Sample on Management Accounting

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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.

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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 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 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

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

Maintenance

Indirect wages and supervision

Allocated

£100,000.00

£99,500.00

£92,500.00

£10,000.00

£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

£15,000.00

£5,000.00

Rent

Area Occupied

£20,000.00

£10,000.00

£30,000.00

£30,000.00

£10,000.00

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

£49,668.87

£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

£16,000.00

£24,000.00

£8,000.00

£8,000.00

Total cost of overhead

 

£346,417.02

£287,636.00

£219,927.00

£79,964.00

£101,056.00

(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

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

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

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£)

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:

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:-

Nature of budgeting process that is adopted by the Jeffrey & Son's management in order to prepare various types of budgets is as follows:-

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

Particulars

July

August

September

Units to be sold

105000

90000

105000

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.

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

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

Causes behind the variances:

Recommendations for further improvement:

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.

4.3 Reporting findings to management according to responsibility centres identified

Based upon the computed variances, it has been reported that entire responsibility centers within the organization are not effectively working. The revenue centers possess the responsibility to attain outcomes in terms of business sales both in units as well as values. In accordance with the case scenario provided actual as well as budgeted revenues of Jeffrey & Son demonstrates huge variation (Kaplan and Atkinson, 2015). Thus it is important for the manager to communicate with the manager of center and determine the major causes. Further it is important for them to develop policies and take suitable decisions for the organizations. But the duty to make appropriate cost control relies on the cost center. Therefore cost center of Jeffrey & Son requires greater monitoring of operational activities in continuous manner (McLean, McGovern and Davie, 2015). This is with the aim to maintain effective control within the organization. By bringing improvement in the working of both the centers manager can effectively attain the pre-determined goals.

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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

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