Sample on Management Accounting

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:

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:

Working note:

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

(b) Reapportion of support departments cost to production departments

(C) Deducing overhead absorption rates (OAR) for every production departments using machine hour basis

OAR = Total cost/Actual machine hours

(D) Calculation of overhead charge to the product

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

Calculation of cost

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

Calculation of difference total cost of electricity due to changing the number of units

Cost report

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:-

• Budgets are prepared by the company is order to estimate the future income, profitability and expenditure that can be incurred by the company after the completion of the specific time period.
• These are also prepared by the managers in order to compare the actual output with that of budgeted output.
• Another purpose of preparing this budget is to create a framework for the managers in order to prepare various strategies (Kaplan and Atkinson, 2015). Strategies are prepared by the organization in order to achieve the desired target and to beat its competitors.

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

• Company should use the last budget prepared by them in order to estimate the upcoming financial environment.
• After that company should determine the estimated amount of fund that can be rendered by them from the sales of the product or other activities.
• After that company should specify the approx amount of expenditure that can be faced by them in terms of raw material, advertisements, production overheads and labour (Parker and Kyj, 2006).
• Then after that Jeffrey & Son's management should subtract the estimated income from that of estimated expenses in order to analyse the budget is showing the condition of deficit or surplus (Mohapatra, 2015).
• After considering and reviewing all the above steps the final budget is need to be submitted (Budgeting and budgetary control, 2016).

Therefore, at last when budgeting period is completed after the specific time period than in that case actual budget need to be compared with the estimate budget in order to analyse the actual result.

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

Calculation of ending inventory

Material purchase budget

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.

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.

Causes behind the variances:

• On the basis of the above mentioned table actual sales are lower than the budgeted sales. It is not the positive sign for an organization because sales aspects are highly associated with the profitability of an organization.
• Besides this, positive material variance of £420 recorded by Jeffery & Sons. It occurred due to the decline in the production units from 4000 to 3500. It is the main cause behind the occurrence of positive material variance.
• In addition to this, labor rate per hour get declined from £8 to £7.8. Due to this aspect actual cost incurred by Jeffery & Sons is lower than the budgeted amount.
• Along with it, company has incurred higher fixed overhead expenses in comparison to the budgeted figures. It reflects that company fails to make effectual financial plan in relation to their overheads.

Recommendations for further improvement:

• It is advised to Jeffery & Sons that they needs to undertake promotional strategies and campaign which helps them in maximize the sales and profitability aspect.
• Furthermore, organization needs to produce more units which help them in getting the economies of scale and thereby improving gross margin of an organization.
• Jeffery & Sons needs to encourage their employees to perform their activities with the high level of efficiency. Through this, company is able to produce more output within the short span of life.
• Along with it, company also needs to frame competent strategies and policies to make control over expenditures. Through this, company is able to attain success in the dynamic business arena.

4.2 Preparation operating statement reconciling budgeted and actual results

Operating statement of Jeffery & Sons on the basis of actual and budgeted results is as follows:

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.

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

Books and journals

• Adah, A. and Mamman, A., 2013. Assessing the Performance of Incremental Budgeting System in the Nigerian Public Tertiary Institutions. European Journal of Business and Management.
• Burgstahler, D. and Eames, M., 2006. Management of earnings and analysts' forecasts to achieve zero and small positive earnings surprises. Journal of Business Finance & Accounting.
• Chan, A.P. and Chan, A.P., 2004. Key performance indicators for measuring construction success. Benchmarking: an international journal.
• Exley. C.J. and Smith, A.D. 2011. The cost of capital for financial firms. Cambridge University Press.
• Fisher, J.G. and Krumwiede, K., 2015. Product Costing Systems: Finding the Right Approach. Journal of Corporate Accounting & Finance.