Dissertation Sample on Management Accounting

Sample On Management Accounting

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Table of Contents INTRODUCTION .........................................................................................................................3 TASK 1...........................................................................................................................................3 P 1.1 Different types of cost classification..................................................................3 P 1.2 Calculation of Unit cost by using unit costing method............................... 4 P 1.3 Cost of exquisite using absorption cost............................................................5 P 1.4 Cost data of exquisite using appropriate techniques..................................7 TASK 2...........................................................................................................................................8 P 2.1 Preparation and analysis of cost report for the month of September and variance analysis ........................................................................................................ 8 P 2.2 Various ares of potential improvements using performance indicators 9 P 2.3 Ways to reduce cost and and enhancing value and quality ...................9 TASK 3........................................................................................................................................ 10 P 3.1 Purpose and nature of budgeting process for Jeffery and Son's Ltd 10 P 3.2 Use of appropriate budgeting technique....................................................... 11 P 3.3 Preparation of production and material budgets ..................................... 12 P 3.4 Preparation of cash Budget ............................................................................... 13 TASK 4........................................................................................................................................ 14 P 4.1 Calculation of variances, identify possible causes and recommend corrective actions...............................................................................................................14 P 4.2 Operating statements includes both budgeted and actual results..... 16 P 4.3 Identified responsibility center.......................................................................... 16 CONCLUSION .......................................................................................................................... 17 REFERENCES ...........................................................................................................................18

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INTRODUCTION Management accounting is also known as managerial accounting which is used by managers as a tool to collect data and for the better use of accounting information so as to decide matters within the organization as well as to make optimal decisions. In today's competitive era, management accounting is a unit that plays a crucial role in business (Mohamed and Lashine, 2003). The present report is going to discuss about the different types of cost and their calculations along with explaining the ways to reduce the cost and to enhance the level of value as well as quality. This report is based on the case scenario of Jeffrey & Sons, a leading manufacturing company that manufactures different kinds of products. The unit discusses about various management tools such as budgets and variance analysis techniques for Jeffrey & Son's so as to predict future causes of actions. In this report, management accounting is used as a tool to increase the value of business so as to attain organizational goals. In addition to that, cost sheet as well as operating statement are prepared to clarify the scenario. At last, various calculations are quoted in respect with the given figurers and case scenario.

TASK 1 P 1.1 Different types of cost classification Cost is a type of expense that a manufacturing company bears at the time of producing goods or services. However, cost of production varies as per 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 of production, it means the cost changes as per the number of products that are to be produced for a specific time period. On the basis of behavior, cost is divided into three areas such as Fixed Cost, Variable Cost and SemiToll Free: +44 203 3555 345 Email: help@onlinedissertationwriting.co.uk Online Dissertation Writing provides dissertation help from expert writers

variable Cost. Fixed cost includes those kinds of cost which do not change at any volume of production (Cohen and Kaimenaki, 2011). On the other hand, cost which changes as per the single change in the volume of production is known

as

variable

cost.

Nonetheless,

Semi-variable

cost

includes

characteristics 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 certain changes in production volume it become variable.

Nature of Expense: According to the nature of expenses, cost is classified into material, labor and expenses. Labor is the cost that is incurred by the manufacturing company in the form of remuneration paid to the employees or workers. Material cost is one which is applicable to the raw material 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 is classified as per the specific activities and functions of different departments of the company. Such kind of cost include Production cost, Administration cost, Selling cost, Distribution cost, R&D cost and so on.

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

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P 1.2 Calculation of Unit cost by using unit costing method Particulars Direct Material 50Kg* £4* 200 units Direct Labour 30 hours * £9 *200 units Variable production overhead £6 * 6000 hours Fixed production overheads (£80,000/20,000 hour) * 6000 hour Total cost for Job 444 Unit cost

Total cost £40000 £54000 £36000 £24000 £154000 £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 and variable production overhead.

However fixed expenses have also been

added for calculating total cost for Job 444. At the end, per unit cost for Job 444 is £770.

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P 1.3 Cost of exquisite using absorption cost Service

Producti Basis Particular

of allocat

departm

on Total

ion

ent

Machine

Machine

Assembl

X

Y

y

£99,500

£92,500

Stores

Maintena nce

Indirect Wages

£362,00

£100,00

0

0

Indirect

£253,00

£100,00

£100,00

Material

0

0

0

And Supervisi on

Light And Heating

Machin e hours Area

Rent

occupi ed

Insurance And Machiner y

£100,00

£26,666.

67

£20,000

£3,333.3 3

£20,000

£10,000

£30,000

£30,000

£3,529.4

£2,205.9

£4,411.8

£2,205.9

0

0

0

0

£150,00

£35,294.

£22,058.

£44,117.

£22,058.

£26,470.5

0

12

80

65

80

9

0

£10,000

Book value of

£15,000

machi

£2,647.06

nery

Depreciat ion

£50,000

£40,000

Book value of

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machi nery Insurance

Area

Of

occupi

Building

ed

Salaries Of

Work

Managem ent

£25,000

£5,000

£2,500

£7,500

£7,500

£2,500

£80,000

£24,000

£16,000

£24,000

£8,000

£8,000

£1,035,

£314,49

£272,26

£245,86

£69,764.

£49,617.6

000

0.19

4.70

2.78

70

5

No. of emplo yees

Total Cost

Particular

Primary distribution (From above table) Stores Maintenance

Production Basis of allocatio n Total in Machine X Machine Y Assembly £314,490.19 £272,264.70 £245,862.78 £10350 00 Direct material Machine hours

£34,882.35

£26,161.76

£8,720.59

£23,816.47

£15,877.65

£9,923.53

£373,189.0 £314,304.1 £264,506.9 1 1 0

Total

c) The calculation of overhead absorption rate for every manufacturing department X, Y and assembly Toll Free: +44 203 3555 345 Email: help@onlinedissertationwriting.co.uk Online Dissertation Writing provides dissertation help from expert writers

Overhead absorption rate

Fixed overhead/ machine hours Overhead 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 using absorption cost. To calculate the cost, various kind expenses are included in the total cost (Kinney and Raiborn, 2012). However, the The calculation of overhead absorption rate for every manufacturing department X, Y and assembly are shown in the next section.

P 1.4 Cost data of exquisite using appropriate techniques Basis Particular

of

allocation Total

Production Machine X

Primary

£10350

Distribution

00 Direct

Stores

material

Machine Y

Assembly 1

£314,490 £272,264.70 £245,862.78 .19 £34,882. £26,161.76 35

£8,720.59

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Maintenanc Labour e

hours

Total Cost

£22,052. £16,539.22 2:1.5:1 29

£11,026.14

£371,424 £314,965.68 £265,609.51 .83

Computation of overhead absorption rates on the basis of labour hours Machine X 371424.83/ (2hr *100000 £1.86 units) Machine Y 314965.68/ (1.5 hr *100000 £2.10 units) Assembly 265609.51/ (1hr *100000 £2.66 units) The calculation of overhead absorption rates is done on the basis of labour hours 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 overhead absorption rate. It was seen that the calculation of overhead absorption rate on 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 rate

the production department were seen continuously increasing i.e 1.86£, 2.10£ and 2.66£ respectively. The major reason is seen that total labour hours are higher than Machine hours.

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TASK 2 P 2.1 Preparation and analysis of cost report for the month of September and variance analysis Jeffrey & Son's job cost sheet is prepared as under: Budgeted Output Actual Output 2000 Units 1900 Units Per unit Total Per unit Total Particular cost cost cost cost Material £12 £24,000 £12 £22,800 Labour £9 £18,000 £10 £19,000 Fixed £15,000 £15,000 Overhead Electricity £8,000 £7,625 Maintenance £5,000 £4,800 Total £35 £70,000 £36 £69,225 Working note: Particular Material Labour cost Variable cost Electricity Fixed electricity Variable cost Maintenance cost

Calculation 12 * 1900 Units 10 * 1900 Units - 8000-5000/2000-800 8000 - 3.75*2000 3.75 * 1900 units 5000 - 200

Budgeted Actual £1,200 -£1,000 £0 £375 £200 £775

Cost £22800 £19000 £3.75 per unit £500 £7125 £4800

Working note Material

12£*1900 Units = 22800£

Labour cost

10£ * 1900 Units = 19000£

Variable cost Electricity =8000£-5000£/2000-800 Fixed electricity = 8000£ - 3.75*2000 = 3.75 per unit = 500£ Variable cost = 3.75£*1900 units = 7125£ Maintenance cost

5000£ - 200£ = 4800£

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Variance analysis From the above calculation , it has been witnessed that material variance raised to £1200. The major reason for increased variance is that the production volume is charged and the material price per unit remained same to £12. To a further extend , it was seen that the labour cost variance is also raised to 1000£ as the labour rate is increased by £1. in respect with the budgeted electricity expenditures it was found that it was seen to be £8000 which is greater than the actual figures of electricity expenditures (£7625). It has been witnessed that per unit variable electricity charges were remained same at £3.75 so it is considered to be the fixed cost. Furthermore. it was witnessed that the other fixed cost remained unchanged with any level of production. However, it can be said that a negative variance is seen in the areas of labour rate variance and total material cost variance. This negative variance had impacted the function and operation of manufacturing unit.

From the calculation and in-depth analysis, it can be said that the company should reduce their material and labour costs as to eliminate the negative impacts of operations of company (Kont, 2012).

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P 2.2 Various ares of potential improvements using performance indicators In order to accomplish desired goals every business sets target and this in turn supports in enhancing overall performance. Further, it is required for management to ensure success of its entity on continuous basis. Large numbers of factors are present in the firm to identify potential improvement.

Turnover is regarded as one of the most significant factor which assist in measuring business performance. Business which is capable enough in earning higher sales than others will make high improvement. Moreover, cost as a factor is also considered as crucial as in case when cost associated with organization is rapidly rising without growth in sales then improvement is not at all possible (Lucey, 2003). Apart from this profitability level of the organization also supports in knowing the level of improvement and growth in same shows improvement and vice versa. Overall financial performance of organization also highlights how healthy organization is and increasing overall assets of firm shows improvement in business performance and vice versa. On the other hand other factors are also present through which overall performance of business can be known easily such as level of customer satisfaction, technology employed for producing goods, competitive position of the company etc.

Therefore, in this way with the help of performance

indicator 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 possible to reduce cost and enhance value of products along with quality.

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

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

Enhancing value: For delivering better value business can increase its earnings along with stability in the operations. Further, by enhancing sales value but not the sale price it is possible for organization to deliver better value. Further, with the help of diversification of customers and industry organization can accomplish this objective. By lowering down the overall cost business enterprise can easily develop a base against its competitors (Hansen Mowen, and Guan,2007).

TASK 3 P 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 department in an organization that determines the possible expenses and income of future. Main purpose of budget is to estimate probable income and expenditure for a company to a specific point of time (Burns, Hopper and Yazdifar, 2004). Furthermore,

major purposes of budget are shown in the

below 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 effective decision-making.

To help production managers in the comparison of estimated output with actual performance.

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

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Nature of budgeting process Budgeting 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 as company can make control over the expenditures and can get rid of the negative variance as well.

The nature of budgeting process is shown in

following table: To estimate the financial situation on the basis of last budget (Budgetary control. 2011).

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

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

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

Review and revise of prepared budget.

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

Variance analysis.

In respect with the given case scenario, Jeffrey & Son's managers prepare budgets by forecasting future income and expenses in respect with the upcoming years. Manager pays attention to sales volume and tries to enhance the sales along with reducing cost so that profits can be increased.

However, it is required to have an effective coordination in budgeting process.

As per the in-depth investigation into budget preparation of the

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mentioned company, it has been noticed that incremental budgeting technique is used by the organization to prepare budget. At last, the actual results are compared with the budgeted figures so as to determine the variance along with taking necessary decisions to remove the negative variance (Sokolov, and Giniatullin, 2015).

P 3.2 Use of appropriate budgeting technique The present case is given in the respect with Jeffrey & Son's manufacturing

company

and

investigation

and

applied

concept

of

management accounting show that company is going to prepare budgets while making use of incremental budgeting system. However, some problems are associated with the use of mentioned budgeting system. The major problem associated with such kind of budgeting system is that volatility in the market as well as the significant impact of volatility are being negated by the management at the time of preparing budget. This is going to put a great impact on the budgeted incomes and expenditures of the company in respect with actual outcomes (Datar and et. al., 2013.). As an effect of such negligence, Jeffrey & Son's manufacturing company fails to meet the actual figures and positive variance. There is a specific need for the organization to change the budgeting method that is previously adopted i.e. incremental budgeting system. By looking over the current scenario of company and future budgeting needs, company

can make use of “ Zero

base 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 can successfully meet the positive variance. Furthermore, applications of “Zero base

budgeting”

enable

aforesaid

company

to

estimate

the

entire

operational cost as well as the anticipated revenues in respect with the proper market behaviour. Organization can come closer to the accurate actual figures of budgets through using this method. However, significant market changes can be analysed and budget will be prepared through considering the impact of market volatility. At last, it can be said that Jeffrey & Son's manufacturing company can remove or reduce the impact of market uncertainties 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 and material purchase budget for the organization has been designed to asses the anticipated experience made on production and material. The production budget help in identifying the level of future production on the other hand materiel budget represents the material used for future period.

Sales Op. Stock Total Closing stock Production

Material Require Less: Opening stock Total Add: Closing stock Purchase

Production Budget 105,000 90,000 11,000 13,500 94,000 76,500 13,500 15,750 107,500 92,250 Material Purchase Budget 215,000 184,500 52,000 45,000 163,000 139,500 45,000 52,500 208,000 192,000

105,000 15,750 89,250 16,500 105,750

211,500 52,500 159,000 55,000 214,000

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Calculation of closing stock of production: 15% of next month Month Calculation Units July 15% of 90000 Units 13500 units August 15% of 1050000 units 15750 units September 15% of 110000 units 16500 units Calculation of closing stock of material: 25% of next month Month Calculation Units July 25% of (90000 units * 2kg/unit) 45000 Kg August 25% of (90000 units * 2kg/unit) 45000 Kg September 25% of (110000 units * 2kg/unit) 55000 kg The table above represents the Material Purchase Budget

and

Production Budget for the mentioned entity, however the working notes are representing the calculation of closing stock of production for 15% of next month and closing stock of material for 25% of next month.

P 3.4 Preparation of cash Budget Cash budget is a financial tools that represents the future cash inflows and outflows of business for a certain time period. In addition, it includes cash incomes and expenditures

for the company that are helpful in

assessing surplus or deficit for a firm. The cash flow for the company is designed in the following points: Particular Opening balance CASH RECEIPTS Cash sales Total cash Income CASH EXPENDITURES

July £16,000

August -£3,250

September -£22,300

£900,000

£821,250

£864,000

£916,000

£818,000

£841,700

Material Purchase

£364,000

£336,000

£374,500

Direct wages

£322,500

£276,750

£317,250

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Variable overhead Fixed Overhead Bad debts Total cash expenses Closing balance

£110,500

£99,550

£103,270

£75,000 £47,250

£87,500 £40,500

£87,500 £47,250

£919,250

£840,300

£929,770

-£3,250

-£22,300

-£88,070

From the in-depth analysis of above budget is has been witnessed that the sales of company is continuously decreasing as it has been decreased from

90000£ to 821250£.

However, in the month of September it has

improved to 864000£. The cash income of business is totally declined in the August and again it is increased in September. The direct wages for the company has decreased from 322500£ to 276750£ in August. At the end, it was found that

budget have negative cash balance

in

the end of

September to 3250£, 22300£ and 88070£. From the overall cash budget, it was reported that the company should increase its sales and has to focus on reducing cost throughout the months by cutting unnecessary expenditures (Jones, and Clatworthy,2006).

TASK 4 P 4.1 Calculation of variances, identify possible causes and recommend corrective actions Particular Sales Material Labour Fixed Overhead Total Cost Profit

Per unit cost 4 0.96 0.8 2.96 1.04

Budgeted 16000 3840 3200 4800 11840 4160

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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 values Material Rate variance = 2.40£ - 2.40£ = Nil Material quantity variance = 0.4kg – 0.41 Kg = (0.01) kg Material 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 and budget sales of enterprise. Further, through this variance it is possible to measure performance of the sales function and business results can be analyzed with the aim to better understand market conditions. The main cause of this variance is due to presence of higher inflation which leads to higher selling price. Further, it can also take place due to worst quality or decreasing purchasing power of consumers along with their unawareness. In order to overcome with the issue of sales variance business can reduce its selling price and products along with services can be delivered to target market which is of high quality so that overall sales volume can be enhanced easily (Mohamed and Lashine, 2003).

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Material variance: It is considered as the difference between actual cost incurred for direct materials and the excepted cost of those materials.

The main cause of material variance can be rise in the level of quantity which is required for producing single unit of a product or commodity (Weygandt and et. al., 2009). In order to deal with the issue of material variance company can undertake skilled and qualified labor hours and their overall impact can be eliminated up to extent.

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

Profit variance: It takes place due to material, sales and labor variance. Further, in order to deal with this variance company must take initiative to meet sales target and materials must be purchased at a budgeted rate with the motive to enhance efficiency of the staff members present within workplace.

P 4.2 Operating statements includes both budgeted and actual results The table mentioned below represents the operating statement of Jeffrey & Son's that includes reconciliation of budgeted figures and actual outcomes.

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Particular Sales Material labour Fixed Overhead Total Operatin g profit

Per unit 4 0.96 0.8

Budgeted(4000 Units) 16000 3840 3200

2.96

4800 11840

1.04

4160

Per unit 3.94 0.97 0.77

Actual(350 Varian 0) ce 13820 -2180 3420 420 2690 510

3.14

4900 11010

-100 830

0.8

2810

1350

P 4.3 Identified responsibility center Purchase 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 issue linked with variance may not arise (Hansen, Mowen and Guan, 2007).

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

Production department: The first and foremost duty of this department is to analyze overall demand for product in the market as supply of commodity is based on the demand for product. Jeffrey & Son's production department

is

responsible

for

producing

the

required

quantity

of

commodities through which it is possible to satisfy need of target market in appropriate manner (Tappura, and et. al., 2015).

Marketing

department:

This

department

is

responsible

for

development of effective marketing plans so as to develop awareness in the market. Further, main stress is on providing appropriate knowledge and information to customers regarding product range. Through this it is possible Toll Free: +44 203 3555 345 Email: help@onlinedissertationwriting.co.uk Online Dissertation Writing provides dissertation help from expert writers

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

CONCLUSION The entire study being carried out has supported in knowing about the concepts

of management

accounting

which

assists

manager

of the

enterprise to use information in effective manner. Further, decisions which have to be taken on daily basis can be made easily for the growth and development of business. On the other hand, concept of directing, planning along with controlling can be implemented within the workplace so that business can reduce its overall cost and this can enhance profitability level of the business. Apart from this, different effective ways are present of reducing cost, enhancing value along with quality of product which are beneficial for company.

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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 Resource Management. pp.154-166. ● Burns, J., Hopper, T. and Yazdifar, H., 2004. Management accounting education and training: putting management in and taking accounting out. Qualitative Research in Accounting & Management. 1(1). pp.1 – 29. ● Cohen, S. and Kaimenaki, E., 2011. Cost accounting systems structure and information quality properties: an empirical analysis. Journal of Applied 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. Cengage Learning EMEA.

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