Management Accounting Report: Costing, Budgeting and Profitability

This report delves into the core concepts of management accounting, providing a detailed analysis of budgeting, costing methods, and profitability. It begins with an introduction to the significance and purpose of budgeting, outlining administrative procedures and the stages involved in the budgeting process. The report then classifies costs, examines the impact of absorption and marginal costing on inventory valuation and profitability, and differentiates between job, batch, process, and service costing. Break-even analysis is performed, and recommendations are made for KBC Ltd and Bata Ltd. The report includes various tables illustrating cost calculations, profitability statements, and budget analyses, offering practical insights into financial management. It concludes with a summary of key findings and provides references for further study.

MANAGEMENT ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................4
TASK 1............................................................................................................................................4
(A) Significance and purpose of budgeting................................................................................4
(B) Administrative procedure used in budgeting process ..........................................................4
© Stages of budgeting process....................................................................................................5
TASK 2............................................................................................................................................5
(A) Classification of cost............................................................................................................5
(B) Calculating fixed and variable costs.....................................................................................6
TASK 3............................................................................................................................................7
(A) Effect of absorption and marginal costing on inventory valuation......................................7
(B) Difference between job costing, batch costing and process as well as service costing........7
(C ) Preparation of profitability statement on the basis of absorption costing............................8
(D) Preparation of profitability statement on the basis of marginal costing...............................9
TASK 4............................................................................................................................................9
(A) Advice to KBC's BOD..........................................................................................................9
b) (1) Calculation of contribution to sales ratio........................................................................10
(2) Calculation of Break-even point..........................................................................................10
(3) Calculation of required sales to earn target profit worth £90000........................................10
c) Limited quantity of labor to 66000 hours.............................................................................11
d) Further availability of 6000 labor hours...............................................................................11
TASK 5..........................................................................................................................................12
(a) Types of budgeting method.................................................................................................12
1) Direct material purchase.......................................................................................................12
2) Cash budget of KBC Ltd......................................................................................................12
3) Benefits of cash budget.........................................................................................................13
4) Advise to KBC Ltd's BOD....................................................................................................13
TASK 6..........................................................................................................................................13
1) Flexed budget and variance determination...........................................................................13
2) Analysis of variance..............................................................................................................14
3) Report to KBC Ltd's Board of Directors..............................................................................14
TASK 7..........................................................................................................................................15
A. Determining Break-even point and margin of safety...........................................................15
B. Calculation of profit/Loss at 26500 pair of shoes................................................................16
C. Determining sales to earn target profit ................................................................................16
D. Determination of BEP units at advertisement campaign costs and higher selling price by
15%...........................................................................................................................................16
E. Advise to Bata Ltd................................................................................................................17
CONCLCUSION...........................................................................................................................17
REFERENCES..............................................................................................................................18

INDEX OF TABLES
Table 1: Variable cost per unit.........................................................................................................6
Table 2: North region ......................................................................................................................8
Table 3: South region.......................................................................................................................8
Table 4: South region ......................................................................................................................9
Table 5: Contribution to sales ratio................................................................................................10
Table 6: Calculation of Break-even point......................................................................................10
Table 7: Calculation of required sales...........................................................................................10
Table 8: Allotted labor hours.........................................................................................................11
Table 9: Calculation of purchase of direct material.......................................................................12
Table 10: Cash budget of KBC ltd.................................................................................................12
Table 11: Variance in flexible budget............................................................................................13
Table 12: Calculation of profit.......................................................................................................15
Table 13: Calculation of BEP .......................................................................................................15
Table 14: Calculation of profit/Loss at 26500 pair of shoes..........................................................16

INTRODUCTION
Management accounting is one of most important branch of accounting. Under this, there
are many techniques that can be used to identify firm weak and strong points. In this report
significance and purpose of budgeting are described in detail. Administrative procedure
described in the report is also discussed in the report. Along with this, stages of budget
preparation process are discussed in detail. In the middle part of the report, costs are classified
and their impact of absorption and marginal costing on inventory valuation and profitability is
discussed in detail. At end of the report, break even analysis is done and suggestions are made in
the report.
TASK 1
(A) Significance and purpose of budgeting
Budgeting have a lots of significance for the business firms because by using same top
managers maintain stiff control on expenses of an organization. If expenses are kept in firm’s
control then its profitability increases (Haiza Muhammad Zawawi and Hoque, 2010). The second
main significance of budget is that firm on the basis of forecast prepare a plan regarding various
things. Plan remain in theoretical form and in order to practically implement same some of the
figures are required to determine the extent to which managers needs to work in order to
complete their objectives. These figures are arranged in systematic form which is known as
budget. While implementing a plan budget is used by the managers to do same accurately.
Hence, it can be said that budget helps managers in successful execution of plan at minimum
cost. Main purpose of preparing a budget is to motivate employees to work hard. In order to
achieve budget objectives separate goals of each employee is decided in an organization (Lee,
2011). Employees have to achieve these goals at any cost and this motivates employees to work
hard. Hence, it can be said that budget is very helpful for an organization.
(B) Administrative procedure used in budgeting process
Under administrative procedure that is used to during budget preparation process first of
all middle level managers of an organization prepare a budget for the firm. While preparing
budget advice from different employees are taken and by considering their advice budget is
prepared by the managers. After preparation of budget same is send to top management for
approval. In respect to this middle level managers that prepare a budget give presentation before

top managers. If top managers of an organization think that there is a need for improvement in
the budget than they make recommendation and same is followed by middle level managers in
order to bring changes in the budget (Angelakis, Theriou and Floropoulos, 2010). Hence, this is
an administrative procedure that is used in budget process.
c) Stages of budgeting process
Stages that are followed in budget preparation process are described below. Collection of data from different sources- Under this stage from different sources of
internal information data is collected by the firm. This data is related to the past budgets
of the firm and actual performance that give on that budget. Hence, it can be said that it is
preliminary stage of budget preparation. Planning and preparation of draft budget- This is second important step of budget
preparation process and under this planning is prepared about the way in which budget
will be constructed by the managers (Englund and Gerdin, 2011). After preparing a
proper plan, a budget is prepared by the managers and sent to the top managers. Approval on budget- In this step of budget, approval from top managers is obtained and
in this regard budget is discussed by middle level managers with them. If top managers
propose any modification in budget then changes is done in same.
 Execution of budget- This is final stage under which budget is implemented at ground
level by the managers through their subordinates (Burritt and Schaltegger, 2010). An
attempt is made in order to conduct all business activities within boundaries determined
by the budget.
TASK 2
(A) Classification of cost
Costs are divided below on the basis of following categories: Function- On the basis of function cost is divided on the basis of various functional
departments like production, HR and finance department. Cost of all these departments is
added to compute final cost of production for the firm.
 Nature- On the basis of nature cost is divided in to two categories namely direct and
indirect cost. Direct cost included expenses that are related to production process of an
organization. On other hand, indirect expenses refer to the expenses that are not linked to

the production process of an organization. Purchase of raw material is example of direct
expenses and transportation expenses are the best example of indirect expenses.
 Behavior- It divides cost on the basis of three categories namely fixed, variable and semi-
variable cost. Fixed cost refers to the cost that remain same even production get changed.
Purchase of machine is example of fixed cost. Variable cost is a cost that keeps on
changing with change in production level (Pitkänen and Lukka, 2011). Marketing
expenses are variable expenses. Semi-variable expenses are those whose some part
remain static and some remain variable. Lease expenses are best example of semi-
variable expenses.
Illustration 1: Classification of cost
(Source:Pitkänen and Lukka, 2011)

(B) Calculating fixed and variable costs
High low method: This method pay a due attention on dividing cost of production. Cost
is a sum of fixed and variable expenses (Taipaleenmäki and Ikäheimo, 2013). It is very easy to
comprehend this method but same is unreliable. Due to simplicity of this method some of
managers use this method in their day to day practice.
Variable cost per unit:
Table 1: Variable cost per unit
Highest costs 56000
lowest costs 20000
highest unit 6100
lowest unit 2100
Variable costs per unit= Highest costs – lowest costs/ highest unit – lowest unit
Variable costs per unit= 56000-20000/6100-2100
Variable costs per unit= 36000/4000
Variable costs per unit= 9
Total fixed costs:
Highest costs – (Variable costs per unit*highest unit) = lowest costs – (Variable costs per
unit*lowest unit)
Total fixed costs= 56000-(9*6100) = 20000-(9*2100)
Total fixed costs= 1100
The major aim behind making use of high-low method is that it acts as an aid in obtaining
cost volume formula that is:
y = a + bx = y = 1100 + 9x
The main limitation of high low regression analysis is that it is very simple to use but it
does not produce reliable results.

TASK 3
(A) Effect of absorption and marginal costing on inventory valuation
The main difference between marginal and absorption costing is that in case of previous
cost only variable expenses are included in computation of cost of production. Whereas, in case
of absorption costing only both type of cost are taken in to account for computing total cost of
production. Hence, it can be said that absorption method of costing help in proper valuation of
inventory then marginal costing because in former method all cost are included which are added
in computing cost of production (Li and et.al., 2012). In marginal costing all costs are not
considered and due to this reason it does not value inventory in proper way. This is main
limitation of this method. Variable expenses like raw material expenses is the best example
which is used in marginal costing method. Whereas, in latter method fixed cost is excluded.
Hence, it can be said that absorption costing method helps in better valuation of inventory.
Amount of profit in case of both methods are shown as absorption costing method and marginal
costing method. If inventory increases in firm then absorption costing method will show less
profit. If inventory elevates then in case of marginal costing three will be higher profit. Hence,
different profit is revealed by different method of costing.
(B) Difference between job costing, batch costing and process as well as service costing Job costing- It is a costing method in which as per customer specification good are
produced. Hence, costing of each batch is done differently. In this all fixed and variable
costs are added to identify cost of each job. Batch costing- It is a method in which cost of each batch is computed by adding all fixed
and variable expenses (Batch cost, 2016). The summed value of cost is divided by the
number of units produced. By doing so per unit cost is computed under batch costing
method. The main difference between job and batch costing is that in previous method
goods are produced as per order of customers. But in latter method good are produced by
the firm according to its own discretion. Process costing- In this cost of each step of production process is identified and added.
By doing so cost of production is computed by the manager under process costing
method.
 Service costing- It is a costing method that is used by the firms that provide services
instead of producing goods (Christ and Burritt, 2013). Hence, this method of costing is

different from other methods of costing. The main difference between process costing is
that it is often used in manufacturing industry. Whereas, service costing is often used in
service industry.

(C ) Preparation of profitability statement on the basis of absorption costing

Table 2: North and south profitability
Gross profit North South Total
Standard 736000 240000