
available for use 15100 23040 38080 65360 117820 223020
Cash outflow
Raw material
purchase at one
month credit 3200 4000 4800 4800 5600 6000
Direct production
expenses
including labour 3000 3600 3600 4200 4500 4500
Production
overheads
excluded
depreciation 1560 1600 1600 1600 1920 1920
New item of plant 2200 2200 2200
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Advertisement
costs 1000 1500
Total cash
outflow 8760 9200 12200 14300 14220 12420
Net cash flow 6340 13840 25880 51060 103600 210600
Closing cash
balance 13840 27680 53560 104620 208220 418820
The ways to remove cash deficiency in cash budgets are:
 Reducing the expenses on the products.
 Increasing the sales of the products
 Maintaining an optimal level of cash
 Using the cash efficiently.
TASK 4
4.1 Variance calculation, identify possible causes and recommend corrective actions
Variances are the difference between the budgeted expenditure and the actual expenditure
of Toscanini Ltd. It can be favourable or unfavourable.
Table 10: Standard and actual results
Name of item Standard rate Total standard
costs (4000
units)
Actual rate Total actual
costs
(3500 units)
Material 0.4 kg at £2.40 1600Kg @ £3840 0.407 kg at £2.40 1425 kg @ £3420
Labour £8 per hour for 6
minute
400 hours @
£3200
5.91 minutes @
£7.8 per hour
345 hours @
£2690
Fixed overheads - £4800 - 4900
Sales £4 £16000 £3.95 13820
Table 11: Calculation of variances
Formula Calculation Variance
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Material variance
Material price
variance (MPV)
(SP-AP)*AQ (2.4-2.4)*1425 Nil
Material usage
variance (MUV)
(SQ-AQ)*SP [(3500*0.4)-
(1425)]*2.40
60(A)
Labour variance
Labour rate variance
(LRV)
(SR-AR)*SH (8-7.8)*350 units 70(f)
Labour efficiency
variance (LEV)
(SH-AH)*SR (350-345)*8 40(f)
Overhead variance Budgeted fixed
overhead – fixed
overhead variance
(4800 – 4900) 100 (A)
Sales volume
variance (SVV)
(4160 – 3040) 1120 (A)
Sales price variance
(SPV)
(AQ*SP)-Actual
sales
(14000 – 13820) 180 (A)
Material: It can be seen form the above table that Material price variance (MPV) is nil
while Material usage variance (MUV) is 60 averse. It shows the company has not used their raw
material properly. It has made the total of material variance negative (Salako and Yusuf, 2016).
Toscanini Ltd. has not been able to maintain the budgeted standards as a result their performance
has been below the budgets.
Labour: Labour rate variance (LRV) is 70 favourable while Labour efficiency variance
(LEV) is 40 favourable. It shows efficiency of the employees (Scott, 2014). The labour has
performed better than the budgeted data.
Overheads: The fixed overheads have increased from the budgets. It means that the
expenses of the company has increased which is not a good situation for them. It indicates
inefficiency in the operations.
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Sales: The sales of the company has dropped from £16000 to £119820. Toscanini Ltd
has to promote their products in the market and adopt a better marketing strategy.
4.2 Operating statement to deduce budget profit for the month of May
Table 12: Operating statement to deduce budget profit for May
Variances Favorable (£) Adverse (£) Net (£)
Sales volume variance 1120
Sales price variance 180
Material price variance Nil
Material usage variance 60
Labor rate variance 70
Labor efficiency variance 40
Fixed overhead expenditure
variance
100
Total variances 110 F 1460 A
Total net variance 1350 (A)
Budgeted operating profit 4160
(-) Total net variance -1350
Actual operating profit 2810
1.3 Report the findings to management
To: Board of Directors, Toscanini Ltd
From: ABC Financial analysts
Date: 16th May, 2016
It can be seen from the analysis that there are many variances in the operating statement of the
company. The efficiency of the production department has reduced and it is important for them
to control it. They have to ensure that there is less of wastage of the raw materials. The
activities of the employees have to be monitored by the company. The production manager
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should ensure about the quality and inspection of the raw materials. There should be new
policies to ensure that less defective material is purchased by the employees. The sales have
also dropped and it is important for the marketing manager to introduce new ways to promote
the products. The demand has dropped in the market which has made it difficult for the
company to achieve its target. Labour efficiency has been satisfactory but overall inefficiency
of the company has reduced the turnover.
Thank You
CONCLUSION
It can be concluded from the above report that costing methods and cost reports are very
essential for the company. The pricing decision cannot be taken without the help of cost analysis.
Standard costing can be used by the company to maintain a level of performance in the market. It
can be used to compare the actual performance of the business with the budgeted data. The
variations from the analysis depicts the limitations of the company which has to be removed by
the management. Cost accounting is continuous process which is carried out every year. All the
changes in the policy and methods are done considering the cost analysis of the business.
Furthermore, a company can achieve its desired goal if it monitors the performance and cost of
their business. It will help them to grow and gain the competitive advantage in the industry. It is
also an indicator of the success of the business.
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REFERENCES
Books and journal
Boyns, T., Anderson, M. and Edwards, J.R., 2014. British Cost Accounting 1887-1952 (RLE
Accounting): Contemporary Essays from the Accounting Literature. Routledge.
Christ, K.L. and Burritt, R.L., 2015. Material flow cost accounting: a review and agenda for
future research. Journal of Cleaner Production.108. pp.1378-1389.
DRURY, C.M., 2013. Management and cost accounting. Springer.
Ellul, A. and et.al., 2015. Is historical cost accounting a panacea? Market stress, incentive
distortions, and gains trading. The Journal of Finance. 70(6). pp.2489-2538.
García-Unanue, J., Felipe, J.L. and Gallardo, L., 2015. Using action research to achieve the
implementation of cost accounting: the case of the public sports organizations at local
level. Systemic Practice and Action Research.28(2). pp.111-123.
Greenberg, M.D., Helland, E., Clancy, N. and Dertouzos, J.N., 2013. Fair Value Accounting,
Historical Cost Accounting, and Systemic Risk. Rand Corporation.
Hocke, S., Meyer, M. and Lorscheid, I., 2015. Improving simulation model analysis and
communication via design of experiment principles: an example from the simulation-based
design of cost accounting systems. Journal of Management Control. 26(2-3). pp.131-155.
Hopper, T., 2013. 7 Cost Accounting, Control and Capitalism. Critical Histories of Accounting:
Sinister Inscriptions in the Modern Era, 11, p.129.
Kamala, P. and et.al., 2015. Principles of Cost Accounting.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Kielbowicz, R.B., 2015. Cost accounting in the service of policy reform: Postal rate making,
1875-1926. Social Science Quarterly. 75. pp.284-99.
Kinney, M. and Raiborn, C., 2012. Cost accounting: Foundations and evolutions. Cengage
Learning.
Passarini, K.C. and et.al., 2014. Assessment of the viability and sustainability of an integrated
waste management system for the city of Campinas (Brazil), by means of ecological cost
accounting. Journal of Cleaner Production. 65. pp.479-488.
Rieckhof, R., Bergmann, A. and Guenther, E., 2013. Material flow cost accounting in
management control systems–a systematic literature review. InProceedings of EMAN-EU
2013 Conference on Material Flow Cost Accounting (pp. 22-25).
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