Sample on management accounting

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Sample on
Management Accounting

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TABLE OF CONTENTS
INTRODUCTION .......................................................................................................................... 3
TASK 1............................................................................................................................................3
1.1 Different types of cost classification......................................................................................3
1.2 Using job costing calculation of unit cost and total job cost for job 444...............................4
1.3 Calculating cost of Exquisite using absorption costing.........................................................5
1.4 Analyzing the cost of Exquisite focusing on technique used by Jeffrey & Son's Ltd........... 7
TASK 2............................................................................................................................................7
2.1 Preparation and analysis of cost report and commenting on variance...................................7
2.2 Identification of areas of improvements using performance indicators.................................9
2.3 Ways to reduce costs, enhance value and quality................................................................10
TASK 3..........................................................................................................................................10
3.1 Purpose and nature of budgeting process.............................................................................10
3.2 Selection of appropriate budgeting methods for firm and its needs.................................... 10
3.3 Preparation of different types of budget.............................................................................. 10
3.4 Preparation of cash budget...................................................................................................11
TASK 4..........................................................................................................................................12
4.1 Calculation of variances, identification of causes and recommending corrective actions.. 12
4.2 Preparation operating statement reconciling budgeted and actual results........................... 13
4.3 Reporting findings to management according to responsibility centers identified..............13
CONCLUSION .............................................................................................................................14
REFERENCES.............................................................................................................................. 15

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INTRODUCTION
Management accounting is regarded as an important business element that assists in
providing accounting information to the managers in the firm (Management accounting, 2014).
This is in order to offer them basis to develop informed business decision which would allow
them to be equipped in their management and keep a track on the functions (Burgstahler and
Eames, 2006). The reports relating with management accounting involve detailed accounts of the
company's available cash, generation of revenue and current organizations accounts payable and
receivables.
In the present report, management accounting has been discussed in context of case study
related with Jeffrey and Son's Ltd. The firm is manufacturing concern that produces popular and
brand product known as Exquisite. The present report entails to make analysis of cost
information in the firm. Further it involves methods to reduce costs and enhance value within
business. In addition to this it also includes preparation, forecasting and budgets for business. At
last it includes monitoring of performance against budget within firm.
1.1 Different types of cost classification
Cost is referred to as expenditures incurred by the organization in accomplishment of its
activities. The cost of business is divided in the elements stated as under:
Basis of
classification
Type of cost Meaning
Elements Labor, Material and
overhead
Material is regarded as an essential element that
involves expenses to purchase raw material for

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production of goods. In contrast to this labor are the one
who carries out production of goods (Exley and Smith,
2011). Further amount paid to them for their services is
referred as labor cost. Beside labor and material cost, all
the other expenses are considered as overhead. For
example, insurance, salary, factory rent etc.
Functions Production,
administration,
research and
development, selling
as well as
distribution.
The expenses related with production which assists in
converting raw material into finished stock are referred
as cost of production. On the contrary entire office
expenses that are needed to control business operations
are termed as administration cost. Such involves
stationery and office rent. Selling and distribution cost
covers the expenses involved in promoting and selling
the products such as cost of marketing.
Nature Direct as well as
indirect cost
Direct cost is the expenses that can be charged to the
product and services. This involves cost of material and
labor. In contrast to this all the other expenses that
cannot be charged from the product cost are indirect
cost which includes supervision, insurance, rent and
rates (Lucey, 2002).
Behavior Variable, Fixed and
semi variable
The expenses that are not influenced with the increase
or decrease in the volume of production are considered

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fixed cost. This includes salary of foreman and rent of
building. But semi variable cost is one that changes
after certain level of production. For instance, telephone
bill, electricity charges etc. On the contrary variable
cost is one that directly changes with the alteration in
the production volume. This includes increase in cost of
material as a result of rise in volume of production.
1.2 Using job costing calculation of unit cost and total job cost for job 444
Job costing is referred to as an essential approach that can be used by firm in order to
calculate the cost in varied situation. Under this every job possess different nature and it has been
scheduled in accordance with specifications offered by customers (Prior, 2004). This technique is
controlled by maintaining direct indirect cost account in relation to the job. Calculation of unit
cost and total cost for job 444 as per case of Jeffrey and Son's Ltd is as under:
Name of Item Per unit cost Amount
Direct material £200 £40000
Direct Labor £270 £54000
Production overhead:
Variable £180 £36000
Fixed £120 £24000
Cost per unit £770
Total cost of 200 units £154000

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Working note:
Particular Qty per
unit
Rate Calculation Cost
Direct material 50 kg. 4£ per kg 50kg*4£*200 40000£
Direct labor 30 hours 9£ per hour 30hours*9£*200 54000£
Variable
production
overhead
30 hours 6£ per hour 30 hours*6£*200 36000£
Fixed production
overhead
(80000£)/(20000 hours)*(30*200) 24000£
Cost per unit (154000£)/(200 Units) 770£
1.3 Calculating cost of Exquisite using absorption costing
Absorption costing is a technique that assists in making cost calculation of a product by
taking into consideration direct costs as well as indirect expenses. It is the technique in which all
the manufacturing costs are absorbed by the units produced (Adah and Mamman, 2013). Cost of
finished unit within inventory would involve direct material, direct labor as well as both variable
and fixed manufacturing overhead.
(a) Allocation and apportion of overheads to three production departments
Basis of
allocation
Machine
shop X
Machine
shop Y Assembly Stores
Maintenan
ce
Indirect wages
and supervision Allocated £100,000.00
£99,500.0
0 £92,500.00
£10,000.0
0 £60,000.00
Indirect
materials Allocated £100,000.00
£100,000.
00 £40,000.00 £4,000.00 £9,000.00
Light and
heating Area occupied £10,000.00 £5,000.00 £15,000.00
£15,000.0
0 £5,000.00
Rent Area Occupied £20,000.00 £10,000.0 £30,000.00 £30,000.0 £10,000.00

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0 0
Insurance and
machinery
Machinery book
value £7,947.02 £4,966.89 £993.38 £496.69 £596.03
Depreciation of
machinery
Machinery book
value £79,470.20
£49,668.8
7 £9,933.77 £4,966.89 £5,960.26
Insurance of
building Area occupied £5,000.00 £2,500.00 £7,500.00 £7,500.00 £2,500.00
Salaries of works
management
Number of
employees £24,000.00
£16,000.0
0 £24,000.00 £8,000.00 £8,000.00
Total cost of
overhead £346,417.02
£287,636.
00
£219,927.0
0
£79,964.0
0
£101,056.0
0
(b) Reapportion of support departments cost to production departments
Particular Basis Machine X Machine Y Assembly
Primary
Distribution
As Stated Earlier £346417.02 £287636 £219927
Stores
Department
Direct material
(4:3:1)
£39982 £29987 £9995
Maintenance
Department
Maintenance
machine hours
(12:8:5)
£48506.88 £32337.92 £20211.2
Total cost £434905.9 £349960.92 £250133.2
(C) Deducing overhead absorption rates (OAR) for every production departments using
machine hour basis
OAR = Total cost/Actual machine hours
Particular Machine X Machine Y Assembly
Total cost £434905.9 £349960.92 £250133.2
Actual machine hours 80000 60000 10000

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OAR £5.44 £5.83 £25.01
(D) Calculation of overhead charge to the product
Items Calculation Per unit cost
Material £8
Labor 2 hours*£7.50 £15
Production Dep’t. Overheads
Machine X 0.8 hours*£5.44 £4.35
Machine Y 0.6 hours*£5.83 £3.5
Assembly 0.1 hours*£25.01 £2.5
Total cost £33.35
1.4 Analyzing the cost of exquisite focusing on technique used by Jeffrey & Son's Ltd
In accordance with the case scenario provided director of finance in Jeffrey's Son is not
delighted with the present allocation basis for calculating overhead absorption rates. It has been
stated that absorption of overhead needs to be based upon direct labor hours.
Calculation of overhead absorption rates using labor hours as a basis
Overhead Absorption rate = Total cost/direct labor hours
Particular Machine X Machine Y Assembly
Total cost £434905.9 £349960.92 £250133.2
Labor hours 200000 150000 200000
OAR £2.17 £2.33 £1.25

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Calculation of cost
Items Calculation Per unit cost
Material £8
Labor 2 hours*£7.50 £15
Machine X 2*2.17£ £4.34
Machine Y 1.5*2.33£ £3.5
Assembly 1*1.25£ £1.25
Total cost £32.09
Therefore it can be determined that labor hour basis is quite good allocation basis. This is
due to reason that under this basis, there is decrease in cost per unit to £32.09. With this firm can
reduce the cost of product.
2.1 Preparation and analysis of cost report and commenting on variance
In accordance with the provided scenario, forecasting was done by the manager in
relation with business expenditures for production of 200 units. The expenses include material,
labor, fixed and variable overheads (Kipp and et. al., 2012). Therefore the preparation of cost
report is done by determining the actual cost in order to produce 1900 units and the variances.
Actual cost calculation
Name of Item Calculation Actual cost

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Material 12£*1900 units 22800£
Labor 10£*1900 units 19000£
Fixed overhead Unchanged 15000£
Electricity (Variable) 3000£/800 units*1900 units 7125£
Electricity (Fixed) 8000£ - (3.75*2000 units) 500£
Total electricity cost 7125£ + 500£ 7625£
Maintenance 5000£-(1000£/500*100) 4800£
Calculation of difference total cost of electricity due to changing the number of units
Units Total cost
Highest 2000 8000£
Lowest 1200 5000£
Difference 800 3000£
Cost report
Elements Budgeted cost Actual cost Variance
2000 units 1900 units
Material 24000£ 22800£ 1200£
Labor 18000£ 19000£ (1000£)

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Fixed Overhead 15000£ 15000£ 0
Electricity 8000£ 7625£ 375£
Maintenance 5000£ 4800£ 200£
Total 70000£ 69225£ 775£
From the calculation of variances above it is clear that material, electricity as well as
maintenance variances positively affect profitability. In contrast to these negative variances is
demonstrated by cost of labor which affects the profitability to a greater extent. The major reason
for the existence of above variances is related with reduction in the volume of production as such
it has reduced from 2000 units to 1900 units. Change in material cost is as a reason of decline in
the total production made by firm. However the price of material remains constant in the budget.
Negative labor variance is £1000 which is resulted from higher labor rate of £10. Semi variable
cost includes electricity cost which remains constant at a limit of £500 and gets changes with the
change in the volume of production. A variance of £375 has been determined as result of
decrease in the volume up to 1900 units. It has been presented by the scenario that maintenance
is regarded as stepped cost which has increased by £1000 for production of 500 extra units.
There is decrease in the actual cost which is up to £4800 as such there is reduction in production
by 1000 units. Thus there is greater need for Jeffrey & Son to develop essential policies that can
assist in mitigating the calculated variances. In addition to this increase in labor cost inclined
total cost. It is important for the management to increase motivation among labor so as to
enhance their efficiency as well as productivity to a greater extent.

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2.2 Identification of areas of improvements using performance indicators
Through application of wide range of performance indicators several areas of
improvement have been determined by Jeffrey and Son. These are enumerated below:
Satisfaction among customers: It is regarded as an essential indicator with which
management is able to resolve the issues related with performance of several products
and services. Under this procedure improvement can be made by management in the
quality of product with respect to customer reviews (Pilleboue and et. al., 2015). By
taking into account feedback and complaints Jeffrey & Son's management can develop
suitable strategies for the purpose of making advancement in the process of production
with which customer satisfaction can be improved.
Accounting statement: Through detail evaluation of several accounting statements like
income statements, balance sheet and cash flow etc. Jeffrey & Son's management can
make assessment of change in financial position. If firm determines reduction in sales
along with the profitability in the expenditure of business then it is important for
management to bring changes in the operational strategies so as to enhance performance
of the organization. Such statements present effectiveness in offering description
regarding the changes that has occurred in the financial values in a particular financial
year.
2.3 Ways to reduce costs, enhance value and quality
There is existence of different techniques that can assist Jeffrey & Son in accomplishing
its target with respect to reduction in cost, enhancement of value and quality. These are
enumerated below:

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Total quality management: It is an effective tool that assists in bringing qualitative
improvements in the various operational activities of firm. Thus total quality approach is
related with improvement in entire process of production through evaluation and
resolution of several variances in the process of manufacturing (Jorgensen, Patrick and
Soderstrom, 2012). With this Jeffrey & Son can bring improvement in its efficiency to a
greater extent.
Kaizen: Likewise, TQM approach, the technique of Kaizen pays huge attention towards
continuous betterment in the entire functioning of the organization. The tool has proved
to be beneficial in terms of motivating the personnel towards attainment of operational
activities in an effective way. It assists management in minimizing wastage of resources
by taking into account the factors such as high time of waiting, ineffective human
resource allocation and increment in faulty units of production. Further it also involves
inappropriate management of inventory as well as inadequacy in the quantity of
production.
3.1 Purpose and nature of budgeting process
Budget is the monetary plan that is prepared by the company for each and every department,
organization and projects that estimate the presumptive income generate and expenses made by
the company during a specific time period. Here are some of the following purpose of preparing
the budgets by Jeffrey & Son’s management is as follows:-
1. Budgets are prepared by the company is order to estimate the future income, profitability
and expenditure that can be incurred by the company after the completion of the specific
time period.

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2. These are also prepared by the managers in order to compare the actual output with that
of budgeted output.
3. Another purpose of preparing this budget is to create a framework for the managers in
order to prepare various strategies (Kaplan and Atkinson, 2015). Strategies are prepared
by the organization in order to achieve the desired target and to beat its competitors.
Nature of budgeting process that is adopted by the Jeffrey & Son's management in order to
prepare various types of budgets is as follows:-
1. Company should use the last budget prepared by them in order to estimate the upcoming
financial environment.
2. After that company should determine the estimated amount of fund that can be rendered
by them from the sales of the product or other activities.
3. After that company should specify the approx amount of expenditure that can be faced by
them in terms of raw material, advertisements, production overheads and labour (Parker
and Kyj, 2006).
4. Then after that Jeffrey & Son's management should subtract the estimated income from
that of estimated expenses in order to analyse the budget is showing the condition of
deficit or surplus (Mohapatra, 2015).
5. After considering and reviewing all the above steps the final budget is need to be
submitted (Budgeting and budgetary control, 2016).
Therefore, at last when budgeting period is completed after the specific time period than in that
case actual budget need to be compared with the estimate budget in order to analyse the actual
result.

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3.2 Selection of appropriate budgeting methods for firm and its needs
Incremental budgeting method is used by Jeffery & Son's in order to prepare various
budgets that prove beneficial for the organization. At the time of preparation of incremental
budget manger of Jeffery & Son's undertake the previous budgets made by them in order to
prepare the new budget for the upcoming time period. This budget prepared by the Jeffery &
Son's has very little importance in the ever-changing business environment. Therefore, in order
to set up more realistic budget Jeffery & Son's should move on towards the preparation of Zero
based budgeting. Zero based budgeting is the method of budgeting the all the expenses that
warrant for each new period of time. Zero based budgeting starts from a zero base. In other
words it could say that zero based budgeting is the method of budgeting, budget holder and
manager of an organization considering the zero as the base for the calculation of income and
expenditure.
This method is used by the manager to make all necessary attempts in order to identify
the various alternatives for the income and expenditure. In addition to this manager also make
real assessment of the income and expenditure which they can obtain over a specific period of
time. In order to form appropriate budget Zero based budgets undertake all the realistic aspects
and views (Fisher and Krumwiede, 2015). Therefore, at last it could be concluded that zero based
budget helps the Jeffery & Son' to achieve the various desired targets and results by reducing the
variance.
3.3 Preparation of different types of budget
Production budget
Particulars July August September
Units to be sold 105000 90000 105000

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Desired ending inventory 13500 15750 16500
Total need 118500 105750 121500
Less: beginning inventory -11000 -13500 15750
Units to be produced 107500 92250 105750
Calculation of ending inventory
July August September
90000 * 15%
= 13500
105000 * 15%
= 15750
110000 * 15%
= 16500
Material purchase budget
Particulars July(£) August(£) September(£)
Units to be produced 107500 92250 105750
Material consumption 215000 184500 211500
Add: Material in ending inventory 46125 52875 54825
Total material needed 261125 237375 266325
Less: material in beginning inventory 52000 46125 52875
material to be purchased 209125 191250 212875
3.4 Preparation of cash budget
The cash budget is presented to evaluate availability of cash balance with the business
unit. The organization is able to anticipate inflow and outflow of cash through preparation of
budget (Chan and Chan, 2004). The cash budget for present case is presented underneath.

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Particulars July(£) August(£) September(£)
Opening balance of cash 16000 44031 -22007
Cash sales 900000 731250 864000
Total receivable 916000 775281 841993
Expenses
Payment to creditors 365969 334688 372531
Direct wages 322500 276750 317250
Variable overhead 108500 98350 100350
Fixed overhead 75000 87500 87500
Total payable 871969 797288 877631
Closing balance of cash 44031 -22007 -35638
As per the budget presented above, it is seen that the business unit is able to earn positive
cash flow in the month of July. However, in month of August and September the organization is
earning negative cash flow. This indicates that the business unit is unable to generate sufficient
cash flow through its operations. The organization strives hard to control its operating and non-
operating expenditure. It is seen that the expenditure is decreasing on continuous basis.
Nevertheless, the cash balance is decreasing due to reduction in overall revenue of the
organization. It is through reduction in sales that the organization is unable to generate sufficient
amount of cash flow. Henceforth, the business unit should focus on increasing sales so as to
improve liquidity position.

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4.1 Calculation of variances, identification of causes and recommending corrective actions
Variance consists of the differences which occur between the actual and standard
performance of an organization. Budget is the most effective tool which helps Jeffery & Sons in
assessing the deviations which occurred in the perform of the firm (Gibassier and Schaltegger,
2015). It enables organization to undertake effectual or corrective measures within the suitable
time frame.
Particular Budgeted Actual Variance
Sales 16000 13820 2180
Material 3840 3420 420
Labor 3200 2690 510
Fixed overhead 4800 4900 -100
Total cost 11840 11010 830
Profit 4160 2810 1350
Working Note:
Formula Calculation Variance
Material variance
Material price variance (SP-AP)*AQ (2.4-2.4)*1425 Zero variance
Material usage
variance
(SQ-AQ)*SP [(3500*0.4)-
(1425)]*2.40
60(A)
Labour variance
Labor rate variance (SR-AR)*SH (8-7.8)*350 units 70(f)
Labor efficiency
variance
(SH-AH)*SR (350-345)*8 40(f)
Overhead variance Budgeted fixed
overhead – fixed
(4800 – 4900) 100 (A)

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overhead variance
Sales volume variance (4160 – 3040) 1120 (A)
Sales price variance (AQ*SP)-Actual sales (14000 – 13820) 180 (A)
Causes behind the variances:
On the basis of the above mentioned table actual sales are lower than the budgeted sales.
It is not the positive sign for an organization because sales aspects are highly associated
with the profitability of an organization.
Besides this, positive material variance of £420 recorded by Jeffery & Sons. It occurred
due to the decline in the production units from 4000 to 3500. It is the main cause behind
the occurrence of positive material variance.
In addition to this, labor rate per hour get declined from £8 to £7.8. Due to this aspect
actual cost incurred by Jeffery & Sons is lower than the budgeted amount.
Along with it, company has incurred higher fixed overhead expenses in comparison to the
budgeted figures. It reflects that company fails to make effectual financial plan in relation
to their overheads.
Recommendations for further improvement:
It is advised to Jeffery & Sons that they needs to undertake promotional strategies and
campaign which helps them in maximize the sales and profitability aspect.
Furthermore, organization needs to produce more units which help them in getting the
economies of scale and thereby improving gross margin of an organization.
Jeffery & Sons needs to encourage their employees to perform their activities with the
high level of efficiency. Through this, company is able to produce more output within the
short span of life.

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Along with it, company also needs to frame competent strategies and policies to make
control over expenditures. Through this, company is able to attain success in the dynamic
business arena.
4.2 Preparation operating statement reconciling budgeted and actual results
Operating statement of Jeffery & Sons on the basis of actual and budgeted results is as
follows:
Particular Per unit Budgeted(4000 Units) Per unit Actual(3500) Variance
Sales 4 16000 3.94 13820 -2180
Material 0.96 3840 0.97 3420 420
labor 0.8 3200 0.77 2690 510
Fixed
Overhead 4800 4900 -100
Total 2.96 11840 3.14 11010 830
Operating
profit 1.04 4160 0.8 2810 1350
On the basis of the above mentioned operating statement it has been identifying that
selling price of the per unit of product is decreased from 4 to 3.94. It is the main cause due to this;
actual amount of sales is lower than the budgeted amount. In addition to this, prices of the
material are get inclined from .96 to .97. Nevertheless, number of units which organization needs
to produce is getting declined. Due to this aspect, positive variance is occurred in the material
variance. In addition to this, prices of the labor are declined from .8 to .77 which may cause
behind the positive variance of an organization. In addition to this, fixed overhead is also
increased. Due to this aspect, negative variance is occurred in the overhead expenses of an
organization. Thus organization requires framing cost effective policies and strategies which
helps in desired level of outcome or success.

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CONCLUSION
It can be concluded from the study that it is important to develop sound managerial
decision. This is because such majorly contributes towards growth of organization in an effective
manner. Present reports demonstrate that there is existence of number of management tools and
techniques that assists in attaining success through business. With this technique firm can
effectively reduce the costs, monitor the spending of firm and can eliminate the variances in an
effective manner. Thus this acts as an aid for the firm in attaining its set targets in an appropriate
way. Further it is effective in reducing the negative financial consequences in order to run
successful business operations. Through cash budget firm can make determination of the
different cost involved in performing the activities. This has greater advantage for firm in terms
that it can keep a track on its expenses in an appropriate manner.
REFERENCES
● Fisher, J.G. and Krumwiede, K., 2015. Product Costing Systems: Finding the Right
Approach. Journal of Corporate Accounting & Finance.
● Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
● Kipp, A. and et. al., 2012. Layered green performance indicators. Future Generation
Computer Systems.
● Lucey, T., 2002. Costing. Continuum.
● Prior, P. B., 2004. Managing Financial Resources and Decisions. BPP Professional
Education.

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