Management Accounting: Costing & Budgeting Individual Assignment

Management Accounting: Costing & Budgeting Individual Assignment

Acknowledgment I like to give my gratitude to my parent, my friends & everyone who helping me in finding information to submission the assignment up to their capability.

Executive SummeryThis report will give a clear idea about an understanding about accounting system of any organization and evaluate the knowledge on management accounting concepts and their application. This report also classify those identify cost. Furthermore this report will discuss the different costing methods and their use with appropriate examples. This report identified the unit cost of the production selling price of the Aloe miracle foot care cream and profit per unit in Lifestyle Private Ltd and also provides an operating statement to the Aloe miracle foot care cream including absorption and marginal costing to find the net profit. Furthermore this report also describes purpose and process of budgeting based on the Oak Wood Restaurant (pvt.) Ltd. Advantages and disadvantages. And explain about the Zero based budgeting. Furthermore this report will prepare sales budget, production budget, operating expenses budget, cash budget and master budget for the year ending in company ZERO.

Table of Contents1.0DIFFERENT TYPE OF COST AND COSTING METHODS41.1 Costing methods82.0 ANALYZED COST REPORT122.1Income Statement for October under Marginal Costing System122.2 Income Statement for October under Absorption Costing System132.3 Calculate cost using appropriate techniques142.4 Recommendation for improvements.153.0 BUDGETING163.1 Purpose of Budgeting for Oak Wood Restaurant (pvt) Ltd.163.2 Types of Budgeting193.3 Budgets according to the budgeting method204.0 VARIANCES244.1 Operating Profit Variance254.2 Report findings to management in accordance with identified responsibility centers265.0 Conclusion and Recommendation27

1.0DIFFERENT TYPE OF COST AND COSTING METHODSCost is the amount ofexpenditure incurred on or attributable to a specific thing or activity. Costs can be classifying base on four elements as bellow.1. Function2. Behavior3. Purpose4. Elements Elements Through elements, the organization can identify the total cost. In elements there are material, labor and expenses.Example for material, labor and expenses assuming apparel industries

Material Labor Expenses

fabric salary of the machine operators electricity

needle Salary of supervisors advertisement

label Salary of drivers Water

threads Salary of cleaners Transporting vehicles

Purpose When comes to the purpose there are two types of costs and those are direct and indirect cost. Direct cost mean is the price that completely attribute and indirect cost is that are not directly accountable to a cost object.

Direct Cost Indirect Cost

Material Ingredients (Pure milk, chocolate powder/ vanilla, fruit essence) Plastic cup

Cost of flavoring ingredients

Labor cost of salaries for machine operators

Salaries for the factory workers Salaries for the supervisors

Expenses Printing on Plastic cup Packaging expenses and labeling cost Machinery depreciation Electricity for the factory Water for the factory Telephone charges to the factory Bank charges Advertising Wages for the supervisors Storage cost Factory insurance

Behavior There are three types in behavior cost. Those are as below 1. Fixed cost is a cost that not increases or decreases in the amount of product or service.2. Variable cost is a cost corporate that varies with the output of the production.3. Semi variable cost is a cost includes both fixed and variable cost.Examples for Fixed, Variable and Semi variable cost assuming groceries industries

Fixed Cost Variable Cost Semi Variable Cost

Ingredients (Pure milk, chocolate powder/ vanilla, fruit essence) Machinery depreciation

Telephone charges to the factory

Plastic cup and the lid Quality control cost

Printing on Plastic cup Electricity for the factory

Straws Water for factory use

Packaging expenses Insurances on factory

Stationary machinery

Storage cost

Advertising

Warehousing cost

Insurance on factory building

Promotional expenses for the product

Phone charges are Semi variable, because its up to certain limit and after that there will be a permanent rate but when its exceeding the limit cost will be differ and have to pay additional amounts.

Function This kind of costs based on the departments of the organization such as marketing, production, finance, human resource department. Manufacturing cost means those cost directly involved to the production and non-manufacturing cost is a cost that not incurred to manufacture a product.Examples for function assuming the groceries industries

Manufacturing Cost Non -Manufacturing Cost

Ingredients (Pure milk, chocolate powder/ vanilla, fruit essence) Electricity for the factory

Plastic cup and the lid Water for the factory

Printing on Plastic cup Telephone charges

Straws Bank charges

Advertising

Travelling

Storage cost

1.1 Costing methodsJob costingJob costing perform includes determining the expenses engaged in developing "function" or manufacture products are on individual expenses. These costs are documented in the ledger accounts throughout the lifestyle of a job or batch is then described in the ultimate test stability before planning of job cost or batch production declaration. Job costing is appropriate in hardware, ship-building, heavy machinery, machine tools, interior decoration and other similar work. Advantages Disadvantages

Job order costing offers a detailed analysis of the costs of materials, labor cost and overheads by functions and nature. Job order costing needs a great deal of clerical work in recording material issue, wage computation and payment and overhead charges.

Job order costing makes it possible to appraise the profitability of a job. Overhead rate needs allocation and apportionment of the overheads from service department to production department by using reasonable parameters like selecting a suitable basis.

Job order costing allocates overheads on the basis of a predetermined rate. Since the job costing method requires a much more clerical work organizations tend to avoid this method.

Batch costingIt is a alternative of job costing. Under batch costing, a lot of identical models which consists of the batch may be used as a device for determining cost. In the situation of batch costing individual cost linens are managed for each batch of items by giving a batch variety. Price per device in an order is determined by splitting the all inclusive costs of a batch by the variety of models created in that batch. Advantages Disadvantages

Distinguish profitable from the unprofitable jobs. Demand excellent production material & labor.

Assist in preparing the estimation. Expensive & laborious as it involves more clerical work.

Detailed analysis of cost elements & functions, Historical costing in nature, so it doesnt give the prompt remedial measures, Costing of minute jobs may leads to inaccurate results.

Helps in future production planning More chance of mistakes and not much use for control purpose.

Such a method of costing is used in the case of pharmaceutical industries, garment industries, industries, manufacturing electronic parts etc.

Process costingProcess costing is discovered where the product go through various levels as it goes to the completed product. Products which are created by mixing different areas of the ultimate product are also such as the process costing method. In process costing industries used to verify the cost in each stage of production. Those as below

Advantages Disadvantages

It collects the overall costs from each department and ignores costs related to specific jobs within a department. Accuracy of the method in determining the production cost.

This reduces the volume of data, and makes data collection easy and quick. Process costing can cause cost error because it does not directly applies a specific amount of raw materials, production labor, and manufacturing overhead to each individual goods or service

The analysis is likewise simple and straightforward, does not require any specialized skills other than normal accounting skills, inexpensive, and does not drain the companies time and resources. This method may cause over-cost or under cost and may let to the product cannot compete in the market or let to lower business profits.

Different between job costing, batch costing and process costing

Job costing Batch costing Process costing

It is used when work is undertaken as per It is a refinement of job costing. The process of producing the product has a

Customers special requirement. continuous flow and products are homogenous

Cost expected to be incurred on the job are estimated and on the basis of estimate a price is quoted to the customer. Here the unit of measurement is batch comprising of lots of similar units. Costs are compiled on time basis for process or department.

Actual costs of material, labor, overhead are accumulated and on the completion of the job these are compared with the quoted price and thus the profit or loss on it is determined. Separate cost sheet are maintained for each batch of products by assigning a unique batch number. Product lose their individual identity as they are manufactured in a continuous flow.

Task 022.0 ANALYZED COST REPORT2.1Income Statement for October under Marginal Costing System

DescriptionTotal (Rs.)

Sales (500 110000)

(-) Cost of SalesOpening stock (18012000)Direct material cost (180102000)

Closing StockCost of salesGross Profit

(-) Other ExpenditureDirect labour cost (40110000)Variable production overhead (30110000)Variable selling expences (5500000010%)

Net profit

21600001836000020520000(720000)

440000033000005500000

55000000

1980000035200000

13200000

22000000

2.2 Income Statement for October under Absorption Costing System

DescriptionTotal (Rs.)

Sales (500 110000)

(-) Cost of SalesOpening stock (18012000)Direct material cost (180102000)

Closing StockCost of salesGross Profit

(-) Other ExpenditureDirect labour cost (40110000)Variable production overhead (30110000)Variable selling expences (5500000010%)

(-) Fixed cost per monthFixed production overhead (990000)Fixed selling and distribution expences (140000)Fixed administration expences (260000)

Net profit

21600001836000020520000(720000)

44000003300000550000013200000

139000055000000

1980000035200000

14590000

20610000

2.3 Calculate cost using appropriate techniquesCalculate Profit per unit under Absorption costing methodDirect material cost 180Direct labour cost 40Variable production overhead 30Variable selling expences (5500000/110000) = 50Fixed production overhead (990000/110000) = 9Fixed selling and distribution expences (140000/110000) = 1.27Fixed administration expences (260000/110000) = 2.36

Cost per unit 312.63

Selling price Rs. 500.00Profit per unit under Absorption costing method 500 312.63 = Rs. 187.37Calculate Profit per unit under Marginal costing methodDirect material cost 180Direct labour cost 40Variable production overhead 30Variable selling expences 5500000/110000 = 50

Cost per unit 300

Selling price Rs. 500.00Profit per unit under Marginal costing method 500 300 = Rs. 200.00

2.4 Recommendation for improvements.In order to reduce costs, chose suppliers that provide goods that are of high quality but for a lower price. When buying large amounts of goods (or even raw materials), obtaining them for a lower price will cut down the final cost.The Organization has certain fixed costs such as production, selling and distribution expenses should be reduced. This can be done by using machinery that produce goods for a lower cost or choosing distribution channels and methods which are less expensive.Variable selling expenses are said to be 10% but this amount can be reduced to a lower percentage.

Task 033.0 BUDGETING3.1 Purpose of Budgeting for Oak Wood Restaurant (pvt) Ltd.Budgets are usually set for both sales revenue and costs and is usually for each cost and profit center to have budgets set for the next 12 months. An organization that does not have a budget or a plan will create choices that do not give rise to the success of the organization because supervisors absence no shocks of objectives of the organization. A budget provides five primary reasons and those are

CommunicationIn the budgeting procedure, managers in every department validate the resources they need to accomplish their goals. They clarify to their superiors the capacity and volume of their activities as well as how their tasks will be performed. The communication between superiors and subordinates helps affirm their mutual commitment to company goals.

CoordinationDifferent units in the company must also coordinate the many different tasks they perform. For example, the number and types of products to be marketed must be coordinated with the purchasing and manufacturing departments to ensure goods are available

PlanningA budget is ultimately the plan for the operations of an organization for a period of time. Many decisions are involved, and many questions must be answered. Old plans and processes are questioned as well as new plans and processes. Managers choose the most effective ways to carry out each task.

ControlOnce a budget is finalized; it is the plan for the operations of the organization. Managers have authority to spend within the budget and responsibility to achieve revenues specified within the budget. Budgets and actual revenues and expenditures are monitored constantly for variations and to determine whether the Oak Wood Restaurant is on target.

EvaluationOne way to evaluate a manager is to compare the budget with actual performance. Such as market and economic conditions, affect a managers performance. Whether a manager achieves targeted goals is an important part of decision making responsibility.

Budgeting Process for Oak Wood Restaurant.Communicating details of the budget policy

Determining the factor that restricts output

Preparations of the sales budget

Initial preparation of budgets

Negotiation of budgets

Coordination and review of budget

Final acceptance of the budget

Budget review

AdvantagesDisadvantages

The major strength of budgeting is that it coordinates activities across departments. Budgets translate strategic plans into action. They identify the resources, revenues, and activities required to carry out the strategic plan for the coming year. Budgets provide an excellent record of organizational activities. Budgets provide a tool for corrective action through reallocations. Budgets can de-motivate employees because of lack of participation. If the budgets are arbitrarily imposed top down, employees will not understand the reason for budgeted expenditures, and will not be committed to them. Budgets can cause perceptions of unfairness.

3.2 Types of BudgetingFixed BudgetingThis budget is only prepared for achieve a one single level of activity and the period of time covered by the budget. Its a financial plan that does not change through the budget period, irrespective of any changes from the plan in actual activity levels experienced.Importance:When making small and large expenditures, these types of budgets help to keep the whole financial responsibilities for an every organization.Flexible BudgetingThis budget is prepared for different levels of activities and it adjusts or flexes for changes in the volume of activities. This budget provides a lot of information which are relate to the different activity levels because of that it helps to make valid judgments between the actual amounts and the budgeted amounts. Though this is time consuming, it is very useful to control the costs. The biggest disadvantage of this budgeting is high cost.Importance:The organizations can compare the actual and the budgeted cost of the business. And it helps to recognize the objectives of cost controlling that the actual performance and the budgeted performanceZero Based BudgetingA method of budgeting in which all expenses must be justified for each new period. Zero-based budgeting starts from a "zero base" and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one (Investopedia, 2013). Advantages Disadvantages

Forces budget setters to examine every item. It a complex time consuming process

Allocation of resources linked to results and needs. Short term benefits may be emphasized to the detriment of long term planning

Wastage and budget slack should be eliminated. Affected by internal politics - can result in annual conflicts over budget allocation

3.3 Budgets according to the budgeting methodSales BudgetsDescriptionDilmaNilma

Sales volume8,5001,600

Selling price100140

Sales volume850,000224,000

Production BudgetsDescriptionDilmaNilma

Sales Volume8,5001,600

Opening stock(170)(85)

Closing stock1,87090

Production unit102001605

Raw Material Usage budgetDescriptionDilmaNilma

Production units10,2001,605

Per unit X Y 10589

Required raw material 153,00027,285

Opening stock(8,500)(8,000)

Closing stock10,2001,700

Budgeted raw material requirement154,70033,585

Material Purchase BudgetDescriptionDilmaNilma

Budgeted raw material154,70033,585

Unit price X,Y5.805.80

Material Purchase897,260194,793

Direct Labour BudgetDescription DilmaNilma

Production units102001605

Per hour unit1.51.13

Labour cost15,3001813

Cost per unit33

Labour cost for production45,9005,440

Manufacturing O/H BudgetsDescriptionDilmaNilma

Direct Material costs154,70033,585

Direct Labour costs45,9005,440

Manufacturing O/H22,4001,299

The production cost223,00040,324

Operating Expenses BudgetsDescription

Salaries- sales18,500

Commission15,000

Advertising20,000

53,500

Cash BudgetsCash InflowCash OutflowCash InflowCash OutflowCash InflowCash OutflowCash InflowCash Outflow

Opening Balance8,50028,50073,500105,496

Cash receipts250,000300,000280,000245,250

258,500328,500353,500350,746

Purchases(100,000)(120,000)(110,000)(136,996)

Wages(100,000)(110,000)(120,000)(161,547)

Other costsAnd expenses(30,000)(25,000)(18,004)(3,409)

Closing Balance28,50073,500105,49648,794

Budgeted income statementOpening stock47,300Sales1,074,000

Purchases466,996466,996

Cost of goods for salesClosing stock514,296(25,160)

Cost of sold goods489,136

Gross profit584,864

1,074,0001,074,000

Gross profit584,864

Administration expenses

Labour costs51,340

O/H Production23,699

Salaries salesOffice18,5007,000

Miscellaneous2000

Stationary1000(103,539)

Selling expenses

Commission15,000

Advertising20,000(35,000)

Net Profit446,325

584,864584,864

Net profit446,325

Budgeted balance sheetRsRsRs

Fixed assets

Land42,500

Building and equipment259,250

(-) Depreciation(45,000)214,250256,750

Current assets

Stocks- Raw materials25,160

Cash48,79473,945

330,704

Shareholders interest300,000

Reserves92,369392,369

Task 044.0 VARIANCESDirect Material Actual cost X Actual Quantity _ Standard X Standard quantity Cost variance = per unit used Cost per unit for actual production

= (8 x 72,000) (5x 100x1000)= 576,000-500,000= Rs 76,000 Actual cost is higher than the standard cost is adverse.

Direct labour = Actual hourly X Actual hours used _ Standard hourly X Standard hours for Cost variance rate for the production rate actual production

= (7.68 x 8200) (8 x 10 x 1000)

= 62,976-80,000= Rs17024 Actual labour cost is less than the standard labour cost is favorable.

Variable production = Actual variable _ Standard hours X Variable production O/HO/H cost variance O/H cost for actual production absorption rate

= 25,000- (1000 x 10 x 2)= 25,000 20,000= Rs 5000 Actual variable O/H cost is high than the standard variable O/H cost is adverse.

4.1 Operating Profit Variance

BudgetedActual

Sales918,000975,000

Cost of sales(600,000)(663,976)

Contribution318,000311,024

Fixed cost(10,000)(9800)

Operating Profit308,000301,224

4.2 Report findings to management in accordance with identified responsibility centersResponsibility Explanation Variance Causes Corrective actions

Favorable Adverse

Cost center A cost center is any part of an organization which incurs costs Material price

Cost increase. Careless purchasing. Change in material standard. Have to decrease the price. Have to concern and supervise more on purchasing. Have to keep steady material standard.

Material usage Material use of lower quality than standard. Less effective use made of material. Have to correct errors in allocating material to job. Material used of higher quality than standard. More effective use made of material. Errors in allocating

Labor rate Use of apprentices or other workers at a rate of pay higher than the standard.

Have to use apprentices or other workers at a rate of pay less than standards

Variable overhead rate

Increase in cost of services used. Excessive use of services. Change in type of services used. Reducing in cost of service used. Necessary use of services. Maintaining steady type of services.

Fixed overhead rateIncrease in cost of services used. Excessive use of services Change in type of services used. Reducing in cost of service used. Necessary use of services. Maintaining steady type of services.

5.0 Conclusion and Recommendation There are various types of costing methods as above report mentioned. Its bit difficult to choose a specific method and sometimes there might be some weakness which will not identify, selling price of the Aloe Miracle foot care cream Rs. 500.00 and Profit per Unit 187.37.And also there is purpose of budgeting for Oak Wood Restaurant and there are some limitations in budgeting and advantages and disadvantages of the budgeting. Budgets are only as good as the data being used to create them and inaccurate or unreasonable assumptions can quickly make a budget unrealistic Budgets can lead to inflexibility in decision-making. And also it is a time consuming process in large businesses, whole departments are sometimes dedicated to budget setting and control. And also by analyzing variance analyses it will give a clear idea to the company where the variance accrued but not why. Sometimes while calculating variance analyses, some information might misinterpreted if the data is aggregated and also future effects of variances not known.

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