Management Accounting Report: Costing, Budgeting and Variance Analysis

This report presents a comprehensive analysis of management accounting principles, focusing on costing methods, budgeting techniques, and variance analysis within the context of ABC Ltd. The report begins by explaining various cost classifications (variable, fixed, and semi-variable) and different costing methods (batch, job, service, contract, and process costing). It then delves into inventory valuation using LIFO, FIFO, and AVCO methods, evaluating their impact on profitability. The report proceeds to calculate a routine cost report with variance analysis, identifies potential improvements using key performance indicators, and suggests cost reduction and quality enhancement strategies. Furthermore, the report explores the budgeting process, analyzes appropriate budgeting techniques, and calculates a cash budget for ABC Ltd. Finally, it measures variances, prepares an operating statement, and identifies responsibility centers of management, providing a holistic view of financial performance and management control within the organization.

MANAGEMENT ACCOUNTING COSTING
AND
BUDGETING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Explaining various kinds of costs.....................................................................................1
1.2 Explaining different kinds of costing methods.................................................................2
1.3 Measuring costs for closing inventories by various methods...........................................2
1.4 Appropriate techniques for analysing the cost data..........................................................4
TASK 2............................................................................................................................................5
2.1 Calculating the routine cost report with variance analysis...............................................5
2.2 Potential improvements for ABC Ltd with the help of performance indicators..............6
2.3 Suggestion for reducing costs as well as improving quality and value............................6
TASK 3............................................................................................................................................6
3.1 Explaining budgeting process and its nature as well as objective....................................6
3.2 Appropriate budgeting technique for the organisation and its needs...............................7
3.3 Analysis of various budgets for ABC Ltd........................................................................7
3.4 Calculation cash budget for ABC Ltd..............................................................................9
TASK 4............................................................................................................................................9
4.1 Measuring variances.........................................................................................................9
4.2 Calculations for operating statement..............................................................................14
4.3 Report finding in context with identifying responsibility centres of management........15
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
Management accounting includes various tools that will be fruitful for organisation to
make control over the internal performance = of firm. It includes various kinds of budgeting
tools such as cost sales, purchase which in turn helps in doing variance analysis and thereby
helps in taking corrective actions within the suitable time frame. The present report is based on
the case situation of ABC Ltd, which will shed light on budgeting tools as well as suggestions
that can be considered for improving the performance of firm.
TASK 1
1.1 Explaining various kinds of costs
Costs may be presented as a sum of the expenses incurred for the production or
manufacturing, distributing as well as advertising the product. It includes various terms such as
labour hour, machine hours as well as their efforts in completing the particular activities for
producing a unit (Goddard and Simm, 2017). There have been three kinds of costs such as
variable costs, fixed costs and semi-variable cost. As per the scenario there are various expenses
incurred by the organisation for manufacturing the units which can be classified in the following
manner such as follows:
Variable cost Semi-variable cost Fixed cost
Maintenance Rent and rates Insurance
Other overhead costs Telephone bill Van purchased
Direct labour Depreciation
Direct material Computer purchased
Direct expenses
Variable cost: This kind of costs are every changing or fluctuating as per the changes in
the volume or output. Costs vary as per the units of manufacturing products, distributing
products as well as advertising them (Hopper and Bui, 2016). There have been high fluctuations
over expenses such as direct material, direct expenses, direct labour, and maintenance and
overhead expenses etc.
1

Semi-variable cost: These cost has the variable of both the costs fixed and variable which
is facilitates professionals deciding the favourable costs for production (Aouni, McGillis and
Abdulkarim, 2017). The expenses like telephone and rent will remain fixed or will be fluctuate
as per changing conditions.
Fixed cost: It denoted as the costs of product which remains same or unchanged at each
level of output. It will be same in every aspect of business operations like office rent, salary of
workers etc.
1.2 Explaining different kinds of costing methods.
Categorization of cost is based on the different kinds of business operations which is going to be
held in the organisation (Bathurst and Schwartz, 2017). Each process and piece of work has its
own costs or expenses which are need to be done as to give the proper outcome. ABC ltd.
Company has incurred various expenses which are to be categorised in the various costing
techniques such as:
Batch costing Job costing Service costing Contract costing Process costing
Telephone Overhead
expenses
Maintenance Computer
purchased
Direct labour
Rent Depreciation Van purchased Direct Material
Insurance Direct expenses
There has been classification of various expenses into these five costing categories. Batch
costing includes rents and rates as well as telephone expenses. Services costing have
maintenance, depreciation as well as insurance expenses which are the services that have been
provided by organisation apart from main functional operations (Kabinlapat and Sutthachai,
2017). Contract costing includes purchase of Van as well as Computer. For production of units
there has been use of various direct costs such as labour machinery that helps in manufacturing
the particular units.
1.3 Measuring costs for closing inventories by various methods
LIFO technique: This method helps in dispatching units at first which has last input
transaction in organisation (Mo and et.al., 2017). It will be beneficial for selling units at higher
2

rates. Rates over the products are increasing till business starts operating than there will be
fruitfulness in selling the last input material to be first. However, here are calculations for ABC
Ltd using LIFO method in selling the units:
Date Units Sales Balance Rate / unit Price
02/06/17 2000 15
06/06/17 800 1100 16500
11/06/17 1000 17
16/06/17 1400 -100 -1700
19/06/17 1000 19
26/06/17 700 300 5700
COST 2900 20500
Interpretation: As per the above calculations it has been interpreted that ABC Ltd has
sold the first unit for 700 from the total unit of 1000. Further, the remaining was 300 than 1400
units were to be sold out of 1300 which has negative inventory balance for 100. This requirement
of the 100 units is to be cover with the next sale of 800 units from 2000 of total units. However,
after calculating the prices of such materials, it has shown the profit of 20500.
FIFO technique: This method is used as the first input unit to be sold firstly at the initial
rates over such products. ABC Ltd will be able to make sales of the firstly purchased units to be
sold first (Adam and Bevan, 2016). Hence, here calculations for calculating closing inventory on
the basis of FIFO of ABC Ltd si enumerated below:
DATE UNITS SALES BALANCE RATE/UNIT PRICE
02/06/17 2000 15
06/06/17 800 1200 18000
11/06/17 1000 17
16/06/17 1400 800 13600
19/06/17 1000 19
26/06/17 700 1100 20900
COST 2900 52500
3

Interpretation: Tabular presentation pertaining to ABC Ltd shows that the products need
to be sold on the basis of first inputs. Hence, 800 units were sold out of 2000 which has the
remaining balance for 1200 which are to be sold on the rate of 15 that is 18000. Same as, rest of
the calculations, the remaining units are surpluses with the newly produced units and the further
sales are to be made with such balances. Hence, it has shown the profit out of sales of such units
for 52500.
AVCO technique: This technique is used as analysing the average costs at which the
units are to be sold (Turner, 2016). The remaining units of the products which are to be
purchased by the ABC Ltd are to be sold for the Average cost as comparing prices of two
periods.
DATE UNITS SALES RATE/UNIT
AVERAGE
RATE PRICE
02/06/17 2000 15
06/06/17 800 16 12800
11/06/17 1000 17
16/06/17 1400 18 25200
19/06/17 1000 19
26/06/17 700
COST 2900 38000
Interpretation: The above depicted table shows that ABC Ltd has made sales of the units
on the basis of applying AVCO technique. For the first remaining sales of 1200 which is to be
sold on the rate of 16 per unit which is the average rate of 15 and 17 brings value of the products
for 12800. Same with the remaining sale of 1400 will sell out for the average rate of 18 which
produces the balance of 25200. It has the final balance or profit for 38000.
1.4 Appropriate techniques for analysing the cost data
On the basis of above calculation with using several techniques such as LIFO, FIFO and
average cost method the most favourable technique is FIFO (Kelly and et.al., 2017). This
method has produces the most profitable balance for ABC Ltd such as 52500. Company will be
benefited if they use this technique as it will sell firstly produced unit at first as well as on the
4

initial rates applied over it. As compare with other techniques such as LIFO and AVCO, there is
not such appreciable balance.
TASK 2
2.1 Calculating the routine cost report with variance analysis
To,
The CEO
(ABC Ltd)
Sir,
Analysis can be made as per the given data regarding the costs and gains of ABC Ltd for
the year 2016. There has been use of various strategies of techniques to improve the
organisational performance. As per the facilitated data the measurement has been made to find
out the variances for the given data. The comparison was made between the expected costs that
have been decided by ABC Ltd and the actual expenses occurred. Thus, the table is shown
below clearly entauils the areas that demand for improvements such as:
VARIANCE ANALYSIS
Sales and production Forecasted Actual Variance Variance%
Sales revenue 20000 30000 10000 50.0
Direct material 6000 8500 2500 41.7
Direct labour 4000 8500 4500 112.5
Maintenance 1000 1400 400 40.0
Depreciation 2000 2200 200 10.0
Rent and rates 1500 1600 100 6.7
Insurance 3600 5000 1400 38.9
Total costs 18100 23200 5100 28.2
Interpretation: Variance and VR% can be calculated on the basis of comparing the
budgeted sales with actual sales that ABC Ltd has the sales revenue of 30000 with was expected
20000 it shows the favourable balance of 10000. It means the company has made gain of 10000
as well as the percentage for the variance is 50% which indicates that it has made earning over
the half cost occurred on production. Hence, it can be said that there is need to make more
strategies as well as changes in the operational functions of the organisation so there would be
5

better profitability in the future.
Thanks and Regards,
Management Accountant
(ABC Ltd.)
2.2 Potential improvements for ABC Ltd with the help of performance indicators
For the potential growth of ABC Ltd in the competitive market there is need to measure
the performance of the entity with the expected requirements. With the help of various key
performance indicators, organisation will be benefited to use various techniques. They need to
make various techniques or strategies to focus over several operational activities of the firm like
sales occurred during the financial year (Koochakpour and Tarokh, 2017). Indicating tools such
as marketing matrix, financial analysis etc. will be fruitful to know the actual condition or
standard of the business in competitive market. Company need to develop the distributional
channel as it facilitates in having the best suppliers of direct material.
2.3 Suggestion for reducing costs as well as improving quality and value
On the basis of above listed performances of the organisation it is to be recommend that
ABC Ltd must do focus over improving marketing techniques (Mo and et.al., 2017). With the
help of promotional techniques there will be increment of sales and the business will be fruitful
in reducing the costs incurred while producing a unit. They need to focus over lowering down
the labour costs used for manufacturing goods, in spite of this there must be installation of
various machineries which will lower down the expenses as well as the time consumed in
producing the units.
TASK 3
3.1 Explaining budgeting process and its nature as well as objective
Budgets can be prepared on the basis of four terms such as:
6
BUDGET PROCESS

Purpose for preparing the budgets:
 Analysing monthly performance of the organisation which helps in monitoring the
financial standard of the entity.
 Professionals of the organisation will be benefited with authenticated data that will help
in making the adequate decisions. Fruitful tool in identifying the problems and evaluating the actual performance of the
organisation.
Nature of budgeting:
 Budget must be flexible as it will be beneficial in making the decisions as per the
changing requirements.
 It helps organisation doing expenses under fixed limit or quota which better management
of funds.
3.2 Appropriate budgeting technique for the organisation and its needs
There has been use of various budgeting techniques which are to be used by ABC Ltd in
improving the operational performances (Adam and Bevan, 2016). Organisation can use several
techniques which are Zero based budgeting, incremental budgeting and Activity based
budgeting. Activity based costing helpful in enhancing the performance of the organisation as
well as improves the profitability.
3.3 Analysis of various budgets for ABC Ltd
Sales budget:
PARTICULARS X kite Y kite Z kite
sales (units) 4000 12000 3000
selling price 60 80 120
budgeted sales 240000 960000 360000
7
Planning and
analysing Approval Execution Evaluation

Production Budget for ABC Ltd:
Material budget (usage):
Material budget (purchase):
8

3.4 Calculation cash budget for ABC Ltd.
TASK 4
4.1 Measuring variances
Sales variance:
9

Material variance:
10