Management Accounting Report: Performance Analysis of Sparky Ltd
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This report provides a comprehensive analysis of management accounting principles applied to the case of Sparky Ltd, an electrical services company. It begins by classifying different types of costs and explores various costing methods, including job, batch, contract, process, and service costing. The report then delves into cost calculation techniques, such as LIFO, FIFO, and weighted average costing, and analyzes cost data using weighted average cost of capital. Furthermore, the report focuses on preparing and analyzing routine cost reports, utilizing performance indicators to identify potential improvements, and suggesting strategies to reduce costs, enhance value, and improve quality for Sparky Ltd. The report also explains the purpose and nature of the budgeting process, selects appropriate budgeting methods, prepares budgets, including a cash budget, and calculates variances to identify possible causes and recommend corrective actions. Finally, the report prepares an operating statement reconciling budgeted and actual results and reports findings to management in accordance with identified responsibility centers.

Management Accounting
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Table of Contents
INTRODUCTION................................................................................................................................3
TASK 1.................................................................................................................................................3
1.1 Classifying different types of cost.............................................................................................3
1.2 Different types of costing methods............................................................................................6
1.3 Calculation of cost using appropriate techniques......................................................................7
1.4 Analyse cost data using appropriate technique..........................................................................8
TASK 2.................................................................................................................................................9
2.1 Prepare and analyse routine cost reports....................................................................................9
2.2 Use performance indicators to identify potential improvements of Sparky Ltd......................10
2.3 Suggest improvements to reduce cost, enhance value and quality of Sparky Ltd...................10
TASK 3...............................................................................................................................................11
3.1 Explain the purpose and nature of the budgeting process........................................................11
3.2 Select appropriate budgeting methods and its need ................................................................12
3.3 Prepare budgets according to the chosen budgeting methods.................................................13
3.4 Prepare a cash budget..............................................................................................................14
TASK 4...............................................................................................................................................15
4.1 Calculate variances and identify possible causes and recommend corrective actions............15
4.2 Prepare an operating statement reconciling budgeted and actual results.................................16
4.3 Report findings to the management in accordance with identified responsibilities centres....16
CONCLUSION..................................................................................................................................17
REFERENCES...................................................................................................................................18
Index of Tables
Table 1: Inventory valuation as per LIFO, FIFO and AVCO...............................................................7
Table 2: Inventory valuation as per weighted average cost .................................................................9
Table 3: Calculation of weighted average price...................................................................................9
Table 4: Cost report of Sparky Ltd.......................................................................................................9
Table 5: Production budget of Sparky Ltd..........................................................................................13
Table 6: Material purchase budget of Sparky Ltd..............................................................................13
Table 7: Cash budget of Sparky Ltd...................................................................................................14
Table 8: Calculation of variance of Sparky Ltd..................................................................................15
Table 9: Operating statement reconciling budgeted and actual results of Sparky Ltd.......................16
Illustration Index
Illustration 1: Classification of cost .....................................................................................................4
Illustration 2: Cost classification on the basis of behaviour ................................................................5
Illustration 3: Inventory valuation techniques .....................................................................................7
Illustration 4: Closing inventory of Bike Ltd. .....................................................................................8
2
INTRODUCTION................................................................................................................................3
TASK 1.................................................................................................................................................3
1.1 Classifying different types of cost.............................................................................................3
1.2 Different types of costing methods............................................................................................6
1.3 Calculation of cost using appropriate techniques......................................................................7
1.4 Analyse cost data using appropriate technique..........................................................................8
TASK 2.................................................................................................................................................9
2.1 Prepare and analyse routine cost reports....................................................................................9
2.2 Use performance indicators to identify potential improvements of Sparky Ltd......................10
2.3 Suggest improvements to reduce cost, enhance value and quality of Sparky Ltd...................10
TASK 3...............................................................................................................................................11
3.1 Explain the purpose and nature of the budgeting process........................................................11
3.2 Select appropriate budgeting methods and its need ................................................................12
3.3 Prepare budgets according to the chosen budgeting methods.................................................13
3.4 Prepare a cash budget..............................................................................................................14
TASK 4...............................................................................................................................................15
4.1 Calculate variances and identify possible causes and recommend corrective actions............15
4.2 Prepare an operating statement reconciling budgeted and actual results.................................16
4.3 Report findings to the management in accordance with identified responsibilities centres....16
CONCLUSION..................................................................................................................................17
REFERENCES...................................................................................................................................18
Index of Tables
Table 1: Inventory valuation as per LIFO, FIFO and AVCO...............................................................7
Table 2: Inventory valuation as per weighted average cost .................................................................9
Table 3: Calculation of weighted average price...................................................................................9
Table 4: Cost report of Sparky Ltd.......................................................................................................9
Table 5: Production budget of Sparky Ltd..........................................................................................13
Table 6: Material purchase budget of Sparky Ltd..............................................................................13
Table 7: Cash budget of Sparky Ltd...................................................................................................14
Table 8: Calculation of variance of Sparky Ltd..................................................................................15
Table 9: Operating statement reconciling budgeted and actual results of Sparky Ltd.......................16
Illustration Index
Illustration 1: Classification of cost .....................................................................................................4
Illustration 2: Cost classification on the basis of behaviour ................................................................5
Illustration 3: Inventory valuation techniques .....................................................................................7
Illustration 4: Closing inventory of Bike Ltd. .....................................................................................8
2

INTRODUCTION
Management accounting is the process of evaluating and examining the business
performance so as to frame strategic policies and take decisions related to gain better results (Malmi
and Granlund, 2009). Businesses make use of cost sheets to take effective decisions and enlarge
profitability. Moreover, budgeting is also an important aspect of management accounting to predict
future trend by the analysis of historical results. Sparky Ltd is a company which employs large
number of electricians for rendering electricity services to the customers. In the present report,
various types of cost and costing method as well as techniques will be applied to ascertain cost of
each unit.. In addition, suggestions will be given for the cost curtailment and enhancing value and
quality of Sparky Ltd. Furthermore, various methods to construct budget will be identified to
determine the most appropriate technique through which Sparky Ltd can prepare an effective
budget. It enables the firm to analysis variance by comparing set budgeted targets with the actual
results. Through this, Sparky Ltd can take decisions to eliminate adverse variances and achieve
targeted goals effectively.
TASK 1
1.1 Classifying different types of cost
Cost refers to the expenditures incurred by Sparky Ltd to deliver electricity services to the
customers. There are different types of costs which are explained below:
Illustration 1: Classification of cost
Behaviour:
3
Management accounting is the process of evaluating and examining the business
performance so as to frame strategic policies and take decisions related to gain better results (Malmi
and Granlund, 2009). Businesses make use of cost sheets to take effective decisions and enlarge
profitability. Moreover, budgeting is also an important aspect of management accounting to predict
future trend by the analysis of historical results. Sparky Ltd is a company which employs large
number of electricians for rendering electricity services to the customers. In the present report,
various types of cost and costing method as well as techniques will be applied to ascertain cost of
each unit.. In addition, suggestions will be given for the cost curtailment and enhancing value and
quality of Sparky Ltd. Furthermore, various methods to construct budget will be identified to
determine the most appropriate technique through which Sparky Ltd can prepare an effective
budget. It enables the firm to analysis variance by comparing set budgeted targets with the actual
results. Through this, Sparky Ltd can take decisions to eliminate adverse variances and achieve
targeted goals effectively.
TASK 1
1.1 Classifying different types of cost
Cost refers to the expenditures incurred by Sparky Ltd to deliver electricity services to the
customers. There are different types of costs which are explained below:
Illustration 1: Classification of cost
Behaviour:
3
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Illustration 2: Cost classification on the basis of behaviour Fixed cost: Expenditures which remain constant regardless to the changes in production
level are called fixed cost like depreciation and insurance. Semi-variable cost: These expenses remain fixed up to a certain level of production and
thereafter it will increase according to the rise in Sparky Ltd's manufacture like electricity
bill (VanDerbeck, 2012).
Variable cost: These expenditures are directly related to the production and it will be either
increase or decrease with the rise or decline in the output level of Sparky Ltd like material
and labour cost.
Nature: Direct cost: Expense which directly can be traced to the production unit is called direct cost.
For instance, material which is used in production to get finished product is known as direct
material. While, labour which is direct engaged in the production process of Sparky Ltd is
called direct cost (Whitecotton, Libby and Phillips, 2013).
Indirect cost: It is just inverse to the direct cost and this expenditure cannot be allocated
directly to each production unit such as depreciation, factory supervision, supervisor's salary,
glue, nails, lubricating oil etc.
Function: Factory cost: All the expenses which Sparky Ltd incurs for the production of goods and
services are called as factory cost like factory lighting, unproductive wages etc (Chen and
4
level are called fixed cost like depreciation and insurance. Semi-variable cost: These expenses remain fixed up to a certain level of production and
thereafter it will increase according to the rise in Sparky Ltd's manufacture like electricity
bill (VanDerbeck, 2012).
Variable cost: These expenditures are directly related to the production and it will be either
increase or decrease with the rise or decline in the output level of Sparky Ltd like material
and labour cost.
Nature: Direct cost: Expense which directly can be traced to the production unit is called direct cost.
For instance, material which is used in production to get finished product is known as direct
material. While, labour which is direct engaged in the production process of Sparky Ltd is
called direct cost (Whitecotton, Libby and Phillips, 2013).
Indirect cost: It is just inverse to the direct cost and this expenditure cannot be allocated
directly to each production unit such as depreciation, factory supervision, supervisor's salary,
glue, nails, lubricating oil etc.
Function: Factory cost: All the expenses which Sparky Ltd incurs for the production of goods and
services are called as factory cost like factory lighting, unproductive wages etc (Chen and
4
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et.al., 2009). Administrative cost: It includes office expenditures like executive, clerical cost, stationery,
CEO's salary etc.
Marketing and distribution cost: Expenditures incurred to sale products in the market like
sales commission, advertisement, free sample, storage etc. are called as marketing cost
(Darvas and et.al., 2012).
On the basis of above cost classification, distinguish between direct and indirect cost is
clear. With regards to Sparky Ltd, cost has been classified as under;
Particulars Type of cost
Wages of electrician Direct
Depreciation on the tools used by electrician Indirect
Salary of Sparky Ltd's accountant Indirect
Cost of cable and other material used on the job Direct
Rent of the premises where Sparky Ltd stores its inventories Indirect
1.2 Different types of costing methods
Job costing- job costing involves the accumulation of the cost of raw material, labour, and
overhead for a specific job. The approach is a good tool for tracing specific cost related to
individual jobs and examining them to see that it can be reduced. This kind of costing is most
appropriate when work is accepted, to requirement of the customer.
Batch costing- It is related with identification and assignment of costs related to producing a
set amount of goods. This includes all fixed and variable costs for producing the batch. Batch
costing is the cluster of costs incurred when a group of product or services are produced and which
cannot be identified to specific product or services (Garrison and et.al., 2010).
Contract costing: Contract costing is the method applied to determine the cost of
construction work performed according to customer specification. The main features of contract
costing is that the contract terminates on the completion. And also work is undertaken on a different
location other than contractors’ premises.
Process Costing- Process costing is method used to ascertain the cost of production of each
process, operation, or stage of manufacture. Under this processes are carried on having one or more
of features. The product of one process become the material of another process or operation and
production is done through continuous flow of identified product (Costing methods, 2015). The
plant and machinery are shut down for maintenance.
5
CEO's salary etc.
Marketing and distribution cost: Expenditures incurred to sale products in the market like
sales commission, advertisement, free sample, storage etc. are called as marketing cost
(Darvas and et.al., 2012).
On the basis of above cost classification, distinguish between direct and indirect cost is
clear. With regards to Sparky Ltd, cost has been classified as under;
Particulars Type of cost
Wages of electrician Direct
Depreciation on the tools used by electrician Indirect
Salary of Sparky Ltd's accountant Indirect
Cost of cable and other material used on the job Direct
Rent of the premises where Sparky Ltd stores its inventories Indirect
1.2 Different types of costing methods
Job costing- job costing involves the accumulation of the cost of raw material, labour, and
overhead for a specific job. The approach is a good tool for tracing specific cost related to
individual jobs and examining them to see that it can be reduced. This kind of costing is most
appropriate when work is accepted, to requirement of the customer.
Batch costing- It is related with identification and assignment of costs related to producing a
set amount of goods. This includes all fixed and variable costs for producing the batch. Batch
costing is the cluster of costs incurred when a group of product or services are produced and which
cannot be identified to specific product or services (Garrison and et.al., 2010).
Contract costing: Contract costing is the method applied to determine the cost of
construction work performed according to customer specification. The main features of contract
costing is that the contract terminates on the completion. And also work is undertaken on a different
location other than contractors’ premises.
Process Costing- Process costing is method used to ascertain the cost of production of each
process, operation, or stage of manufacture. Under this processes are carried on having one or more
of features. The product of one process become the material of another process or operation and
production is done through continuous flow of identified product (Costing methods, 2015). The
plant and machinery are shut down for maintenance.
5

Service or operating costing - Operating costing is a mix of job costing and process costing
and it is used in different situations. A product initially uses the different raw material, and is then
finished using a common process that is the same of group of products. And a product initially has
identical processing for a group of product, and is then finished using more product specific
procedure (Kumar, 2010).
1.3 Calculation of cost using appropriate techniques
Illustration 3: Inventory valuation techniques
LIFO (Last in First Out): As per this costing technique, Bike Ltd will sell bikes from the
last inflow of goods. Henceforth, the older inventory which came prior will remain in the closing
stock (Whalley, 2015).
FIFO (First in First Out): According to this technique, inventory which has been received
first will be sold prior to the other. Thus, closing inventory will be the part of last inflow of goods
(Mustafa and Talab, 2016).
Average costing: In this method, average price is taken for the inventory received by Bike
Ltd to sell goods to the customers. In such respect, average cost is simply the average of all the
prices at which goods have been received by Bike Ltd .
Table 1: Inventory valuation as per LIFO, FIFO and AVCO
LIFO FIFO AVCO
Bike sold
January, 05 2 Bike* $50 = $100 2 Bike* $50 = $100 2 Bike* $50 = $100
6
and it is used in different situations. A product initially uses the different raw material, and is then
finished using a common process that is the same of group of products. And a product initially has
identical processing for a group of product, and is then finished using more product specific
procedure (Kumar, 2010).
1.3 Calculation of cost using appropriate techniques
Illustration 3: Inventory valuation techniques
LIFO (Last in First Out): As per this costing technique, Bike Ltd will sell bikes from the
last inflow of goods. Henceforth, the older inventory which came prior will remain in the closing
stock (Whalley, 2015).
FIFO (First in First Out): According to this technique, inventory which has been received
first will be sold prior to the other. Thus, closing inventory will be the part of last inflow of goods
(Mustafa and Talab, 2016).
Average costing: In this method, average price is taken for the inventory received by Bike
Ltd to sell goods to the customers. In such respect, average cost is simply the average of all the
prices at which goods have been received by Bike Ltd .
Table 1: Inventory valuation as per LIFO, FIFO and AVCO
LIFO FIFO AVCO
Bike sold
January, 05 2 Bike* $50 = $100 2 Bike* $50 = $100 2 Bike* $50 = $100
6
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January, 10 1 Bike*$50 = $50 1 Bike*$50 = $50 1 Bike*$50 = $50
January, 25 3 Bikes *$70 = $210 2 Bikes *$50 = $100
1 Bike *$70 = $70
3 Bike *$60(See
working note) = $180
Closing
Inventory
2 Bikes * $50 = $100
2 Bikes *$70 = $140
Total = $140+$100 =
$240
4 Bikes *$70 = $280 4 Bikes *$60
= $240
Working note:
Average price: ($50+$70)/2
= $120/2
= $60
1.4 Analyse cost data using appropriate technique
Weighted average cost of capital: As per this method, Bike Ltd will sell goods on weighted
average prices in the market. In this regard, weighted average prices can be computed by dividing
total cost of the goods received from total number of bikes. Thus, this method is considered quite
superior than LIFO, FIFO and average costing because it considers both inventory items and total
weighted cost.
7
LIFO FIFO AVCO
220
230
240
250
260
270
280
240
280
240
Illustration 4: Closing inventory of Bike Ltd.
January, 25 3 Bikes *$70 = $210 2 Bikes *$50 = $100
1 Bike *$70 = $70
3 Bike *$60(See
working note) = $180
Closing
Inventory
2 Bikes * $50 = $100
2 Bikes *$70 = $140
Total = $140+$100 =
$240
4 Bikes *$70 = $280 4 Bikes *$60
= $240
Working note:
Average price: ($50+$70)/2
= $120/2
= $60
1.4 Analyse cost data using appropriate technique
Weighted average cost of capital: As per this method, Bike Ltd will sell goods on weighted
average prices in the market. In this regard, weighted average prices can be computed by dividing
total cost of the goods received from total number of bikes. Thus, this method is considered quite
superior than LIFO, FIFO and average costing because it considers both inventory items and total
weighted cost.
7
LIFO FIFO AVCO
220
230
240
250
260
270
280
240
280
240
Illustration 4: Closing inventory of Bike Ltd.
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Table 2: Inventory valuation as per weighted average cost
Weighted average cost
Bike sold
January, 05 2 Bike* $50 = $100
January, 10 1 Bike*$50 = $50
January, 25 3 Bike *$64.29(See working note) = $192.87
Closing Inventory 4 Bikes *$64.29
= 257.16
Working note;
Table 3: Calculation of weighted average price
Quantity Rate Total cost
Purchase on 1st January 5 Bikes 50 250
Sale on 5th January 2 Bikes 50 100
Sale on 10th January 1 Bike 50 100
Balance 2 bike 50 100
Purchase on 25th
January
5 bike 70 350
Weighted average cost 7 Bike 64.29 450
TASK 2
2.1 Prepare and analyse routine cost reports
Cost report comprises different type of costs that Sparky Ltd, incur to deliver services to the
customers. It is essential for the management to analyse cost reports to control their production cost
and increase profitability (Drury, 2013). Here, Sparky Ltd's cost report has been prepared and
compared with budgeted targets as under:
Table 4: Cost report of Sparky Ltd
PARTICULARS BUDGETED ACTUAL VARIANCE
Direct material 10500 12000 -1500
8
Weighted average cost
Bike sold
January, 05 2 Bike* $50 = $100
January, 10 1 Bike*$50 = $50
January, 25 3 Bike *$64.29(See working note) = $192.87
Closing Inventory 4 Bikes *$64.29
= 257.16
Working note;
Table 3: Calculation of weighted average price
Quantity Rate Total cost
Purchase on 1st January 5 Bikes 50 250
Sale on 5th January 2 Bikes 50 100
Sale on 10th January 1 Bike 50 100
Balance 2 bike 50 100
Purchase on 25th
January
5 bike 70 350
Weighted average cost 7 Bike 64.29 450
TASK 2
2.1 Prepare and analyse routine cost reports
Cost report comprises different type of costs that Sparky Ltd, incur to deliver services to the
customers. It is essential for the management to analyse cost reports to control their production cost
and increase profitability (Drury, 2013). Here, Sparky Ltd's cost report has been prepared and
compared with budgeted targets as under:
Table 4: Cost report of Sparky Ltd
PARTICULARS BUDGETED ACTUAL VARIANCE
Direct material 10500 12000 -1500
8

Direct labour 8000 7500 500
Direct overhead 1200 1400 -200
Total variable cost 19700 20900 -1200
Fixed overheads 5000 5800 -800
Total costs 24700 26700 -2000
Interpretation:
As per the report, it can be seen that target material cost of Sparky Ltd was decided to
£10500 whereas actual material cost incurred to £12000. Thus, adverse variance of £1500
has been arisen which is not good. Hence, Sparky Ltd, should negotiate with the suppliers to
reduce their material cost.
Direct labour indicates favourable variance to £500 which demonstrates that Sparky Ltd
paid less wages to the labours as compare to set targets which is good.
Overhead reflects adverse variances of £200 which may be arisen due to ineffective
management control and monitoring.
Fixed overhead implies unfavourable variance of £800 hence, it can be controlled by regular
monitoring of the operations.
2.2 Use performance indicators to identify potential improvements of Sparky Ltd.
To successfully measure the performance of a business, identification and focus on the right
areas of a business, is very important. Finding the areas which make the business successful and
then deciding how best to measure performance in those areas. Sparky Ltd make use of various KPI
for identify and analysis company performance. The most important indicator used by sparky are as
follows- Cost of goods sold- By identifying all production costs for the product, company can get a
better idea of both what its product mark-up should look like and what its actual profit
margin is (Steven, 2014). Sales and profit - Increase in sales will increase the profits for the business of the company.
There is a direct relation with sales to profit. Number of customers - Company can also identify and analysis the performance by
measuring the number of customer within the company. By determining the number of
customer it have gained and lost, it can further understand whether company is meeting the
customer’s needs (Parmenter, 2015). Percentage of product defects - Take the number of defective units and divide it by the total
9
Direct overhead 1200 1400 -200
Total variable cost 19700 20900 -1200
Fixed overheads 5000 5800 -800
Total costs 24700 26700 -2000
Interpretation:
As per the report, it can be seen that target material cost of Sparky Ltd was decided to
£10500 whereas actual material cost incurred to £12000. Thus, adverse variance of £1500
has been arisen which is not good. Hence, Sparky Ltd, should negotiate with the suppliers to
reduce their material cost.
Direct labour indicates favourable variance to £500 which demonstrates that Sparky Ltd
paid less wages to the labours as compare to set targets which is good.
Overhead reflects adverse variances of £200 which may be arisen due to ineffective
management control and monitoring.
Fixed overhead implies unfavourable variance of £800 hence, it can be controlled by regular
monitoring of the operations.
2.2 Use performance indicators to identify potential improvements of Sparky Ltd.
To successfully measure the performance of a business, identification and focus on the right
areas of a business, is very important. Finding the areas which make the business successful and
then deciding how best to measure performance in those areas. Sparky Ltd make use of various KPI
for identify and analysis company performance. The most important indicator used by sparky are as
follows- Cost of goods sold- By identifying all production costs for the product, company can get a
better idea of both what its product mark-up should look like and what its actual profit
margin is (Steven, 2014). Sales and profit - Increase in sales will increase the profits for the business of the company.
There is a direct relation with sales to profit. Number of customers - Company can also identify and analysis the performance by
measuring the number of customer within the company. By determining the number of
customer it have gained and lost, it can further understand whether company is meeting the
customer’s needs (Parmenter, 2015). Percentage of product defects - Take the number of defective units and divide it by the total
9
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number of units produced in the time frame company is examining. This will give the
percentage of defective product within the business.
Employee turnover rate - By finding the ETR, firm can identify the number of employees
who have departed the company and divide it by the average number of employees. If
company have a high ETR than it should start employing strategies which can improve the
workplace culture and environment.
2.3 Suggest improvements to reduce cost, enhance value and quality of Sparky Ltd.
To reduce cost of the company- For the purpose of reducing the cost, firm is required to
identify the major cost centres. These centres includes marketing, manufacturing, finance,
administration. This can be done by assessing the company’s profit and loss statements for the last
six month and by ranking all the expenses from highest to lowest. After that users should identify
the areas where company could save cost (Bodenheimer, 2013). By focusing on cost saving tactics
in areas where organization can see the most reward. Management can also reduce the costs by
eliminating unnecessary costs and wastages. And avoiding over specifications such as high quality
for low quality component.
To enhance the value - In order to enhance the value, firm can maintain multiple profit
centres and keep a diversified product services base so that profits can be diversified. It can
diversify revenue and profits and also it can reduce the shareholder loan. It should maintain a
business plan and keep it current. Even if the management is not thinking of existing business then
they can plan for something new. They should plan for next move towards more or continue
success. Firm can grow human capital and its intangible asset for enhancing the value (Libby and
Lindsay, 2010).
To enhance the quality- For measuring the quality of performance, company is required to
use the TQM philosophy. Under this method a management approach is adopted for long term
success through customer satisfaction (Parmenter, 2015). Quality cost are those incurred in excess
of those that would have been incurred if the product were built or the service performed exactly for
the right time. TQM help to get greater customer loyalty, market share improvement, higher prices,
increase productivity.
TASK 3
3.1 Explain the purpose and nature of the budgeting process
Budgeting: Meaning: It is a financial plan which accumulates predicted income and
revenues for the future period so as to determine profitability. It is a management and planning tool
which provide huge assistance to ensure optimum utilization of resources.
10
percentage of defective product within the business.
Employee turnover rate - By finding the ETR, firm can identify the number of employees
who have departed the company and divide it by the average number of employees. If
company have a high ETR than it should start employing strategies which can improve the
workplace culture and environment.
2.3 Suggest improvements to reduce cost, enhance value and quality of Sparky Ltd.
To reduce cost of the company- For the purpose of reducing the cost, firm is required to
identify the major cost centres. These centres includes marketing, manufacturing, finance,
administration. This can be done by assessing the company’s profit and loss statements for the last
six month and by ranking all the expenses from highest to lowest. After that users should identify
the areas where company could save cost (Bodenheimer, 2013). By focusing on cost saving tactics
in areas where organization can see the most reward. Management can also reduce the costs by
eliminating unnecessary costs and wastages. And avoiding over specifications such as high quality
for low quality component.
To enhance the value - In order to enhance the value, firm can maintain multiple profit
centres and keep a diversified product services base so that profits can be diversified. It can
diversify revenue and profits and also it can reduce the shareholder loan. It should maintain a
business plan and keep it current. Even if the management is not thinking of existing business then
they can plan for something new. They should plan for next move towards more or continue
success. Firm can grow human capital and its intangible asset for enhancing the value (Libby and
Lindsay, 2010).
To enhance the quality- For measuring the quality of performance, company is required to
use the TQM philosophy. Under this method a management approach is adopted for long term
success through customer satisfaction (Parmenter, 2015). Quality cost are those incurred in excess
of those that would have been incurred if the product were built or the service performed exactly for
the right time. TQM help to get greater customer loyalty, market share improvement, higher prices,
increase productivity.
TASK 3
3.1 Explain the purpose and nature of the budgeting process
Budgeting: Meaning: It is a financial plan which accumulates predicted income and
revenues for the future period so as to determine profitability. It is a management and planning tool
which provide huge assistance to ensure optimum utilization of resources.
10
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Purpose:
The main aim of constructing budgets by Sparky Ltd is to estimate probable revenues and
expenditures for the forthcoming period. By this, management can forecast business
profitability for the future year.
Budgets works as a financial framework which will surely assist Sparky Ltd's managers in
their decisions making process (Bonazzi and Iotti, 2014).
Comparison between budgeted targets and actual results enable management to identify
deviations whether positive or negative. Through this, managers can take strategic decisions
to eliminate adverse results and enjoy success.
It helps to assure maximum utilization of business resources to manage cost and enhance
profitability.
Nature of budgeting process:
Initially, Sparky Ltd's managers will estimate future income by evaluating historical
budgets. It can be determined by identifying potential sales and other operational income.
Thereafter, managers will analyse the money require to be spent on future operational
activities like purchase material, labour's wages, salary etc (Lukka and Modell, 2010).
After this, income will be compared with the expenditures to determine the net position in
terms of deficit or surplus.
In the end, once budget will be reviewed and modifications will be done, if required. After
necessary alteration, final budget will be communicated to all the departments who will be
require to manage their operations to accomplish set target goals and objectives.
3.2 Select appropriate budgeting methods and its need
There are different types of budgeting methods available to Sparky Ltd, to construct their
budget to prepare future plan. Here, some of the methods which company can use, are described
below:
Static budgeting: It is also called fixed budgeting method because it is prepare only for a
specified production level. Henceforth, it does not reflect revenues and expenditures at different
output level of Sparky Ltd. While, in the present dynamic environment, it is not always possible to
produce target number of units in the real market (Modell, 2010). Thus, comparative analysis can
not be done between standard targets and actual performance to eliminate adverse results.
Flexible budgeting: This budget consist prediction of probable income and spendings for
more than one production level. Further, it can be flexed as per actual production of Sparky Ltd.
Thus, it provide benefits to compare actual cost with the budgeted targets in order to examine
11
The main aim of constructing budgets by Sparky Ltd is to estimate probable revenues and
expenditures for the forthcoming period. By this, management can forecast business
profitability for the future year.
Budgets works as a financial framework which will surely assist Sparky Ltd's managers in
their decisions making process (Bonazzi and Iotti, 2014).
Comparison between budgeted targets and actual results enable management to identify
deviations whether positive or negative. Through this, managers can take strategic decisions
to eliminate adverse results and enjoy success.
It helps to assure maximum utilization of business resources to manage cost and enhance
profitability.
Nature of budgeting process:
Initially, Sparky Ltd's managers will estimate future income by evaluating historical
budgets. It can be determined by identifying potential sales and other operational income.
Thereafter, managers will analyse the money require to be spent on future operational
activities like purchase material, labour's wages, salary etc (Lukka and Modell, 2010).
After this, income will be compared with the expenditures to determine the net position in
terms of deficit or surplus.
In the end, once budget will be reviewed and modifications will be done, if required. After
necessary alteration, final budget will be communicated to all the departments who will be
require to manage their operations to accomplish set target goals and objectives.
3.2 Select appropriate budgeting methods and its need
There are different types of budgeting methods available to Sparky Ltd, to construct their
budget to prepare future plan. Here, some of the methods which company can use, are described
below:
Static budgeting: It is also called fixed budgeting method because it is prepare only for a
specified production level. Henceforth, it does not reflect revenues and expenditures at different
output level of Sparky Ltd. While, in the present dynamic environment, it is not always possible to
produce target number of units in the real market (Modell, 2010). Thus, comparative analysis can
not be done between standard targets and actual performance to eliminate adverse results.
Flexible budgeting: This budget consist prediction of probable income and spendings for
more than one production level. Further, it can be flexed as per actual production of Sparky Ltd.
Thus, it provide benefits to compare actual cost with the budgeted targets in order to examine
11

positive or negative variances. This in turn, firm can take remedial actions in order to remove
unfavourable deviations and accomplish target goals.
Incremental budgeting: In this method, every year budget can be constructed by using
historical period budget as a basis. In this, past income and expenditures can be increased by either
a fixed percentage or a specified amount (Zero based budgeting vs Incremental budgeting, 2012).
Simplicity is the benefits of it but still, it does not make evaluation of potential operations and
increase unnecessary spendings which are its disadvantage.
Zero-based budgeting: In this, budget is prepared by taking zero as base. Sparky Ltd's
managers need to determine future activities in order to predict potential income and spendings
(Shelby, 2013). It includes an analysis of real market situations henceforth, it is comparatively a
superior technique than incremental method.
From all of the above, zero base budgeting is consider best budgeting method which helps to
ensure optimum utilization of resources through efficient allocation. Through this, Sparky Ltd can
manage their cost and enlarge profitability to a greater extent. As a result, operational performance
can be enhanced.
3.3 Prepare budgets according to the chosen budgeting methods
Production budget: This budget helps to ascertain potential number of units which Sparky
Ltd has to produce in order to fulfil customer demands timely (Modell, 2010). It has been prepared
here as under:
Table 5: Production budget of Sparky Ltd
Particulars April May June
Forecasted sales 40000 47000 62000
Add: Closing inventory (15% of the
following month's sales) 7050 9300 11700
Total 47050 56300 73700
Less: Opening inventory 5500 7050 9300
Required production 41550 49250 64400
Interpretation: As per the budget, it can be seen that Sparky Ltd, maintains 15% of next
month's sales in the closing inventory. So that, it can meet sudden increase in market demand.
Estimated sales will be increase from 40000 units to 62000 units whilst initial period opening stock
is 5500 units. However, sales for the month of July has been estimated to 78000 units hence, closing
12
unfavourable deviations and accomplish target goals.
Incremental budgeting: In this method, every year budget can be constructed by using
historical period budget as a basis. In this, past income and expenditures can be increased by either
a fixed percentage or a specified amount (Zero based budgeting vs Incremental budgeting, 2012).
Simplicity is the benefits of it but still, it does not make evaluation of potential operations and
increase unnecessary spendings which are its disadvantage.
Zero-based budgeting: In this, budget is prepared by taking zero as base. Sparky Ltd's
managers need to determine future activities in order to predict potential income and spendings
(Shelby, 2013). It includes an analysis of real market situations henceforth, it is comparatively a
superior technique than incremental method.
From all of the above, zero base budgeting is consider best budgeting method which helps to
ensure optimum utilization of resources through efficient allocation. Through this, Sparky Ltd can
manage their cost and enlarge profitability to a greater extent. As a result, operational performance
can be enhanced.
3.3 Prepare budgets according to the chosen budgeting methods
Production budget: This budget helps to ascertain potential number of units which Sparky
Ltd has to produce in order to fulfil customer demands timely (Modell, 2010). It has been prepared
here as under:
Table 5: Production budget of Sparky Ltd
Particulars April May June
Forecasted sales 40000 47000 62000
Add: Closing inventory (15% of the
following month's sales) 7050 9300 11700
Total 47050 56300 73700
Less: Opening inventory 5500 7050 9300
Required production 41550 49250 64400
Interpretation: As per the budget, it can be seen that Sparky Ltd, maintains 15% of next
month's sales in the closing inventory. So that, it can meet sudden increase in market demand.
Estimated sales will be increase from 40000 units to 62000 units whilst initial period opening stock
is 5500 units. However, sales for the month of July has been estimated to 78000 units hence, closing
12
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