Costing and budgeting by yousuf

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Assignment on costing and budgeting

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YousufHasan Id no:6650

Introduction:

Ford motor company one of the top manufacturing company in UK. It was established

in 1993 and employed 5929 people. Ford is now most popular car maker in UK. Over

100 years they are leading UK market by creating innovative products and more

efficient and attainable for people.

Answer outcome (1.1)

Cost represented the estimated dollar value of resources consumed by the

organization in providing a product or service; they are critical element of many

business decisions. Detailed cost information provides a company with useful data

on its resource spending and how each product and service contributes to

profitability.

According to William Baumol, 1968 ³costs are the monetary value of expenditures for

supplies, services, labour, products, equipment and other items purchased for use

by a business or other accounting entity´

In other way cost is anything incurred during the production of the good or service to

get the output into the hands of the customer.The customer could be the public (the

final consumer) or another business.Controlling costs is essential to business

success.

Classification of cost:

Figure 1.1: Classification of cost

cost

Elements

Nature

FunctionRelevance

Controllability




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Elements of cost: Row materials are converted into product by the help of

manufacturing concern, such as labour, plants. The elements which are contribute

the cost of manufacturing known as elements of cost. The elements of cost are

follows:

Particular process, job operation or product has a relationship with direct material,

direct labour and direct expense but there is no relationship with indirect material,

indirect labour and indirect expenses.

Factory cost= Prime cost + factory overhead

Cost of production= factory cost + administration overhead

Total cost of sales = cost of production + selling and distribution overhead

Material Labour Expenses




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Nature of cost:

Function of cost:

Fixed cost

� Costs remain fixed over arange of output levels,e.g. rent and rates

Semi fixed

� Costs which combine afixed and variableelement, e.g. telephone

bill with fixed monthly or quarterly rental andcharge per unit

Variable

� Costs vary directly withoutput, e.g. directmaterials and directlabour

� Every year ford motor company spend hugeamount of money in

production to createinnovative andattainable products for

people.

Production

�After produce the productford company needs tomake sure product reach tocustomer and that¶s costmoney.

Selling anddistribution

�To make the operationsuccessful Ford motor company has to spendmoney for administration

Administration

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R esearch anddevelopment




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Figure 1. : Costing techniques

Absorption costing

Absorption costing means that all of the manufacturing costs are absorbed by the

units produced. In other words, the cost of a finished unit in inventory will include

direct materials, direct labour, and both variable and fix ed manuf actur i ng overhead.

As a result, absorption costing is also referred to as full costing or the full absorption

method.

Marginal costing

µThe accounting system in which variable costs are charged to cost units and thefixed costs of the period are written off in full against the aggregate contribution. Itsspecial value is in decision making¶. (Terminology.)

The term µcontribution¶ mentioned in the formal definition is the term given to thedifference between Sales and arginal cost. Thus

ARGINA COST = VARIAB E COST DIRECT ABOUR+DIRECT ATERIA+DIRECT EXPENSE+VARIAB E OVERHEADS

CONTRIBUTION SA ES ARGINA COST (globusz.com, 2010)

Costing

Techniques

Absorption

costing/ full costing

arginal

costing




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Absorption Costing

Ford motor company now want to calculate how much money they spend to produce

tire

Full Capacity of Ford Company , units

Current production production is , units

Var iable cost per units tire £

otal fixed cost rent, electr icity, as) £ ,

Selling pr ice would be fixed £ per units

Sales Revenue , units50£50,0000

Less) total var iable cost ,000 units 0 £ 0,000)

Less) total fixed cost £ 58,000)

Pr of it 42,2000

Unit cost otal cost

umber of units

£ 0,000+£58,000

0,000 units

£7.8per unit

8 per unit




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Answer outcome(1.4

Ford motor company uses both uantitative and ulitative data to get the inf ormation,

masure their success and plan f or f uture.

Quantitative data: Quantitative data is type of data that counted numar ically and

measured and expressed in uantit y. Its help to now the trends and changes over time. Quantitative data can be manipulated and satistically analyzed , it can be

shown in graphs, tables and histographs.

able .

Qualitative Data: Qualitative methods use to descr ibe the inf ormation rather than

showing statistical inf erences. his method provides more depth and r ich

descr iption.

able .

Qualitative and uantitative data can be presented in diagrammatical, graphical,

index number .

iagrammatical or raphical presentation: hereare some benefits of

iagrammatical or raphical presentation. hey are f ollows:

y elp to understand the situation uickly , explained and compared data in

presentation.

y ranslate the ideas eff ectively and uickly

y More eff ective than table but may be less accurate.

y able and diagram suitable f or descr iptive data but graph is suitable f or

continuous data.

he buyers of Ford cars in table . can be shown in graph:

Frequency distr ibution of 00 Ford car buyers

Age Frequency

8- 8 0

8- 8 5

8-48 0

48-58 5

Frequency distr ibution of 80 Ford car buyers

User Frequency

Official 40

personal 5

Public 0

ospital 5




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Figure 1.3: Ford car buyer

Index number: Index number measures the economic changes over time.Because

the©

work in a similar wa©

to percentages the©

make such changes easier to

compare. Briefl©

, this works in the following wa©

:

Suppose Ford car TDCi163 costs £19 thousands in 2009 and in2011 its cost £21,

corresponding to 100% .

The index number can be calculated for period of 2009 as a proportion change

follows:

The index number 21 100 110.53

100 19

0

10

20

30

40

Frequency

Car buyer

18-28

28-38

38-48

38-49




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Whole year they will buy tire, window regs and body panel, they will also recruit and

pay new employees. If Ford find chipper supplier with discount they may change the

supplier . hese diff erences will lead to var iations between actual cost and standard

costs budgeted as f ollows:

Mater ials Q uantity X Price = Standard Cost

ire 4 tires X £15 £ 0

Body panel 1body panel X £ 5 £ 5

Window Regs 1window regs X £5 £5

Mater ial¶s total cost £90

irect labour cost 8 hours X £11 £88

otal direct cost £178

he analysis of mater ial var iance would be:


window regs Budget window regs X £5 £10

Actual 1window regs X £5 £5

Mater ial var iance £5 f avourable

Pr ice var iance £ 0-£ 5) X 1 Body panel £5 Unf avourable

Variance in quantity .00-1.00) X £5 £5 f avourable

Mater ial var iance o var iance

The analysis of variance in direct labour would be the following:


irect labour Budget 10 hours X £10 £100

Actual 8 hours X £11 £88

DL Variance £12 f avourable

Pr ice var iance £10-£11) X 8 hours £8 Unf avourable

Variance in quantity 10-8) X £11 £22 f avourable

DL Variance £14 f avourable

Responsibility centre: Responsibility centre is an organization unit or

aamanager is held accountable. Responsibility accounting enables accountability f or

financial results and outcomes to be allocated to individuals throughout the




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organization. he ob jective is to measure the result of each responsibility centre. It

involves accumulating costs and revenues f or each responsibility centre so that

deviation f rom per f ormance target typically the budget) can be attr ibuted to the

individual who is accountable f or the responsibility centre.

Answer outcome (2. )

Cost reduction methods:

* Cost reduction methods that helps to enhance value and quality

* elp to make buying decision

* Buy the components and inputs f rom external suppliers if it is cheaper than making

* Purchase in bulk to qu alif y f or bulk purchase discount Cash purchase

* Pay on time or ear ly to qualif y f or ear ly payment discounts

* Maximize use of f ull capacity to reduce fixed cost per unit

* Introduce quality control to reduce wastage and warranty claims

* Use high skilled workers to reduce wastage and increase output per labour hour

* Use of state-of-ar t technology or machinery in cer tain cases produce f ast and in

many cases cheaper

* rained employees work f aster and reduce wastage with better quality and finishing

* Change of costing method/system example use of marginal costing will reduce cost

per unit theoretically

* Closing down loss making divisions ± caref ul when you make such a statement

* his is also known as key f actor analysis. his analysis to allocate scarce resources

to minimize the cost and maximize profit




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Budget:

A budget is the financial bluepr int or action plan f or a depar tment or organization. It

translates strategic plans into measurable expenditure and anticipated returns f or a

cer tain per iod of time.

According to J.J. ampton cited by isar Ahmed, 2004:220) A budget is f ormal

plan expressed by dollars´

So a budget is not an ornamental yellow bird f rom tropical climes. It is a plan, a course through the f uture. ormally a budget descr ibes a per iod in the f uture not the past.

THE PURPOSE O A BUDGET Budgets can accomplish the f ollowing:

Forecasting Inevitably, if an organisation is going to draft a budget which will be of any use whatsoever , it will have to make f orecasts. hese f orecasts will notalways be correct, but at least the organisation has had to look ahead. Itwon¶t see every danger or oppor tunity, but looking ahead must be better than moving f orward with eyes closed.

Planning Once f orecasts are completed, planning can be carr ied out. For example, if the f orecast suggests a dramatic increase in demand, then new production f acilities might have to be planned. owever , it is impor tant to be aware atthe planning stage that the f orecasts might not be correct, or even if they were correct at the time they were made, things can change. etailed

planning might even require the f orecasting stage to be revisited to check estimates or to try to gather more evidence f or estimates.

Coor dination In many ways, coordination is an aspect of planning making sure the company delivers what it has budgeted to sell), but it is wor thy of a separate mention. Coordination really highlights is that there has to be a match between the organisation¶s structure and ambition and the requirements f or its success. In some businesses it is impor tant to meetwell-understood customer demands quickly and reliably, and in this context, str ict budget targets and measurement can be vital to success.

Communication

A budget is a succinct and precise way of communicating targets to depar tments and employees ± or at least some aspects of what should be achieved. he problem is not what is specified in the budget, it¶s what¶s notspecified. he budget might state explicitly that 2,000 units should be made in a per iod, but implicit in the target is that the units should be of a ce r tain quality. he budget might be explicit about the labour rate per hour to be paid, but might not specif y the skills that employees should have.




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Receipts and payment method: This is most popular and widely used method to

prepare cash budget. The estimation under this method can be given monthly,

f or tnightly or weekly basis. This method is suitable f or the business where sales are

unstable, seasonal or suff er f rom the shor tage of liquid resources.

Adjusted Earnings Method:The estimation under this method can be considered at

least 5 years. Earning ad justed f or non -recruiting or extraordinary products. The

ad justed earnings can be averaged or can use prevailing rate of return f or

comparable companies or an appropr iate discount rate.

Balance Sheet Method:The balance sheet methods estimate the financial condition

end of the budget per iod .Based onactual data it¶s similar to balance sheet. For this

reason company balance sheet is not illustrated f or the company colt manuf actur ing.

If the budgeted balance sheet indicates weakness of financial position, revising the

financial plan or correction would be mandatory.

Importance of regular cash budget in For d motor company:

i) elpf ul in planning: Cash budget help to make plan that allows efficient

use of cash. Whenever company run out of surplus or find weakness of

the plan they can change the plan.

ii) Estimate the f uture needs: cash budget f orecast f uture plan, f uture

surplus and amount in advance. It¶s help to raising f unds with profitable

way at reasonable terms and cost.

iii) Maintenance of cash balance: Cash based on liquidity enterpr ise and

cash budget helps to maintain the liquidity. It¶s suggesting adequate

cash balance at a f air margin f or the contingencies.

iv) Evaluation of per f ormance: cash budget evaluate the per f ormance of

company in per iod of time.

v) Sound dividend policy: Cash budget plans f or shareholders dividend

and consistent with the liquid position of firm. Its helps to f ollow the

dividend policy.




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Estimated cash receipt :

January February March Budgeted sales £ 40,000 £1,120,000 £1,120,000

ote: £ 40,000= £ ,200,000X 20%

£1,120,000= £ ,200,000X 5%

Titan Ltd

Schedule of Collections f r om Sales For the Three Months Ending March 31, 2012

January February March

Receipts f rom deposit :

Cash sales 10% X current month's sales

- ote A)

£ 4,000 £112,000 £112,000

Receipts f rom cash sales:

Collections f rom pr ior month's sales 50%

of previous month's sales - ote B)

£ 20,000 £560,000 £560,000

Collections f rom pr ior month's sales 5%of previous month's sales - ote C)

£224,000 £ 92,000 £ 92,000

Total receipts f r om sales on account £608,000 £1,064,000 £1,064,000

ote A: £64,000= £640,000 X 10%

£112,000= £1,120,000 X10%

ote B:£ 20,000=£640,000 X 50%

£560,000 = £1,120,000 X50%

ote C: £224,000 = £640,000 X 5%

£ 92,000=£1,120,000 X 5%




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Estimated Cash Payments Estimated cash payments are planned reductions in cash f rom manuf actur ing costs,

selling and administrative expenses, capital expenditures, and other sources, such as buying secur ities or paying interest or dividends. A suppor ting schedule can be used in estimating the cash payments f or manuf actur ing costs.

January February March

Manuf actur ing costs £40,000 £80,000 £80,000

ote: £40,000 = 200,000X20%

£80,000 = 200,000X40%

£80,000 = 200,000X40%

Completing the Cash Budget

Titan Ltd.Cash Budget

For the Three Months Ending March 31, 2012

Estimated cash receipts f rom: January February March

Cash sales £64,000 £112,000 £112,000

Collections of accounts receivable £608,000 £1,064,000 £1,064,000

Total cash receipts £672,000 £1,176,000 £1,176,000

Estimated cash payments f or:

Manuf actur ing costs £40,000 £80,000 £80,000

Payroll £9,000 £9,000 £9,000

Administrative expenses(office rent) £ 0,000 £5,000 £5,000

Var iable production costs £ ,700 £6,475 £8, 25

Adver tising £20,000 £10,000

Administrative overhead £700 £700 £700




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Total cash payments £103,400 £111,175 £103,025

Cash increase(Decrease) £568,600 £1,064,825 £1,072,975

Cash balance at beginning of month £200,000 £768,600 £1,833,425

Cash balance at end of month £768,600 £1,833,425 £2,906,400




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Answer outcome Task-4

(i) Mater ials pr ice var iance: (SP-AP) X AQOr

(SP X AQ) ± ( AP X AQ)

(£45 X 86450) ± [(£4379800/96500)*86450)

£3,890,250 ± £3,923,665

=33,415 (Unf avourable)

Mater ials usage var iance: (SQ-AQ) X SP

{(10kg X 8,250) ± 86,450} X £45.00

(82,500 ± 86,450) X £45.00

= -£177,750 (U)

Total mater ials var iance: (SQ X SP) ± ( AQ X AP)

(8250 X 10 X £45) ± £3,923,665

£3,712,500 - £3,923,665

= -211,165

(ii) Labour rate var iance: (SR ± AR) X A

Or

(SR X A ) ± ( AR X A )

(£60.00 X 32,000) ± (£1,968, 000)




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F. O. Capacity var iance: (BH ± AH) X SR

{(4 X 8,000) ± 32,000} X £15

= £00.00

F. O. total var iance: ( A. F.O.H. ± S. F. O. H.)

(£117,500) ± (8,250 X £15)

= £ 6,250 (F)




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t A

t ing New Delhi: Anmol publication ltd

AW Willsmore(1973), B iness B get s in p t ice, Pitman publishing.

Accounting coach.com, H. Averkamp. (19 may 2009) w !

t is "

get?(http://blog.accountingcoach.com/what-is-a-budget/)

Amer ican council on education, Natalie K. (2003) w ! t is " get?

(http://www.acenet.edu/resources/chairs/docs/Krawitz_what _ isFMT.pdf )

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