Management Accounting Report: Cost Analysis for Smart Looks Ltd

This report provides a comprehensive analysis of management accounting principles applied to Smart Looks Limited, a textile company. It begins by classifying costs based on various criteria, including fixed, variable, and semi-variable costs, and computes total and per-unit production costs. The report then explores different stock valuation methods (FIFO, LIFO, and weighted average) and their impact on the cost of goods sold. Key Performance Indicators (KPIs) are used to analyze business performance, and strategies for reducing expenses and enhancing quality are discussed. The report further delves into budgeting, including different techniques and budget statements, such as a cash budget. Finally, it applies marginal costing to determine selling prices and calculates estimated and actual margins, culminating in a report to the board of directors based on the budget.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Separation of expenses on the basis of different criteria..................................................1
1.2 Computation of total and per unit cost of production.......................................................2
1.3 Analysis of cost data.........................................................................................................3
1.4 Stock valuation methods for costing................................................................................5
1. FIFO...................................................................................................................................5
2. LIFO...................................................................................................................................5
3. Weighted Average Method.................................................................................................6
TASK 2............................................................................................................................................6
2.1 Report of COGS using three stock valuation methods.....................................................6
2.2 Use of KPI for analysing business performance..............................................................8
2.3 Strategies which are helpful for reduce expenses and enhance quality..........................10
TASK 3..........................................................................................................................................10
3.1 Budget and its importance for Smart Looks Limited.....................................................10
3.2 Different techniques for preparing budget.....................................................................11
3.3 Various budget statements for Smart Looks Limited.....................................................12
3.4 Cash budget for chosen firm...........................................................................................14
TASK 4..........................................................................................................................................15
4.1 and 4.2 Use of marginal costing method to compute selling price and Calculating
estimated as well as actual margin.......................................................................................15
4.3 Report to board of directors on the basis of budget........................................................17
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................20

INTRODUCTION
In the firm management plays an integral role whether it is related to financial or non
financial aspects. By using different management techniques the company able to achieve its
various numbers of goals and objectives in very effectual and smooth way. In the current study
there is Smart Looks Limited firm is selected which operates and run its business in the textile
industry. It produces and prepare cloths and garments for the retail stores and shops. The present
study describes about the different criteria of costing which helps to segregate number of
expenses. It shows about the budget and its significant in the firm for estimating future data and
taking highly effectual business decisions. On the basis of current report, the reader is able to
know different budget statements of Smart Looks Limited.
TASK 1
1.1 Separation of expenses on the basis of different criteria
Fixed cost Variable costs Semi-variable costs
Factory rent Material for cloths Factory supervisor's wages
Office rates Power for sewing machinery Telephone
Factory heating Packaging material Delivery drivers pay
Fixed costs- Cost incurred in an entity which is unaffected with the changes in the sales units of
an entity as this will not increase or decreases with the time (Bowling, 2014). Fixed costs is
always remained constant throughout the making of product as it is occurred in the business.
Variable costs- This cost is fluctuating in nature as this gets changed with a minute changes
takes places in the overall sales unit of an entity like smart Looks Ltd. It has parallel relationship
between sales unit of an entity and the variable cost incurred. Material cost is variable costs
which gets changes with various sales units included in the business.
Semi-variable costs- It is that kind of costs which has both characteristics of variable and fixed
nature of costs in order to give the status of semi-variable costs in the business enterprise.
Delivery dealer's pay comes under this particular category as fixed amount of dealer's rates along
with changes takes places in the future in the rates. Factory bill fall under this stream in which
amount is fixed but the units used by the firm will increases the utility bill of the factory.
1

Other ways to classify costs
Direct costs- It is regarded as that type of costs which is directly attributable to a product as this
costs is included in the making of a product. For example raw material required for
manufacturing different products.
Indirect costs- Costs spend by an individual are indirectly related to a specific product will
contribute indirectly in a product. For instance, maintenance costs incurred in an entity such as
oiling and lubricating used in improving the current conditions of machines. Indirect costs will
include maintenance of oil which helps in boosting the current machinery in order to generate
higher outcomes in the near future as this is beneficial for an enterprise.
Opportunity costs- It is that type of costs incurred in an entity which states that one alternative
sacrificed for taking the next best alternative in an enterprise It is incurred in the firm which is
incurred in a firm where an entity owner sacrificed one cost for next best alternative are regarded
as the opportunity costs for the business.
1.2 Computation of total and per unit cost of production
In the total cost those all the expenses used and added which incur in the firm in direct or
indirect manner. Furthermore, unit cost helps to the firm to analyse that for producing each cloth
how many expenses are comes into consideration. On the basis of various expenses total and unit
cost computed as below:
2

Less Variable Cost(units) 15,000 20,000 25,000
Material@ £5 £75,000.00 £100,000.00 £125,000.00
Labour@ £6 £90,000.00 £120,000.00 £150,000.00
Total Variable Cost £165,000.00 £220,000.00 £275,000.00
Fixed Cost £50,000.00 £50,000.00 £50,000.00
Total Cost £215,000.00 £270,000.00 £325,000.00
Unit Cost £14.33 £13.50 £13.00
From the above table it can be interpreted that to produce total 15000, 20000 and 25000
number of units total cost of production incur is worth of 215000, 270000 and 325000
respectively. In the total cost variable expenses (material and labour) and fixed charges are
included and determined.
In addition to this, unit cost of 15000, 20000 and 25000 production items is worth of
14.33, 13.50 and 13.00 GBP respectively. On the basis of such all the cost of one unit the Smart
Looks Company is able to determine and take decision of selling price.
1.3 Analysis of cost data
For producing number of units and cloths there are different cost incur which are such as
variable, fixed, semi-variable etc. In the current scenario different costs are shown with the help
of graphical presentation are as below:
Total variable costs:
15000 20000 25000
0
50000
100000
150000
200000
250000
300000
165000
220000
275000
3

It can be analysed from the above graph that to produce 15000, 20000 as well as 25000
cloths total variable cost comes into consideration are like as 165000, 220000 and 275000 GBP
respectively. On the basis of such kinds of expenses Smart Looks able to calculate overall cost of
the production.
Fixed costs:
15000 20000 25000
0
10000
20000
30000
40000
50000
60000
50000 50000 50000
In order to manufacture and stitch 15000 units fixed cost incur is worth of 50000 GBP.
Apart from this, when the production units increases such as 20000 as well as 25000 cloths cost
remain same and constant which is 50000 GBP (Macintosh and Quattrone, 2010). The reason is
that to fixed cost has nature of constant and not changes as number of products and services.
Total cost of production:
4

15000 20000 25000
0
50000
100000
150000
200000
250000
300000
350000
215000
270000
325000
The above graphical presentation describes that for stitching and make ready total 15000
and 20000 cloths total cost incur is worth of 215000 and 270000 GBP. In addition to this, when
level of products and cloths enhances up to 25000 units then total cost increase which is worth of
325000 GBP.
1.4 Stock valuation methods for costing
1. FIFO
2. LIFO
5

3. Weighted Average Method
TASK 2
2.1 Report of COGS using three stock valuation methods
6

Cost of goods sold is essential for an entity as it will include in the income statements of
an entity as it is essential to know the amount of costs to be incurred by an entity in the near
future. It is essential to know in advance as this decreases the sales and the revenue of an
enterprise which in turn reduces the current profit amount entered by an enterprise in a particular
year. FIFO: The method and technique of stock valuation at which the stock which comes at
first time that will be sold on the spot or first time (Macintosh and Quattrone, 2010). As
per the name, first in first out it clearly states that as stock occurs that will be immediately
sold in the market. In the current case value of stock of Smart Looks on the basis of FIFO
7

is worth of 12000 GBP at which production and unit cost is such as 500, 800, 700 units
and 20, 24, 26 GBP respectively. LIFO: The other technique of stock valuation is last in first out at where the firm sell
those inventory which is comes at last time. Due to this nature most of the companies are
not using he method because of not giving clear and actual value of the whole inventory.
In the current scenarios on the basis of LIFO method value of overall stock is worth of
15600 GBP.
 Weighted average method: According to the respective method of stock valuation the
company determine average value which is helpful to take better decisions. From the
above table it can be assessed that average stock value of Smart Looks Limited is 21000
GBP where ending stock level is such as 600 units. Stock of the ending is 600 units only
because among total 2000 units of production there are 1400 sold up the year end.
2.2 Use of KPI for analysing business performance
When the company and firm going to analyse that in which direction and trend its
business is performing there are different ways and indicators used by it. On the basis of various
types of key performance indicators the management able to assess that firm has increasing trend
or decreasing in the overall industry where it operating. The KPIs are such as quality, balanced
scorecard, satisfaction level of users, benchmarking etc. Apart from this, on the basis of different
kinds of financial informations the Smart Looks able to assess it business performance which are
such as variance analysis, cost, profit level etc (Kaplan and Atkinson, 2015). In the firm when
profitability ratios increases consistently then it can be said that firm is able to attract more
number of buyers and generate higher profit. By using quality aspect, when there are quality of
the cloths and products is better and higher as compare to previous year then it can be clearly
said that Smart Looks is performing well. In addition to this, the balanced scorecard is one of the
effectual tool because it helps to analyse performance in terms of four aspects which are such as
customer, internal business process, financial as well as learning and growth.
Customer Experience- The success factor such as customer experience helps to know that
whether business performance of Smart Looks is better and in the profitable ways or not. If it
able to provide higher quality of the cloths and products as compare to previous year then it can
be clearly said that Smart Looks is performing well and customers having more interest towards
8

it. Apart from this, if the potential and new customer's level of loyalty raise towards the Smart
Looks entity improve then assessed that it performs well. The two critical success factors under
the customer experience are like as increasing satisfaction level of consumers along with the
quality of product. Moreover, the key performance indicators are such as sales and turnover of
the Smart Looks. If these both the factors improve then management determine that company
growing and performing well in the industry.
Suppliers and products quality- In this if the suppliers provide higher and the bets quality of
products as well as services to the Smart Looks then able to perform well in the industry of
cloths and garments. Here on the basis of quality of raw materials provided by suppliers business
performance is to be measured in the better ways. CSFs are such as improve quality of the cloth
and garments as well as attract more number of suppliers. The KPIs in the suppliers and quality
aspect are such as attract more of customers and increase the revenue with the help of higher
quality of cloths.
Operational efficiency- Apart from this, another critical success factors is like as operational
efficiency where it has been measured that for producing and manufacturing cloths management
is up to which extent producing as well as efficient. Higher the level and extent of productivity
and efficiency of the operational department lead to improve the business performance of Smart
Looks Limited. Improve the production process and reduce number of the damage products
which are the critical success factors. Furthermore, the performance will be measure in form of
declining the total production cost and enhance the efficiency of individuals and production
employees.
Reducing maintenance spending- In order to reach up to goals and become success the
management needs to reduce and decrease the level of costs which comes under the maintenance
of various equipments and other associated things. Lower the maintenance charges helps to
Smart Looks for enhancing level of success and business performance both. Mainly two kinds of
the CSFs in this current element are such as optimum utilisation of production equipments by
reducing extra load on them and eliminate damaged products. In addition to this, key
performance indicators at there are like as increase the production level using same quantity of
raw fabrics and increase quality of the products by eliminating the damaged items.
9

Cost reduction and profitability increase- Decreasing the costs and different number of
expenses helps to the management in order to become success because lower the costs lead to
improve the profitability in the industry. The critical success factors by which respective aspect
will be achieve are like as use the strategies for controlling over expenses and marketing cloths
for attracting higher consumers. Apart from this, KPIs to measure such factors are such as extent
of total cost of production and revenue generation.
2.3 Strategies which are helpful for reduce expenses and enhance quality
In the firm level of expenses are sometimes increases and at that position it is necessary
to reduce it. In addition to this, to improve level of quality is also one of the important aspect for
firm which helps to enhance consumer's attraction and generate more sales and profit. By using
cost management and risk management strategies Smart Looks able to reduce those costs which
are incurred in production and hamper profitability ratios (Islam and Hu, 2012). To improve
quality of the products and cloths effective strategies are like as use of innovative techniques, six
sigma, total quality management, lean production etc. By using and applying such kinds of
techniques and strategies Smart Looks Limited able to determine wastage products and eliminate
them from operation process. Along with this with the help of new and innovative techniques the
management able to make the production process effective by which cost reduce and quality
become highly better. The six sigma is also one of the best method for enhancing the production
quality by which cost ultimately reduces. When the manager of Smart Looks Limited apply the
six sigma then level or proportion of defective products will be comes up to 0.06% behind total
10000 units.
TASK 3
3.1 Budget and its importance for Smart Looks Limited
The statement and account which highly helpful for the selected company to assess and
identify those informations which will be occur in current and further financial period. By using
budget the management can know future data in terms of different aspects like as sales, cost,
incomes, expenditures, profit etc. In the corporate world, most of the companies are use budget
for identify future performance of business (10 Benefits of Budgeting Your Money, 2013). It has
key importances for the company which are expressed as below:
10