Management Accounting Sample

Dissertation Sample on Management Accounting

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INTRODUCTION

Management accounting is associated with the field of accounting through which it is possible for business to combine norms of budgeting along with cost. By considering different techniques it is possible for organization to calculate actual cost of production along with operational activities so that decisions can be taken accordingly. Further, it has become necessary for enterprise to record actual cost and expenses by considering different methods of costing (Adler, 2013). Through, this it is possible for company to reduce the level of cost and profitability level can be enhanced easily. Apart from this every organization has indulged into practices of maintaining different type of accounts so that overall performance in the market can be known easily and corrective actions can be taken on the basis of same. For conducting the present study, organization chosen is Jeffrey and Sons which manufactures many branded products called Exquisite. Further, business has many departments where major one is service and production. Various tasks have been covered in the report which involves different type of cost classification, calculation of job costing etc.

TASK 1

1.1 Different type of cost classification

Cost is considered as the expenses which are incurred by company for conducting overall operations. Further, main costs associated with the business are segregated into:

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1.2 Calculation of Unit cost and total job cost

Job cost is considered as one of the most appropriate method through which cost is calculated in condition where each job is different from other (Steffan, 2008). Further, this method is developed of undertaking an account where direct along with indirect cost are undertaken. Computation of unit cost along with total cost of job 444 has been shown below:

Particulars

Amount (£)

Direct cost

 

Direct material

200

Direct labour

270

Indirect cost

 

Variable production overhead

180

Fixed production overhead

120

Cost per unit

770

Units to be produced

200

Total cost 770*200

154000

Working note

Fixed production overhead

(Budgeted overhead / total direct labor hours) * Direct labor hours used in Job 444

 

=(£80000 / 20000 hours) * 30 hours

=£120

After doing the above calculations it can be said that per unit cost of job 444 is £3.85 and total cost of this job will be £770.

1.3 Calculating cost of Exquisite using absorption costing

Production Departments Service Department

 

Basis of

Total

Machine

Machine

Assembly

Stores

Maintenance

 

Apportioning

 

Shop X

Shop Y

     
   

000’s

         

Indirect

Wages

Allocated

362

100,000

99,500

92,500

10,000

60,000

Indirect

Materials

Area

occupied

253

100,000

100,000

40,000

4,000

9,000

Lighting

Heating

&

Area

Occupied

50

10,000

5,000

15,000

15,000

5,000

Rent

Area

Occupied

100

20,000

10,000

30,000

30,000

10,000

Insurance &

Machinery

Book value

of Machinery

15

7,947

4,967

993

497

596

Depreciation

of Machinery

Book value

of Machinery

150

79,470

49,669

9,934

4,967

5,960

Insurance of

Building

Area

Occupied

25

5,000

2,500

7,500

 

7,500

2,500

Salaries

Works

Mgmt.

of

No.

employees

of

80

24,000

16,000

24,000

8,000

8,000

Sub Totals

 

1,035

346,417

287,636

219,927

79,964

101,056

Re-of service dept. cost

             

Stores Dept.

   

39,982

29,987

9,995

(79,964)

 

Maintenance

   

48,507

32,338

20,211

 

(101,056)

Totals

   

434,906

349,961

250,133

0

0

Working Note

     

Lighting & Heating:

Machinery X

10/50 x £50,000 — f10,000

 

Machinery Y

5/50 x £50,000 — £5,000

 

Assembly

15/50 x £50,000 — f 15,000

 

Stores

15/50 x £50,000 = £15,000

 

Maintenance

5/50 x £50,000 = £15,000

Rent
Machinery X 10/50 x £100,000 = f20,000
Machinery Y 5/50 x £100,000 = £10,000
Assembly 15/50 x £100,000 = £30,000
Stores 15/50 x £100,000= £30,000
Maintenance 5/50 x £100,000 = £10,000


Insurance & Machinery

Machinery X 800/1510 x £15,000 = £7,964
Machinery Y 500/1510 x £15,000 = £4,966
Assembly 100/1510 x :E15,000= £994
Stores 50/1510 x £15,000= f 497
Maintenance 5/1510 x f15,000= £596

Depreciation of Machinery
Machinery X 800/1510 x £150,000 = £79,470
Machinery Y 500/1510 x £150,000 = £49,669
Assembly 100/1510 x £150,000 = £9,934
Stores 50/1510 x £150,000 = £497
Maintenance 60/1510 x £150,000 = £596

Insurance of Buildings
Machinery X 15/50 x £25,000 — £5,000
Machinery Y 5/50 x £25,000 = £2,500
Assembly 15/50 x £25,000 = f7,500
Stores 15/50 x £25,000 = £7,500
Maintenance 5/50 x £25,000 = £2,500

Salaries of works management
Machinery X 3/10 x £80,000 = £24,000
Machinery Y 2/10 x :E80,000 = £16,00
Assembly 3/10 x £80,000 = £24,000
Stores 1/10 x £80,000 = £8,000
Maintenance 1/10 x £80,000 = £8,000

Reappointing workings: based on material issues
Machinery X 400/800* £79,964 = £39,982
Machinery Y 300/800 * £79,964 = £29,987
Assembly 100/800 * £79,964 = £9,9995

Based on time spent
Machinery x 12/25 * £101,056 = £48,507
Machinery y 8/25 * £101,056 = £32,338
Assembly 5/25 * £101,056 = £20,211

Overhead absorption rate workings
Departments = Total / actual machine hours per dept
Machinery X = £ 434,906/ 80,000 = £5.44
Machinery Y = £349,960/ 60,000 = £5.83
Assembly = £250,134/ 10,000 = £25.01

Overhead absorption rate
Machinery X= 434906/80000=5.44
Machinery Y= 349960/60000= 5.83
Assembly=250134/10000=25.01

Computation of absorption rate:

 

£

£

Materials

 

8

Labour

 

15

Overheads

   

X

(0.8*5.44)

4.34

Y

(.6*5.83)

3.5

Assembly

(.1*25.01)

2.5

Total cost

 

33.35

Allocation of cost of support departments on the basis of machine hours

 

Machine shop X

Machine shop Y

Assembly

Total

Store

£39,982.00

£29,987.00

£9,995.00

£79,964.00

Maintenance

£45,807.00

£32,338.00

£20,211.75

£101,056.00

Total

£434,906.00

£349,961.00

£250,133.00

 

Allocation of criteria of cost

Particulars

Description

Indirect wages and supervision

As per the provided amount.

Indirect materials

As per the provided amount.

Light and heating

On the basis of area occupied

Rent

On the basis of area occupied

Insurance and machinery

On the basis of book value of machine

Depreciation of machinery

On the basis of book value of machine

Insurance of building

On the basis of area occupied

Salaries of works management

On the basis of number of employees.

Units to be produced

Material cost

£400,000.00

£300,000.00

£100,000.00

per unit material

8

8

8

A/B no. of units

50000

37500

12500

Overhead absorption rate

Machinery X

434906/80000=5.44

Machinery Y

349960/60000= 5.83

Assembly

250134/10000=25.01

Computation of absorption rate

Exquisite calculation

 

£

£

Materials

 

8

Labour

 

15

Overheads

   

X

(0.8*5.44)

4.34

Y

(.6*5.83)

3.5

Assembly

(.1*25.01)

2.5

Total cost

 

33.35

1.4 Analyzing cost of Exquisite

Calculation of absorption rate on the basis of labor hour

Machinery X

434908/200000= 2.17

Machinery Y

349960/150000= 2.33

Assembly

250134/20000= 2.15

Calculation of Exquisite

 

£

£

Materials

 

8

Labour

 

15

Overheads

   

X

(2*2.17)

4.34

Y

(1.5*2.33)

3.5

Assembly

(1*1.25)

1.25

Total cost

 

32.09

By considering the overall change linked with absorption rate from machine to labor hour it has been noticed that changes are taking place in the per unit absorption rate of company. By undertaking the norms of costing technique it has been identified that technique such as absorption labor hour is appropriate and this can provide long term benefits to business.

TASK 2

2.1 Preparing and analyzing cost report for the month of September

Cost report for the month of September

 

Budgeted cost

Actual cost

Variances

Particulars

     

Units

2000 units

1900 units

 

Material cost

24000

22800

-1200

Labor cost

18000

19000

1000

Fixed overhead

15000

15000

-

Prime cost

57000

56800

-

Electricity

     

Fixed portion

500

500

-

Variable portion

7500

7125

375

Maintenance

5000

5000

-

Total production cost

70000

69425

 

Calculation of standard budget at 1900 units

 

Budgeted cost

Budgeted cost

Particulars

   

Units

2000 units

1900 units

Material cost

24000

22800

Labor cost

18000

17100

Fixed overhead

15000

15000

Prime cost

57000

54900

Electricity

   

Fixed portion

500

500

Variable portion

7500

7125

Maintenance

5000

5000

Total production cost

70000

67525

Calculation of variable cost – electricity

change in total cost / change in no of units to be produced

 

(8000-5000) (2000-1200)

= £3.75

Computation of stepped cost

The maintenance cost linked with company will not alter as it is occurred on slot of 500. Further, by considering this aspect decline in 100 units will not bring any kind of difference in cost.

Analysis of variance

Labor cost: Cost report of Jeffrey and Sons is showing adverse variance of 1000. Further, actual variance is 1900 and it has affected labor cost per unit which is 9 and actual labor cost is 10. So, this is having unfavorable impact on company where management has to pay amount of 1.
Material cost: It is highlighting favorable variance where no change has been noticed in the per unit cost and through this it can be said that proportionate units can be produced easily (Houghton, 2007). Further, it will have unfavorable impact on cost of material which will decline.
Fixed overhead: It is not representing any type of variance. Further, with the rise or decline in production level no such alteration has been seen in the amount of fixed expense (Innes, Mitchell and Sinclair, 2000).
Electricity: It is of semi variable nature and after computation it has been found that no such alteration is present in the fixed proportion. Further, amount of variable portion has been decline significantly.

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2.2 Various performance indicators to identify area for improvement

Different performance indicators are present through which Jeffrey and Sons can determine the area for improvement. Further, such indicators are as follows:

2.3 Ways to reduce cost and enhance quality

Different ways are present which Jeffrey and Sons can consider for enhance quality level of its service and it can save overall cost of the business. Such ways are as follows:

TASK 3

3.1 Purpose and nature of budgeting process

Main purpose of budgeting process is to forecast future operational tasks. Further, it supports in estimating future expenses along with revenue so that resources can be allocated properly (Wielicki and et.al., 2002). Jeffrey and Sons has developed budget with the motive to know expenditure level so that crucial operations can be carried out easily. Apart from this profitability level or loss can be known easily through budgeting process undertaken by management.

Nature
By nature entire budgeting process is flexible where actual values of the last accounting period are undertaken by Jeffrey and Sons. Further, with the help of estimation computation of actual amount of cash is done from the sales volume which is also beneficial for company (Zimov, Schuur and Chapin, 2006). Apart from this, all the expenses are considered such as material, labor and production. Further, expenditure amount is deducted from profit and this helps in knowing the deficit or surplus amount.

3.2 Appropriate budgeting method for organization

Different budgeting methods are present which Jeffrey and Sons can undertake for enhancing overall performance of the business. Such methods are as follows:

3.3 Preparing different type of budgets

(a) Production budget

Particulars

July

August

September

October

Sales

105000

90000

105000

110000

Less: opening stock

11000

13500

15750

16500

Add: Opening stock

13500

15750

16500

15000

Units to be produced

107500

92250

105750

108500

Working note
Closing Stock:
July = 15% * August sales = 15%*90000 = 13500
August = 15% * Sept. sales = 15%*105000 = 15750
September = 15% * Oct. sales = 15%*110000 = 16500
October = 15%*Nov. sales = 15%*100000 = 15000

(b) Material purchase budget

 

July

August

September

October

Material usage

215000

184500

211500

217000

Less: Opening stock

52000

46125

52875

 

Add: Closing stock

46125

52875

54250

 

Purchases

209125

191250

212875

 

July opening stock = 52000 kg and closing = 25%* 184500 = 46125
Material usage budget
July material usage= 107500 units * 2 kg = 215000 kg
August material usage= 92250 units * 2 kg = 184500 kg
September material usage= 105570 units * 2 kg= 211,500 kg
October material usage= 108500 units * 2 kg = 217,000 kg

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3.4 Preparing cash budget

Cash budget of Jeffrey and Son's smake

Particulars

July

August

September

Opening balance of cash

£16,000.00

£204,431.25

£192,306.25

Received from debtors

£333,000.00

£335,250.00

£330,750.00

Cash sales

£567,000.00

£486,000.00

£567,000.00

Total receivable

£916,000.00

£1,025,681.25

£1,090,056.25

Expenses

     

Payment to creditors

£290,568.75

£333,375.00

£289,693.75

Direct wages

£300,000.00

£300,000.00

£300,000.00

Variable overhead

£46,000.00

£100,000.00

£100,000.00

Fixed overhead

£75,000.00

£100,000.00

£100,000.00

Total payable

£711,568.75

£833,375.00

£789,693.75

Closing balance of cash

£204,431.25

£192,306.25

£300,362.50

Working notes

Computation of amount receivable from debtors

 

July

August

September

Amount received for sales before a month

247500

236250

236250

Amount received for sales before two months

85500

99000

94500

Sum

333000

335250

330750

Computation of amount of overhead payment

Overhead payment

July

August

September

Variable overhead

46000

100000

100000

Fixed overhead

75000

100000

100000

Computation of production cost

 

July

August

September

Material cost

£3.50

£3.50

£3.50

Wages

£3.00

£3.00

£3.00

Variable overhead

£1.00

£1.00

£1.00

Total variable cost

£7.50

£7.50

£7.50

Fixed overhead

£100,000.00

£100,000.00

£100,000.00

Units to be produced

107500

92250

104250

Total variable cost

£806,250.00

£691,875.00

£781,875.00

Total production cost

£906,250.00

£791,875.00

£881,875.00

Sales budget

 

July

August

September

Units to be sold

105000

90000

105000

Sale price

9

9

9

Sales

945000

810000

945000

Cash budget of Jeffrey and Son's

Particulars

July (£)

August (£)

September (£)

Cash inflow

     

Sales receipts (w.n.1)

900000

731250

864000

Cash outflow

     

Purchase

365969

334688

372531

Labour (w.n.2)

322500

276750

317250

Variable O/H (w.n.3)

108500

98350

100350

Fixed O/H

75000

87500

87500

Net cash flow

28031

-66038

-13631

Opening balance

16000

44031

22007

Closing balance

44031

-22007

-35638

Working notes

Working Note-1

 

Sales (£)

July (£)

August (£)

September (£)

May

855000

85500

   

June

990000

247500

99000

 

July

945000

567000

236250

94500

August

810000

 

486000

202500

September

945000

   

567000

July: 105000*9 = 945000
August: 90000*9 = 810000
September = 105000*9 = 945000

July receipts

August receipts

September receipts

10%*855000 May

10%*990000 June

10%*945000 July

25%*990000 June

25%*945000 July

25%*810000 Aug.

60%*945000 July

60%*810000 Aug.

60%*945000 Sept.

Working Note-2

Labour

July

1075000*3 = 322500

August

92250*3 = 276750

September

105750*3 = 317250

Working Note-3

Variable overhead

July (£)

August (£)

September (£)

June

44000

   

July

64500

43000

 

August

 

55350

36900

September

   

63450

Total

108500

98350

100350

Based on Junes Sales = 40% * 110000 and it should be based on production of June and the difference is in immaterial.

40%*110000 units = 44000*1 = £44000 from June and payable in July
60%*107500 units = 64500*1 = £64500 from July and payable in July
40%*107500 units = 43000*1 = £43000 from June and payable in Aug.
60%*92250 units = 55350*1 = £55350 from June and payable in Aug.
40%*92250 units = 36900*1 = £36900 from July and payable in Sept.
60%*105750 units = 55350*1 = £63450 from June payable in Sept.

Working Note-4

Budgeted profit and loss account

 

July (£)

August (£)

September (£)

Total (£)

Sales

945000

810000

945000

2700000

Less: bad debts

47250

40500

47250

135000

897750

769500

879750

2565000

Total MC of production

806250

691875

793125

2291250

Add: opening stock

     

82500

Less: closing stock

     

123750

Cost of sales

     

2250000

Contribution

     

315000

Fixed overheads

     

300000

Profits

     

15000

 

July (£)

August (£)

September (£)

Total (£)

Material

376250

322875

370125

1060500

Direct labour

322500

276750

317250

916500

Variable O/H

107500

92250

105750

305500

Total MC of production

806250

691875

943125

2582500

TASK 4

4.1 Calculating variance and identifying causes

Computation of variances of Jeffrey and Son's

Particulars

 

Budgeted

 

Actual

Variance

Nature of variance

 

Per unit

Total

Per unit

Total

   

Sales revenue (A)

4 per unit

14000

3.95 per unit

13820

-180

Adverse

Material Cost (a)

2.4 per kg

3360

2.4 per kg

3420

60

Adverse

Labor charges (b)

8 per hour

2800

7.80 per hour

2690

-110

Favorable

Fixed overheads (c)

 

4800

 

4900

100

Adverse

Total Cost (a + b + c)

 

10960

 

11010

50

Adverse

Actual profit (A-Total cost)

 

3040

 

2810

-230

Adverse

Working note

Sales variances
Sales volume variance (4160- 3040) = (1120) (A)
Sales prices variance (14000- 13820) = (180) (A)
(Budgeted: 35000*£4- Actual sales)
The material prices variances
AQ (1425Kg) X AR (£2.40) = £3420
The material prices variances 0(A)
AQ (1425Kg) X SR (£2.40) = £3420
The material usage variance 60(A)
SQ (3500 Units x 0.4) X SR (£2.40) = £3420
The labor variances
AH(345Hrs) X AR (£7.8 ) =£2690
The labor variance rate 70 (F)
AH(345Hrs) X SR (£8.0 ) =£2760
the labour efficiency variance
SH (3500 Units x0.1)350hrs X SR (£2.40)= £2800
Fixed overhead selling
Actual fixed overheard = £4900
The fixed overhead expenditure variances100(A)
Budgeted fixed production overhead = £4800

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Budget

 

Original

Flexed

Actual

Output (Production and sales units )

4000

3500

3500

 

£

£

£

Sales revenue

16000

14000

13820

Raw materials

-(3840)

(3360) (1400)Kg

(3420) (1425Kg)

Labour

-3200

(2800)(350Hrs)

(2690)(345Hrs)

Fixed overheads

-4800

-4800

-4900

Operating profit

4160

3040

2810

After computation of variance it has been found that Jeffrey and Son’s is not performing up to the mark. Further, variance is being present in the labor, sales and profitability of business. This is showing that business is not efficient in determining sale price per unit which has lead to decline in sales volume (Arai, Kitada and Oura, 2013). Further, manufacturing tasks of business have consumed large amount of material which is high as expected. Therefore, it is necessarily required for business to take corrective measures with the motive to deal with situation such as variance.

4.2 Preparing operating statement reconciling budgeted

Reconciliation statement is prepared with the motive to identify the main cause of variance. Statement of reconciling of Jeffrey and Sons is as follows:

Particulars

Amount (in £)

Budgeted profit

3040

Less: Variance of sales

-180

Less: Variance of cost

-60

Add: Labor

110

Less: Overhead

-100

Actual profit

2810

Operating statement for May

 

£

£

£

 

Favorable

Adverse

 

Sales volume variance

 

1120

 

Sales price variance

 

180

 

Material price variance

0

   

Material usage variance

 

60

 

Labor rate variance

70

   

Labor efficiency variance

40

   

Fixed overhead expenditure variance

 

100

 
       

Total variance

110 F

1460A

 

Total net variance

   

-1350

Budgeted operating profit

   

4160

Less: Net variance

   

-1350

Actual operating profit

   

2810

After developing reconciliation statement it has been found that actual profit of organization is less than £230 and it is one of the main reason behind decrease in sale price of enterprise and rise in overhead consumption and material.

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4.3 Findings to the board of directors

To: Managing Director

From: Finance manager

Subject: Responsibility centers report of company

Date: 25th Jan 2016

After preparing reconciliation statement overall performance of the business has been judged where it is necessary for each and every department to develop effective strategies so that situation of variance can be avoided easily.

For sales department it is required to estimate proper sale price so that situation of variance can be avoided. Further, conducting market research is also appropriate for business through which sale price of product can be determined easily. This can enhance overall performance of business. Further, in case of production department it is required to deal with situation of excess material consumption. By employing advanced tools wastage can be reduced and profitability can be enhanced. At last, human resource department is also required to take actions as it is showing variance due to decrease in labor charges.

CONCLUSION

The entire study being carried out has supported in knowing about the concept of management accounting. Further, it has assisted in knowing performance of Jeffrey and Sons in the market where business is required to take appropriate actions with the motive to avoid situation of variance. Budgeting techniques such as zero base, incremental etc are appropriate for business through which corrective actions can be taken for performance improvement. Apart from this, the techniques present such as total quality management, Kaizen costing etc are appropriate through which business can reduce cost and can enhance quality level.

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