Management Accounting Report: Analysis of Smart Looks Ltd

This report provides a comprehensive analysis of management accounting principles as applied to Smart Looks Ltd, a clothing retailer. It begins by classifying costs into fixed, variable, and semi-variable categories, followed by a discussion of total cost computation and inventory costing methods like FIFO, LIFO, and average cost. The report then delves into costing analysis, including a graphical presentation of cost structures and the cost of goods sold performance. Furthermore, it examines performance indicators useful for measuring company performance and discusses methods for reducing costs and managing quality. Budgeting is addressed with an emphasis on sales and cash budgets, along with a comparison of budgeted and actual profits, and the application of marginal costing for a new product line. The report concludes with an overall assessment of the company's financial performance and recommendations for improvement.

Management
Accounting
1

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Classifying the cost................................................................................................................3
1.2 Computation of total cost.......................................................................................................4
1.3 Inventory costing methods.....................................................................................................5
1.4 Costing analysis.....................................................................................................................6
TASK 2............................................................................................................................................6
2.1 Cost of goods sold performance............................................................................................6
2.2 Performance indicators helpful in measuring performance of the company.........................7
2.3 Reduction in cost and managing the quality..........................................................................7
TASK 3............................................................................................................................................8
3.1 Budget and its significance....................................................................................................8
3.2 Methods for preparing budgets..............................................................................................9
3.3 Budget for the three months to 30 June...............................................................................11
Sales budget: It is an important for any business. Without budgeting company can't take record
of progress and or performance improvement. First step for company while creating while
budgeting is creating sales budget A sales budget estimates sales in unit as well as estimates
profit in each sale. Organization carefully analyses economic condition, marketing condition,
production capacity and selling expenses while preparing sales budget...................................11
3.4 Cash budget..........................................................................................................................13
TASK 4..........................................................................................................................................14
4.1 Marginal costing methods and price determination for new product line...........................14
4.2 Comparison of budgeted and actual profit for Smart Looks Ltd.........................................14
4.3 Budgetary report..................................................................................................................15
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16
1

INTRODUCTION
Management accounting is multidisciplinary approach that is useful for managing all
business operations and enhancing efficiencies by using decision making tools. It is helpful to
improve quality services and preparing strategies to gain competitive advantages. The present
report is based on understanding different management accounting tools as costing and
budgeting for forecasting and decision making process for Smart Looks Ltd. It is clothing retailer
manufacturing company of UK that makes clothes for different retailers. In this regard, several
costing methods and budgeting for purchasing and selling goods are to be obtained. Along with
this, differences between actual and standard performance of organization is also to be
determined that is interrelated with productivity and profitability of organization.
TASK 1
1.1 Classifying the cost A
Cost can be defined as the value which is attached with anything. Further, the word cost
is used in many different contexts. Cost of the products and services are included by included
resources, time and the risk which is occurred in producing goods as well as services
(Weißenberger and Angelkort, 2011). Besides this, the nature of the cost is also different from
others which are the main basis for differentiation. Costs are of different types one is the fixed
cost, variable and the semi-variable costs.
Variable cost Semi-variable cost Fixed cost
Power for sewing machine
(power changes with the
production)
Deliver delivers pay
(sometimes it is fixed and if
the deliver is more than the
cost increases)
Factory rent
(according to the contract it is
fixed)
Material for clothes
(according to the increase or
decrease of demand and the
cost changes)
Factory heating
( it is fixed at one point of
time, but if the production
increases or decreases it
changes)
Factory supervisor wages
(according to the agreement it
is fixed)
Packaging material Office rates
2

(according to the production
the packaging material cost
changes
(it also remains constant as it
does not vary according to
changes in production )
Telephone charges ( it is also
fixed because fixed month
charges are assigned to the
organization)
Fixed costs: - It can be define as the cost which does not change with the change in
production or services. It remains constant even if any time of change is incurred in production.
The factory rent is the fixed cost because even if the production increases or decreases, the
building rent will remain same (Cinquini and Tenucci, 2010). The total cost does not fluctuate
with the change in the activity but the per unit cost changes. In case of the Smart Looks Limited
the fixed costs are the factory supervisory salary because in the initial the flat rate is paid and
even the bonus is also paid.
Variable costs- This is opposite to the fixed cost, they increase or decrease with the
activity of the business. In case of the Smart Looks Limited, the power of sewing machine is the
variable cost the reason is that the power will be used according to the production which will be
carried out in the factory (Luft and Shields, 2010). Material of clothes is the variable cost
because in case if the production will increase then more material will be required to carry out
the activity. So, in this case it can be said that it increases and decreases according to the
activities carried out in the organization.
Semi-variable costs- It can be said that they are the mixture of the fixed and the variable
costs. In this, there is some part which remains fixed and the other changes according to the
change in business activity.
B ways of classifying the cost- Besides these costs, there are also different types of costs which
include direct and indirect cost, prime cost, relevant and irrelevant costs etc. Product costs
include the costs which are incurred in the purchasing material. On the other hand, relevant costs
are impacted by the decisions made by the management on the other hand, irrelevant costs are
not affected by the decisions of the organization.
3

1.2 Computation of total cost Q2A
Formulas:-
Total cost= Total variable cost+Total fixed cost
Total variable cost= Total material cost+ Total labor cost
Unit cost= Total cost/ number of units
Interpretation: - Under this system, management accountant of Smart Looks Ltd
determines prices of products for production and distribution of clothes. However, variable cost
includes labor and material costs which remains flexible. Therefore, total cost for purchasing
material is evaluated is 300000 and providing salary to workers is 660000. Thus, total cost on
production and supplement of goods is obtained by adding both substances that is 215000,
270000 and 325000 for different units. Further, price is determined for production and
supplement of goods and services. However, unit cost is determined by dividing total cost to
number of units. Hence, for first evaluated unit, 215000 are divided by 15000 that present 14 as
unit cost result. Similarly, other cost units are measured through ratio of total cost to number of
unit produced for production and supplement of products. In this process, it is useful estimation
for operating further business activities related to investments and selling goods of organization.
Hence, costing method is helpful for forecasting and decision making related to preparing
income statement and presenting financial performance of entity.
1.3 Inventory costing methods Q3
4

 Total cost= number of units* unit cost
 Average cost= total sum of all costs / number of transactions (estimations)
Here, total cost is to evaluated by multiplying unit costs to number of units. In this
process, for beginning inventory, total is measured by multiplying number of units (500) to unit
cost (20) that is 10000. Further, total cost to be incurred on 18th and 25th January are calculated as
19,200 and 18,200 respectively. Therefore, overall costs incurred for further production and
distribution system is determined as 47400. In this regard, management accountant finds out
average of total costs as per which further estimation and decision making is obtained that is
useful to operate further business activities.
Interpretation:- Inventory management as accounting tool is beneficial for adequate
income and expenses that is related to keeping goods safe effectively. Therefore, management
accountant interpreters and further focuses on supplying goods through different methods such
as:-
First in, first out method (FIFO);- Through this system, by selling goods prepared at 1st
of January are to sold out therefore, units proceed for this is 500 and unit cost produced in this
process is obtained as 20. Therefore, total cost on production through FIFO method considered
as 10000. Hence, by producing and supplementing goods of 1st week will be resulted effectively.
Last in, last out method (LIFO):- Under this system, produced goods in last week of
January is to be sold out. Thus, management accountant of Smart Looks Ltd plans to sell out
inventory purchased at last time on which total cost is created as 18200. Hence, inventories get
managed through this system by applying LIFO method.
5

Average cost method:- In this method, management accountant of Smart Looks Ltd
determines average as dividing sum total of costs to number of variables. In this process, total
cost on production and distribution system is considered as 47400. Thus, it is divided by 3 that
evaluate average of costs that is calculated as 15800. Hence, by using average cost method, it is
analyzed that through effective forecasting for production and distribution of goods can be
implemented that impacts on further business activities as well production and distribution of
goods.
Thus, by using above mentioned methods, different forecasting and decision making can
be done effectively that affects productivity and profit earning capacity. It is useful for
determining price of products and preparing income statement to present economic position of
organization at high level.
1.4 Costing analysis q2b
Graphical presentation:-
Management accountant recognizes prepared costing that leads to prepare income
statement thereby financial performance of organization is presented. Thus, for analyzing
costing, it is interpreted that costs are evaluated by addition of variable and fixed costs on
6
1 2 3
0
50000
100000
150000
200000
250000
300000
350000
Total variable cost (A)
Fixed cost (B)
Total cost

incurring expenditures to operate business activities. It is evaluated that material costs for each
unit are different such as 75000, 100000 and 125000. Similarly, costs incurred on labor are
considered as 90000, 120000 and 1500000. In respect to this, total material and labor costs are
obtained as 300000 and 360000 that are presented as variable costs which are flexible. For each
production and manufacturing process, these costs are different. On the other hand, fixed costs
are incurred as 50000 for each unit that presents that organization incurred fixed expenses on
some expenditure are termed as fixed costs. Further, total costs for each unit are created as
215000, 270000 and 325000. On the basis of this cost calculation, several ideas are created for
operating further business activities as production and supplement of Smart Looks Ltd products.
TASK 2
2.1 Cost of goods sold performance Q4
To
Board Of Director
Smart Looks Ltd
In this process, cost of goods sold are presented that is valuable for forecasting and
decision making related to production and distribution of goods. However, performance of cost
of goods sold is presented through this process that affects price determination and economic
position of Smart Looks Ltd. In addition to this, selling price is evaluated that is interrelated
with increasing business performance and making decisions for further implementation at high
level. Through this process system, management accountant recognizes all costs and prices for
further investments and incurring expenses. However, total costs incurred for producing goods
is measured as 47400 therefore, expansion and of organization and decision making can be
created at large scale. It impacts on productivity and profitability of firm. In addition to this,
cost of goods sold are determined as well forecast through different methods as first in, first out
(FIFO), LIFO and average method. It is helpful for decision making process and implementing
strategies for further business operations as well remains impacted for cost effectiveness.
Therefore, cost of goods sold performance evaluation is useful for planning procedure and
further decisions that affects productivity and profitability at high level. Including this,
management accountant of Smart Looks prepares this strategies and planning procedures to
7

operate business activities in future time.
2.2 Q5 A Performance indicators helpful in measuring performance of the company
There are several performance indicators of the organization which can help in deciding
the performance of the company. For gaining the customer experience, the Smart Looks Limited
is required to provide good quality product to the customers so that their customer experience
can be enhanced. Besides this, another factor is the services, through effective services; the
customer will gain huge experience (Vaivio and Sirén, 2010). The performance indicator is
basically the profitability of the Smart Looks Limited which can help in identifying the customer
good experience. For Supplier and product quality the two success factors are the materials
which are purchased from the suppliers. If the materials are good then the Smart Looks Limited
can provide quality products to the customers.
Further, the operational efficiency can be attained by determining the price determination
strategies. This will help in attaining the operational efficiency. The two critical success factor
for the cost reduction and profitability increase is the less expense incurred on the production
process (Giovannoni, Maraghini and Riccaboni, 2011). This will help in reducing the cost of the
product and due to this reason the profitability of the Smart Looks Limited can be increased. The
performance indicator which can be used for analyzing the profitability is the balance sheet as
through this they can effectively identify the profits which are earned by the organization (Vaivio
and Sirén, 2010). On the other hand, cash flow statements are also the performance indicator
which can aid in identifying the profitability of the firm. For reducing maintenance spending the
two critical success factors are the repeatedly carrying out the serving of the machines and
training the employees to use the machines. The key performance indicators which can be used
for measuring the performance are the less expense in the profit and loss sheet.
5A (1) Reduction in cost
There are several techniques which can be applied by the Smart Looks Limited to reduce
the cost of the production which is carried out in the Smart Looks Limited. The main techniques
are the target costing it basically helps to design the product and further estimated cost price is
determined which helps in reducing the cost of the product (DRURY, 2013). The other technique
is the kaizan cost which is the process that assists in reducing the cost at the time of
8

manufacturing phrase. In this, the slow and gradual improvement is carried out so that they can
improve the performance of the manufacturing process. The cost can be reduced by focusing on
the material, labor, and overhead. In case of the outdated machinery, the cost of the product
increases which further increases the cost of the product. Due to this reason, to reduce the cost of
the product, proper machinery needs to be installed. Overhead can be considered as the
additional cost. With the use less material, the cost of the production can be reduced. Factors of
production has huge role in reducing the cost of the product. With the help of the new
machinery, the time will be consumed less so the cost will also be less. On the other hand, if the
labor rates are low they also it will directly affects the cost of production. So if this adopted in
the organization then the cost can be reduced.
5B (ii) Managing the quality
For increasing the quality of the products, Smart Looks Limited can use the total quality
management in which the process is involved in continuous improvement which aids the
organization in improving the quality of the product. On the other hand, business process re-
engineering is the process which redesigns the process for achieving the goals and objectives of
the organization. This is the whole process that focuses on reducing the costs as well as
improving the quality of the products (Pitkänen and Lukka, 2011). It has been witnessed that
through reducing the cost of the products it has been witnessed that the quality is not maintained
by the organization; due to this reason the quality degrades which affects the satisfaction of the
customers. But in the case of business process re-engineering it focuses on increasing the quality
and reducing the cost. Besides this, there are further tools and techniques which can be applied in
the Smart Looks Limited for improving the quality and reducing the cost in the organization
(Cinquini, and Tenucci, 2010). Further, it is important to enhance the quality because the
organization can gain customer satisfaction and experience when they are provided with good
quality products.
9

TASK 3
3.1 Budget and its significance Q6 A
In order to do forecasting for the business operations that will be performed in the future
and to take decisions accordingly, making budget is the most appropriate approach. With the
help of this, present business performance in an actual manner is shown. Along with that, it also
tells about the different factors of organization like profit the firm is earning, its productivity,
customer dealing services and working culture of the firm. Under this system, it is the
responsibility of management accountant of Smart Looks Ltd. to make the budget prepared by
assessing the structure of organization in relation with various activities (Quattrone, 2016).
However, there are many ideas are through which productivity of company can be effectually
increased as well as higher profits can be gained. In addition to this, it will also help the
organization to expand at a large scale and gain various benefits out of the same. It can be said
that budget plays a significant role in creating balance between production and supplement of
goods. Further, budget proves to be highly effectual in maintaining the level of required
resources along with the fund that are needed to be attained to meet the objectives. Hence,
budget can be referred as a technique that helps in making prediction and decision making by
which the set targets can be attained within stipulated time period in a systematic manner
(Zimmerman and Yahya-Zadeh, 2011). Moreover, budget proves to be very helpful in
formulating business, competitive and marketing strategies of entity.
Preparing budget is highly essential for the organization and its importance can be
understood in a way that to assess the present and actual performance that business is rendering,
it plays a significant role. Along with that, it can be said that by the help of preparing budget,
Smart Looks Ltd. would be able to make optimum utilization of resources and funds invested.
Through this, company will gain higher profits in the market at reasonable cost as well as its
productivity would also get increased to a high extent in an efficient manner. Budget plays a
crucial role in maintaining proper balance between incurred expenses and gained revenue. Also,
it can be said that budget proves to be highly helpful in formulating the business and competitive
strategies with the help of which Smart Looks Ltd (DRURY, 2013). would gain a competitive
edge over others and stay in the market for longer span of time. Therefore, with all these, a
positive and healthy working environment will be created in the firm by which employees will
10

render effective services and thus, maximum level of customer satisfaction would be attained. It
can be said that in order to manage the overall business operations by setting a particular budget,
employees would perform in a systematic and coordinated manner.
Therefore, on the basis of analyzing actual business performance through preparing
budget, company will come in position to generate different ideas for the purpose of operating
different business activities. Level of production and balance of distribution of goods, income
and expenditure made by business as well as rise in productivity and profits are some of the
factors that get directly affected by the budget that organization prepares for a year (Christ and
et.al., 2017). In addition to this, elements like demand for products and proper allocation of
resources as well as fund can be effectually done by Smart Looks Ltd. with the help of preparing
budget. Therefore, it can be said that with the help of setting budget in company, quality of
products and services can be improved as according to the same, operations will take place.
Q6 B.
There are a lot of purposes of preparing budgets for Smart Looks Ltd. among which the
major one is that the budgets play a significant role in setting the short term targets as well as
achieving the same within stipulated time period. Along with that, these budgets prove to be
highly helpful for monitoring the business performance. It is because; as per the budget set,
company reviews the performance time to time so as to assess that whether functions are being
carried out as per the decided budget or not (Bhimani and et.al., 2013). In case if the process is
not going as per the decided budget, corrective actions are taken on immediate basis. Apart from
that, there is one more purpose behind preparing the budget, that is, to have control on the
operations as well as on use of resources. In addition to this, these budgets help in keeping the
workforce and management motivated to attain the specified targets on time and thus, level of
their performance gets improved. It can be said that in Smart Looks Ltd., budgets will help in
monitoring the relationship between costs and revenues as well. Thus, company would come in
position to earn higher revenues at low cost by making effective utilization of the resources due
to having a limited budget (Christ and et.al., 2017). Last but not the least; budgets fulfill an
important purpose, that is, it helps in leading communication with the senior management which
creates a healthy working environment in the firm.
11