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Table of ContentsINTRODUCTION .........................................................................................................................3TASK 1...........................................................................................................................................3P 1.1 Different types of cost classification..................................................................3P 1.2 Calculation of Unit cost by using unit costing method............................... 4P 1.3 Cost of exquisite using absorption cost............................................................5P 1.4 Cost data of exquisite using appropriate techniques..................................7

TASK 2...........................................................................................................................................8P 2.1 Preparation and analysis of cost report for the month of Septemberand variance analysis ........................................................................................................8P 2.2 Various ares of potential improvements using performance indicators 9P 2.3 Ways to reduce cost and and enhancing value and quality ...................9

TASK 3........................................................................................................................................10P 3.1 Purpose and nature of budgeting process for Jeffery and Son's Ltd 10P 3.2 Use of appropriate budgeting technique.......................................................11P 3.3 Preparation of production and material budgets .....................................12P 3.4 Preparation of cash Budget ...............................................................................13

TASK 4........................................................................................................................................14P 4.1 Calculation of variances, identify possible causes and recommendcorrective actions...............................................................................................................14P 4.2 Operating statements includes both budgeted and actual results..... 16P 4.3 Identified responsibility center..........................................................................16

CONCLUSION .......................................................................................................................... 17REFERENCES ...........................................................................................................................18




INTRODUCTIONManagement accounting is also known as managerial accounting which

is used by managers as a tool to collect data and for the better use ofaccounting information so as to decide matters within the organization aswell as to make optimal decisions. In today's competitive era, managementaccounting is a unit that plays a crucial role in business (Mohamed andLashine, 2003). The present report is going to discuss about the differenttypes of cost and their calculations along with explaining the ways to reducethe cost and to enhance the level of value as well as quality. This report isbased on the case scenario of Jeffrey & Sons, a leading manufacturingcompany that manufactures different kinds of products. The unit discussesabout various management tools such as budgets and variance analysistechniques for Jeffrey & Son's so as to predict future causes of actions. In thisreport, management accounting is used as a tool to increase the value ofbusiness so as to attain organizational goals. In addition to that, cost sheetas well as operating statement are prepared to clarify the scenario. At last,various calculations are quoted in respect with the given figurers and casescenario.TASK 1P 1.1 Different types of cost classification

Cost is a type of expense that a manufacturing company bears at thetime of producing goods or services. However, cost of production varies asper the volume of production. The cost is classified on the basis of elements,behaviors, nature and function which are shown in below points.

Behavior of Cost: Behavior of cost generally refers to the volume ofproduction, it means the cost changes as per the number of products thatare to be produced for a specific time period. On the basis of behavior, costis divided into three areas such as Fixed Cost, Variable Cost and Semi-




variable Cost. Fixed cost includes those kinds of cost which do not change atany volume of production (Cohen and Kaimenaki, 2011). On the other hand,cost which changes as per the single change in the volume of production isknown as variable cost. Nonetheless, Semi-variable cost includescharacteristics of fixed as well as variable cost, it means to a specific level.This kind of cost remains unchanged with production level but after a certainchanges in production volume it become variable.

Nature of Expense: According to the nature of expenses, cost isclassified into material, labor and expenses. Labor is the cost that is incurredby the manufacturing company in the form of remuneration paid to theemployees or workers. Material cost is one which is applicable to the rawmaterial that is used by the organization for the production purpose.However, expenses are the costs of services provided by the company(Burns, Hopper and Yazdifar, 2004).

Functions / Activities: On the basis of functions and activities, cost isclassified as per the specific activities and functions of different departmentsof the company. Such kind of cost include Production cost, Administrationcost, Selling cost, Distribution cost, R&D cost and so on.

Elements of cost : There are three major elements of cost that aredivided into Material , Labor and Expenses. These elements are furtherdivided into direct and indirect forms, for example: direct cost and indirectcost (Hirsch, 2000).




P 1.2 Calculation of Unit cost by using unit costing method

Particulars Total costDirect Material

50Kg* £4* 200 units £40000Direct Labour

30 hours * £9 *200 units £54000Variable production overhead

£6 * 6000 hours £36000Fixed production overheads

(£80,000/20,000 hour) * 6000 hour £24000Total cost for Job 444 £154000

Unit cost £770

From the above table, it can be said that units cost for the product is£770 which has been acquired after adding direct Material direct Labour andvariable production overhead. However fixed expenses have also beenadded for calculating total cost for Job 444. At the end, per unit cost for Job444 is £770.

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P 1.3 Cost of exquisite using absorption cost

Particular

Basisofallocation

Total

Production

Servicedepartment

MachineX

MachineY

Assembly

StoresMaintenance

IndirectWagesAndSupervision

£362,000

£100,000

£99,500 £92,500

IndirectMaterial

£253,000

£100,000

£100,000

£40,000

Light AndHeating

Machinehours

£50,000£26,666.67

£20,000£3,333.33

RentAreaoccupied

£100,000

£20,000 £10,000 £30,000 £30,000 £10,000

InsuranceAndMachinery

Bookvalueofmachinery

£15,000£3,529.40

£2,205.90

£4,411.80

£2,205.90

£2,647.06

Depreciation

Bookvalueof

£150,000

£35,294.12

£22,058.80

£44,117.65

£22,058.80

£26,470.59




machinery

InsuranceOfBuilding

Areaoccupied

£25,000 £5,000 £2,500 £7,500 £7,500 £2,500

SalariesOf WorkManagement

No. ofemployees

£80,000 £24,000 £16,000 £24,000 £8,000 £8,000

Total Cost£1,035,000

£314,490.19

£272,264.70

£245,862.78

£69,764.70

£49,617.65

Particular ProductionBasis ofallocation Total in Machine X Machine Y Assembly

Primarydistribution(From abovetable)

£1035000

£314,490.19 £272,264.70 £245,862.78

StoresDirectmaterial

£34,882.35 £26,161.76 £8,720.59

MaintenanceMachinehours

£23,816.47 £15,877.65 £9,923.53

Total£373,189.01

£314,304.11

£264,506.90

c) The calculation of overhead absorption rate for every manufacturingdepartment X, Y and assembly




Overhead absorption rate Fixed overhead/ machine hoursOverhead absorption rate

Department X 14490.19+ 26161.76+15877.65/80000= 373189/80000

= £4.66

Department Y 272264.70+ 26161.76 +15877.65/60000

= 314304.11/60000= £5.24

Assembly 45862.78+ 8720.59+ 9923.53/10000= 264506.90/10000

= £4.41

The above tables are aiming at calculating the cost of exquisite usingabsorption cost. To calculate the cost, various kind expenses are included inthe total cost (Kinney and Raiborn, 2012). However, the The calculation ofoverhead absorption rate for every manufacturing department X, Y andassembly are shown in the next section.P 1.4 Cost data of exquisite using appropriate techniques

ParticularBasis ofallocation Total Production

MachineX Machine Y Assembly 1

PrimaryDistribution

£1035000

£314,490.19 £272,264.70 £245,862.78

StoresDirectmaterial

£34,882.35 £26,161.76 £8,720.59




Maintenance

Labourhours 2:1.5:1

£22,052.29 £16,539.22 £11,026.14

Total Cost £371,424.83 £314,965.68 £265,609.51

Computation of overhead absorption rates on the basis of labour hoursMachine X 371424.83/ (2hr *100000

units)£1.86

Machine Y 314965.68/ (1.5 hr *100000units)

£2.10

Assembly 265609.51/ (1hr *100000units)

£2.66

The calculation of overhead absorption rates is done on the basis of labourhours for Machine X, Machine Y and Assembly. The calculation is shown in

the following section:Machine X = 371424.83£/ (2hours*100000units) = 1.86£Machine Y = 314965.68£/ (1.5 hour*100000 units) = 2.10£Assembly = 265609.51£/ (1hour*100000 units) = 2.66£

There is seen a expect difference between the calculation of overheadabsorption rate. It was seen that the calculation of overhead absorption rateon the basis of machine hour rate the rates were found to be 4.66£,5.24£ and 4.41£ respectively. Nevertheless, while using labour hour ratethe production department were seen continuously increasing i.e 1.86£,2.10£ and 2.66£ respectively. The major reason is seen that total labourhours are higher than Machine hours.




TASK 2P 2.1 Preparation and analysis of cost report for the month of September andvariance analysisJeffrey & Son's job cost sheet is prepared as under:

Budgeted Output Actual Output

Budgeted -Actual

2000 Units 1900 Units

ParticularPer unitcost

Totalcost

Per unitcost

Totalcost

Material £12 £24,000 £12 £22,800 £1,200Labour £9 £18,000 £10 £19,000 -£1,000FixedOverhead £15,000 £15,000 £0Electricity £8,000 £7,625 £375Maintenance £5,000 £4,800 £200Total £35 £70,000 £36 £69,225 £775

Working note:Particular Calculation CostMaterial 12 * 1900 Units £22800Labour cost 10 * 1900 Units £19000Variable cost -Electricity

8000-5000/2000-800 £3.75 per unit

Fixed electricity 8000 - 3.75*2000 £500Variable cost 3.75 * 1900 units £7125Maintenance cost 5000 - 200 £4800

Working noteMaterial 12£*1900 Units = 22800£Labour cost 10£ * 1900 Units = 19000£Variable costFixed electricity = 8000£ - 3.75*2000= 500£

Variable cost = 3.75£*1900units = 7125£

Electricity =8000£-5000£/2000-800= 3.75 per unit

Maintenance cost 5000£ - 200£ = 4800£




Variance analysisFrom the above calculation , it has been witnessed that material

variance raised to £1200. The major reason for increased variance is that theproduction volume is charged and the material price per unit remained sameto £12. To a further extend , it was seen that the labour cost variance is alsoraised to 1000£ as the labour rate is increased by £1. in respect with thebudgeted electricity expenditures it was found that it was seen to be £8000which is greater than the actual figures of electricity expenditures (£7625). Ithas been witnessed that per unit variable electricity charges were remainedsame at £3.75 so it is considered to be the fixed cost. Furthermore. it waswitnessed that the other fixed cost remained unchanged with any level ofproduction. However, it can be said that a negative variance is seen in theareas of labour rate variance and total material cost variance. This negativevariance had impacted the function and operation of manufacturing unit.From the calculation and in-depth analysis, it can be said that the companyshould reduce their material and labour costs as to eliminate the negativeimpacts of operations of company (Kont, 2012).



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P 2.2 Various ares of potential improvements using performance indicatorsIn order to accomplish desired goals every business sets target and

this in turn supports in enhancing overall performance. Further, it is requiredfor management to ensure success of its entity on continuous basis. Largenumbers of factors are present in the firm to identify potential improvement.Turnover is regarded as one of the most significant factor which assist inmeasuring business performance. Business which is capable enough inearning higher sales than others will make high improvement. Moreover, costas a factor is also considered as crucial as in case when cost associated withorganization is rapidly rising without growth in sales then improvement is notat all possible (Lucey, 2003). Apart from this profitability level of theorganization also supports in knowing the level of improvement and growthin same shows improvement and vice versa. Overall financial performance oforganization also highlights how healthy organization is and increasingoverall assets of firm shows improvement in business performance and viceversa. On the other hand other factors are also present through which overallperformance of business can be known easily such as level of customersatisfaction, technology employed for producing goods, competitive positionof the company etc. Therefore, in this way with the help of performanceindicator potential improvement is possible (Ward, 2012).P 2.3 Ways to reduce cost and and enhancing value and quality

Different effective ways are present with the help of which it is possibleto reduce cost and enhance value of products along with quality.

Reducing cost: For reduction of cost better technology can beemployed along with large scale production, recycling of wastage, optimumutilization of available resources etc. All these techniques are regarded to beeffective for business and reduction of cost leads to rise in profitability levelwhich is one of the main aims of company(Lukka, 2007).




Quality: For enhancing quality level business can use new techniques,better use of material and can implement quality measurement tool with theaim to offer quality products to target market. This can lead to favorableoutcomes such as rise in level of customer satisfaction along with rise insales volume along with profitability of the business.

Enhancing value: For delivering better value business can increaseits earnings along with stability in the operations. Further, by enhancingsales value but not the sale price it is possible for organization to deliverbetter value. Further, with the help of diversification of customers andindustry organization can accomplish this objective. By lowering down theoverall cost business enterprise can easily develop a base against itscompetitors (Hansen Mowen, and Guan,2007).TASK 3P 3.1 Purpose and nature of budgeting process for Jeffery and Son's Ltd

Budget is generally refers to a monetary plan of a specific departmentin an organization that determines the possible expenses and income offuture. Main purpose of budget is to estimate probable income andexpenditure for a company to a specific point of time (Burns, Hopper andYazdifar, 2004). Furthermore, major purposes of budget are shown in thebelow points:To estimate future income, expenditure and profitability of the company(Ahrens and Chapman, 2007).To provide a financial framework to the managers for helping in effectivedecision-making.To help production managers in the comparison of estimated output withactual performance.

Major purpose of Jeffrey & Son’s budget is to find out businessrevenues and expenditures for a given period of time.




Nature of budgeting processBudgeting process is a major tool that is used to set anticipations for

revenues and expenses for the near future. Going through the process,company can estimates the availability of cash in the organization as well ascompany can make control over the expenditures and can get rid of thenegative variance as well. The nature of budgeting process is shown infollowing table:

To estimate the financial situation on the basis of last budget (Budgetarycontrol. 2011).

To discover the future amount of cash that is going to be generated fromsales and other activities.

To define the necessary expenditure i.e. raw materials, labor, productionoverheads and promotions.

Then subtracting estimated expenses from foretasted revenues so as todetermine surplus or deficit.

Review and revise of prepared budget.

At last, comparison of budgeting outcome with actual outcome (Budgetarycontrol. 2011).

Variance analysis.

In respect with the given case scenario, Jeffrey & Son's managersprepare budgets by forecasting future income and expenses in respect withthe upcoming years. Manager pays attention to sales volume and tries toenhance the sales along with reducing cost so that profits can be increased.However, it is required to have an effective coordination in budgetingprocess. As per the in-depth investigation into budget preparation of the




mentioned company, it has been noticed that incremental budgetingtechnique is used by the organization to prepare budget. At last, the actualresults are compared with the budgeted figures so as to determine thevariance along with taking necessary decisions to remove the negativevariance (Sokolov, and Giniatullin, 2015).P 3.2 Use of appropriate budgeting technique

The present case is given in the respect with Jeffrey & Son'smanufacturing company and investigation and applied concept ofmanagement accounting show that company is going to prepare budgetswhile making use of incremental budgeting system. However, someproblems are associated with the use of mentioned budgeting system. Themajor problem associated with such kind of budgeting system is thatvolatility in the market as well as the significant impact of volatility are beingnegated by the management at the time of preparing budget. This is goingto put a great impact on the budgeted incomes and expenditures of thecompany in respect with actual outcomes (Datar and et. al., 2013.). As aneffect of such negligence, Jeffrey & Son's manufacturing company fails tomeet the actual figures and positive variance. There is a specific need forthe organization to change the budgeting method that is previously adoptedi.e. incremental budgeting system. By looking over the current scenario ofcompany and future budgeting needs, company can make use of “ Zerobase budgeting” as a method to prepare budget (Kotas, 2014).



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While making use of the mentioned budgeting practices or methods,company can overcome the limitations of incremental budgeting and cansuccessfully meet the positive variance. Furthermore, applications of “Zerobase budgeting” enable aforesaid company to estimate the entireoperational cost as well as the anticipated revenues in respect with theproper market behaviour. Organization can come closer to the accurateactual figures of budgets through using this method. However, significantmarket changes can be analysed and budget will be prepared throughconsidering the impact of market volatility. At last, it can be said that Jeffrey& Son's manufacturing company can remove or reduce the impact of marketuncertainties from the budgets by using “Zero base budgeting”.P 3.3 Preparation of production and material budgets

According to given details in the company, the production andmaterial purchase budget for the organization has been designed to assesthe anticipated experience made on production and material. The productionbudget help in identifying the level of future production on the other handmateriel budget represents the material used for future period.

Production BudgetSales 105,000 90,000 105,000Op. Stock 11,000 13,500 15,750Total 94,000 76,500 89,250Closing stock 13,500 15,750 16,500Production 107,500 92,250 105,750

Material Purchase BudgetMaterial Require 215,000 184,500 211,500Less: Opening stock 52,000 45,000 52,500Total 163,000 139,500 159,000Add: Closing stock 45,000 52,500 55,000Purchase 208,000 192,000 214,000

Required working notes are given as under:




Calculation of closing stock of production: 15% of next monthMonth Calculation UnitsJuly 15% of 90000 Units 13500 unitsAugust 15% of 1050000 units 15750 unitsSeptember 15% of 110000 units 16500 units

Calculation of closing stock of material: 25% of next monthMonth Calculation UnitsJuly 25% of (90000 units * 2kg/unit) 45000 KgAugust 25% of (90000 units * 2kg/unit) 45000 KgSeptember 25% of (110000 units * 2kg/unit) 55000 kg

The table above represents the Material Purchase Budget andProduction Budget for the mentioned entity, however the working notes arerepresenting the calculation of closing stock of production for 15% of nextmonth and closing stock of material for 25% of next month.

P 3.4 Preparation of cash BudgetCash budget is a financial tools that represents the future cash inflows

and outflows of business for a certain time period. In addition, it includescash incomes and expenditures for the company that are helpful inassessing surplus or deficit for a firm. The cash flow for the company isdesigned in the following points:

Particular July August SeptemberOpening balance £16,000 -£3,250 -£22,300CASH RECEIPTS

Cash sales £900,000 £821,250 £864,000Total cash

Income £916,000 £818,000 £841,700

CASHEXPENDITURES

Material Purchase £364,000 £336,000 £374,500

Direct wages £322,500 £276,750 £317,250




Variableoverhead £110,500 £99,550 £103,270

Fixed Overhead £75,000 £87,500 £87,500Bad debts £47,250 £40,500 £47,250Total cashexpenses £919,250 £840,300 £929,770

Closing balance -£3,250 -£22,300 -£88,070

From the in-depth analysis of above budget is has been witnessed thatthe sales of company is continuously decreasing as it has been decreasedfrom 90000£ to 821250£. However, in the month of September it hasimproved to 864000£. The cash income of business is totally declined in theAugust and again it is increased in September. The direct wages for thecompany has decreased from 322500£ to 276750£ in August. At the end, itwas found that budget have negative cash balance in the end ofSeptember to 3250£, 22300£ and 88070£. From the overall cash budget, itwas reported that the company should increase its sales and has to focus onreducing cost throughout the months by cutting unnecessary expenditures(Jones, and Clatworthy,2006).TASK 4P 4.1 Calculation of variances, identify possible causes and recommendcorrective actions

Particular Per unit cost BudgetedSales 4 16000Material 0.96 3840Labour 0.8 3200

Fixed Overhead 4800Total Cost 2.96 11840

Profit 1.04 4160

Required working note:




Material cost 0.4kg*2.40£*4000 units = 3840£

Labour cost 6/60*8£*4000 units = 3200£

Profit 16000£ - 11840£ = 4160£

Variance = Budgeted values – actual valuesMaterial Rate variance = 2.40£ - 2.40£ = Nil

Material quantity variance = 0.4kg – 0.41 Kg = (0.01) kgMaterial cost variance = 3840£ - 3420£ = 420£Labour variance = 3200£ - 2690£ = 510£Labour rate variance = 8£ - 7.80£ = 0.20£

Fixed overhead variance = 4900£ - 4800£ = 100£Sales variance = 16000£ - 13820£ = 2180£

Profit variance = 4160£ - 2810£ = 1350£

Sales variance: It is regarded as the difference between actual andbudget sales of enterprise. Further, through this variance it is possible tomeasure performance of the sales function and business results can beanalyzed with the aim to better understand market conditions. The maincause of this variance is due to presence of higher inflation which leads tohigher selling price. Further, it can also take place due to worst quality ordecreasing purchasing power of consumers along with their unawareness. Inorder to overcome with the issue of sales variance business can reduce itsselling price and products along with services can be delivered to targetmarket which is of high quality so that overall sales volume can be enhancedeasily (Mohamed and Lashine, 2003).




Material variance: It is considered as the difference between actualcost incurred for direct materials and the excepted cost of those materials.The main cause of material variance can be rise in the level of quantitywhich is required for producing single unit of a product or commodity(Weygandt and et. al., 2009). In order to deal with the issue of materialvariance company can undertake skilled and qualified labor hours and theiroverall impact can be eliminated up to extent.

Labor variance: This type of variance takes place due to variation inlabor rate and the labor hours. The corrective actions which can be taken todeal with this variance is to decrease the labor rate to 7.8£ which canpositively influence the entire firm. Further, budgeted and actual labourhours are 400 and 345. Further, to eliminate this impact company canmodify its labour policies (Kinney and Raiborn, 2012).

Profit variance: It takes place due to material, sales and laborvariance. Further, in order to deal with this variance company must takeinitiative to meet sales target and materials must be purchased at abudgeted rate with the motive to enhance efficiency of the staff memberspresent within workplace.P 4.2 Operating statements includes both budgeted and actual results

The table mentioned below represents the operating statement ofJeffrey & Son's that includes reconciliation of budgeted figures and actualoutcomes.




ParticularPerunit

Budgeted(4000Units) Per unit

Actual(3500)

Variance

Sales 4 16000 3.94 13820 -2180Material 0.96 3840 0.97 3420 420labour 0.8 3200 0.77 2690 510Fixed

Overhead 4800 4900 -100Total 2.96 11840 3.14 11010 830

Operating profit 1.04 4160 0.8 2810 1350

P 4.3 Identified responsibility centerPurchase department: Main responsibility of this department is to

purchase the right kind of material required in the production process.Further, it is necessary to purchase material at budgeted rates so that issuelinked with variance may not arise (Hansen, Mowen and Guan, 2007).

Selling department: Main responsibility of this department is toachieve the sales target as per the decided value and volume (McMillan,2007). Considering the scenario of Jeffrey & Son's firm was unable to meetactual sales to the budgeted one. So, it is necessarily required for the entiredepartment to identify the level of negative variance so as to eliminate it.

Production department: The first and foremost duty of thisdepartment is to analyze overall demand for product in the market as supplyof commodity is based on the demand for product. Jeffrey & Son's productiondepartment is responsible for producing the required quantity ofcommodities through which it is possible to satisfy need of target market inappropriate manner (Tappura, and et. al., 2015).

Marketing department: This department is responsible fordevelopment of effective marketing plans so as to develop awareness in themarket. Further, main stress is on providing appropriate knowledge andinformation to customers regarding product range. Through this it is possible




for Jeffrey & Sons to enhance sales volume and can assist in earning higherprofits.

CONCLUSIONThe entire study being carried out has supported in knowing about the

concepts of management accounting which assists manager of theenterprise to use information in effective manner. Further, decisions whichhave to be taken on daily basis can be made easily for the growth anddevelopment of business. On the other hand, concept of directing, planningalong with controlling can be implemented within the workplace so thatbusiness can reduce its overall cost and this can enhance profitability level ofthe business. Apart from this, different effective ways are present ofreducing cost, enhancing value along with quality of product which arebeneficial for company.




REFERENCES● Ahrens, T. and Chapman, C.S., 2007. Management accounting as practice.

Accounting, Organizations and Society. 32(1). pp.1-27.● Armstrong, P., 2014. Limits and possibilities for HRM in an age of

management accountancy. New Perspectives On Human ResourceManagement. pp.154-166.

● Burns, J., Hopper, T. and Yazdifar, H., 2004. Management accountingeducation and training: putting management in and taking accountingout. Qualitative Research in Accounting & Management. 1(1). pp.1 – 29.

● Cohen, S. and Kaimenaki, E., 2011. Cost accounting systems structureand information quality properties: an empirical analysis. Journal ofApplied Accounting Research. 12(1). pp.5 – 25.

● Datar, S. M. and et. al., 2013. Cost accounting: a managerial emphasis.Pearson Higher Education.

● Hansen, D., Mowen, M. and Guan, L., 2007. Cost management:accounting and control. Cengage Learning.

● Hirsch, L.M., 2000. Advanced Management Accounting. CengageLearning EMEA.



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